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The Foundation for Hyperinflation

13 Jul

Hyperinflated Cash is Trash [courtesy Google Images]

Hyperinflated Cash is Trash
[courtesy Google Images]

A lot of people agree that America is heading for a second “Great Depression”. A lot of people disagree as to whether the next economic depression will be deflationary or hyperinflationary.

In both alternatives, an economic depression would cause rising unemployment, business failures, and increasing poverty over a prolonged period.

But, in a deflationary depression (like the Great Depression of the 1930s) the money is deflated and becomes more valuable. What you might buy for $100 today might sell for $80 next year and $60 the year after that. Prices fall, the purchasing power of the dollar rises, and “cash” becomes “king”.

A deflationary depression is dangerous because falling prices make it difficult for businesses to make a profit. A manufacturer might pay for the parts, materials, tools and labor to build a product which he expects to sell for $100 and make a $20 profit. But if he can’t sell that product almost as soon as he manufactures it, his expected price of $100 might fall to $90 or even $80 before he can sell it. If he gets caught in that deflationary price squeeze, his accounting will show that he’s selling products for less money than they cost to build, and he’ll therefore go broke.

If the manufacturer goes broke, his workers become unemployed, there’ll be less money in the economy, and the prices for remaining goods and services will sink even lower.

Because America lived through a deflationary depression in the 1930s, we tend to think of deflationary depressions as “traditional,” predominant and perhaps the only kind of depression that we might ever see again.

But that’s not necessarily true.

 

• We’ve also seen hyperinflationary depressions in Germany in the 1920s and Zimbabwe in the 2000’s.

Hyperinflationary depressions and deflationary depressions are similar in that both are characterized by rising unemployment, slowing business activity, and increasing levels of poverty. However, these two kinds of depressions differ in terms or what happens to the value of their currencies.

During a deflationary depression the value of money rises and “cash is king” (a little money can buy a lot).

During a hyperinflationary depression the value of the currency falls dramatically and “cash is trash” (a lot of currency may buy almost nothing).

That hyperinflationary “cash is trash” phenomenon is why it required a wheel barrel full of German Marks to buy a loaf of bread in the 1920s and, in the 2000s, Zimbabwe posted signs on public toilets warning people not to use Zimbabwean paper dollars as toilet paper (Zimbabwean dollars didn’t dissolve and therefore clogged the sewers). The Zimbabweans’ use of their currency as toilet paper is the ultimate example of hyperinflating cash becoming “trash”.

 

• In the event of another US depression, it’s important for American investors to anticipate whether that depression will be deflationary or hyperinflationary. Why? Because, depending of the kind of depression, the investors’ “cash” might become “king” or might become “trash”.

I.e., if we’re sliding into a depression and an investor wants to at least preserve and possibly increase his wealth, it’s critical that he know whether the depression will be deflationary (when the value of “cash” will increase) or hyperinflationary (when the value of cash will plummet). If the next depression is deflationary, the smartest investment you could make is save up a huge stack of paper dollars and wait for them to become more valuable.   If the next depression is hyperinflationary, the value of paper dollars will be decimated and those who save dollars now will be ruined.

So, will the next depression be deflationary or hyperinflationary?

Investors who answer that question incorrectly will lose their assets. But even small investors who answer that question correctly could become fabulously wealthy.

 

• Assuming that we’re heading into an economic depression, how might we predict whether that depression will be deflationary or hyperinflationary?

Well, as the Anglo-Irish statesman, author, and philosopher Edmund Burke (A.D. 1729-1797) famously observed, “Those who don’t know history are doomed to repeat it.”

Burke implied that: 1) history runs in cycles where economic and political circumstances that occurred previously will, in a general sense, tend to occur again; and 2) a primary means of anticipating and coping with the future is to know the past.

For example, we know that most people lose their wealth in an economic depression.   We can therefore anticipate that if there’s another depression, most people (including you and me) will lose their wealth and standard of living—unless they study the history of depressions to learn why most people tend to lose their wealth. If we can learn from history, we can learn how to avoid our predecessors’ mistakes and preserve or even increase our own wealth in the next depression.

I haven’t yet studied all economic depressions. I’ve only looked superficially at three: that of Germany in the 1920s; that of the US in the 1930s; and that of Zimbabwe in the 2000s.

Even so, my cursory examination of history has revealed a common denominator which I suspect may reliably predict whether our next depression will be deflationary or hyper-inflationary: the nature of our currency.

 

• Let’s review:

In the 1920s, Germany’s “Weimar Republic” suffered a hyperinflationary depression wherein the economy collapsed and the Mark’s value fell so rapidly that it required a wheel barrel full of German Marks to pay for a loaf of bread.

In the 1930s, the US suffered the Great Depression where the economy collapsed but the dollar became increasingly valuable.   What cost $10 last year might only cost $8 today and $6 a year later.

According to Wikipedia, in Zimbabwe’s depression of the 2000s, their hyperinflation rate peaked in November of A.D. 2008 at 89,700,000,000,000,000,000,000%. Lessee—lemme count the sets of three zeroes—we have hundreds, thousands, millions, billions, trillions, quadrillions—what comes after quadrillions? “Sextillions”? I don’t recall. But Zimbabwe had a peak annual inflation rate of almost 90 thousand quadrillions!

There are just over 31 million seconds in a year. If we divide Zimbabwe’s peak annual hyperinflation rate (90 thousand quadrillions) by the 31 million seconds in a year we learn that Zimbabwe’s peak hyperinflation was running at nearly 3 quadrillion percent per second. In the time it took to say, “I’ll give you 5 billion Zimbabwean dollars for that Snickers bar,” the price could’ve risen by several quadrillion times. That’s not “inflation,” or even “hyper-inflation”—that’s a kind of economic madness on speed and LSD.

 

• The first lesson to be drawn from comparing these three episodes of economic depression is that during the deflationary depression of the US, “cash (especially savings) was king” but during the hyperinflationary depressions of Germany and Zimbabwe, “cash (especially savings) was trash”.

If you had a decent job, a fixed income, or adequate savings, you might be able coast through a deflationary depression since the value of your earnings, subsidies and savings was constantly growing.

On the other hand, during a hyperinflationary depression, your savings and fixed incomes (pensions, welfare, etc.) would be quickly wiped out. Under a 100% inflation rate, after a year, your $100,000 in savings would purchase only $50,000 in goods and services. After two years, $25,000, etc. If the inflation rate was 1000%, the purchasing power of your $100,000 in savings would be $10,000 at the end of one year, and only $1,000 at the end of two years. At the end of three years, the purchasing power of the $100,000 you spent years struggling to save would be reduced to $100—barely enough to take your wife and kids out for a cheap dinner and a movie.

If you relied on So-So Security or some other retirement or welfare program to support you during a period of hyperinflation, your monthly $1,200 check from So-So Security would be quickly reduced in purchasing power—as would your standard of living.

If you relied on the (fairly) “fixed” income from a regular job, you’d also be quickly impoverished by hyperinflation. Suppose you were making $50,000 a year when 100% hyperinflation began—by the end of that year, your $50,000 income would only purchase $25,000 in goods and services. 100% annual hyperinflation could cut your annual income by half. Can you live on half of what you currently earn?

During hyperinflation, the only way to even survive is to spend every nickel that falls into your hands just as fast as you can. If you saved anything (rather than spent immediately) in the medium of your hyperinflating currency, your savings would quickly disappear.

Thus, we can see that during a deflationary depression, “savings (denominated in the currency) are king”—but during hyperinflation, “savings (denominated in the currency) are trash”.

The only way to survive hyperinflation is to hustle, hustle, hustle, every moment of the day. You must increase your prices every day, every hour, every minute.   You’d have to be geared mentally and morally to rob everyone you met by paying less for what they wanted to sell and demanding more for whatever you were selling. (They’d try to do the same to you.) Or you could become a bank robber or cat burglar to rob others. (Others would also become crooks to rob you.) Then, you might survive.   However, if you were too old, weak, cowardly, ignorant or unintelligent to “hustle,” you’d slide into poverty or premature death.

When the hyperinflation finally ended, you’d be exhausted and you’d have absolutely no savings denominated in your national currency.

How can anyone run a “capitalist” economy, if the capital has been wiped out by hyperinflation?

 

• The big lesson to be learned from the history of the German, US and Zimbabwean depressions is glimpsed from Wikipedia’s description of the German hyperinflation of the 1920s:

 

“The hyperinflation in the Weimar Republic was a three-year period . . . between June 1921 and January 1924. . . . In order to pay the large costs [debts] of the First World War, Germany suspended the convertibility of its currency into gold when that war broke out.”

 

In A.D. 1914, Germany suspended the Mark’s gold backing. The Mark became a fiat currency.   Hyperinflation didn’t begin until seven years later (A.D. 1921). But note that Germany’s hyperinflation occurred in relation to a fiat currency that was not backed by gold or silver.

More,

 

“Because reparations [post-WWI debts] were required to be repaid in hard currency [gold or silver] and not the rapidly depreciating Papiermark, one strategy Germany employed was the mass printing of bank notes to buy foreign currency which was in turn used to pay reparations.”

 

In the 1920s, Germany “mass printed” fiat Marks in order to avoid paying its reparation debts in gold or silver.

Today, the US government—which has run up a national debt of between $17 and $200 trillion—has been “mass printing” and inflating the fiat dollar in order to avoid paying that debt in full.

In the 1920s, Germany could “mass print” Marks because they were fiat and unbacked by gold or silver.

Today, the US can “mass print” dollars under Quantitative Easing because the dollar is a fiat currency.

  

“During the first half of 1922, the Mark stabilized at about 320 Marks per Dollar. . . . inflation changed to hyperinflation and the Mark fell to 800 Marks per Dollar by December 1922. . . . By November 1923, the American dollar [which was still backed by gold] was worth 4,210,500,000,000 German marks.”

 

The fiat Mark’s value fell from 320/gold-backed-dollar to over 4 trillion/gold-backed-dollar in just 18 months. The mere thought of such extraordinary change in monetary value is chilling.

 

• According to Wikipedia,

 

“The economy of Zimbabwe shrunk significantly after 2000, resulting in a desperate situation for the country and widespread poverty and an 80% unemployment rate.”

 

As was 1920s Germany, 2000s Zimbabwe was in a depression.

(Coincidentally, the US is currently in a recession and may slide into a depression. Some claim we have already entered into another depression.)

 

“The participation from 1998 to 2002 in the war in the Democratic Republic of the Congo set the stage for this deterioration by draining the country of hundreds of millions of dollars.”

 

Just as Germany in the 1920’s was deeply in debt due to World War I, Zimbabwe in the 2000s was also deeply in debt due to a war in the Congo.

(Coincidentally, today, the US government is also deeply in debt some of which can be attributed to our recent wars in Afghanistan and Iraq.)

 

“Hyperinflation has been a major problem from about 2003 to April 2009, when the country suspended its own currency.”

 

Hyperinflation killed the German Mark that existed immediately after WWI. Hyperinflation also killed Zimbabwean dollar. Zimbabwe still has no national currency, but relies on foreign currencies to conduct domestic transactions.

(Coincidentally, the US dollar has lost 95% of its purchasing power over the past 40 years.   This loss was caused by inflation rather than hyperinflation. But we are left to wonder how much time remains before a currency that’s lost 95% of its former value loses the remaining 5% and dies.)

 

“Zimbabwe’s peak month of inflation is estimated at 79.6 billion percent in mid-November 2008.”

 

There are almost 2.6 million seconds in a 30-day month. If we divide the 80 billion percent hyperinflation rate of November, by the 2.6 million seconds in that month, we see that during the height of the Zimbabwean inflation, prices were rising at the astonishing and incomprehensible rate of roughly 30,000 per cent per second.  The mind boggles. How is that possible? How is that even conceivable?

Germany’s hyperinflation rate also reached the tens of billions level in the 1920s.

Once hyperinflation begins, it can quickly rocket to levels that are not only incomprehensible, but seemingly impossible.

 

• Wikipedia described causes for Zimbabwean hyperinflation as follows:

 

“A monetarist view is that a general increase in the prices of things is less a commentary on the worth of those things than on the worth of the money. This has objective and subjective components:

“Objectively, that the money [actually, “currency”]has no firm basis to give it a value.

“Subjectively, that the people holding the money [“currency”] lack confidence in its ability to retain its value.

“Crucial to both components is [government] discipline over the creation of additional money.”

 

Hyperinflation is an expression of the public’s loss of confidence in the persistent value of their currency. That confidence is lost because:

1)      the currency has “no firm basis” (gold or silver backing) “to give it value”; it is a fiat currency.

2)      the government lacks monetary discipline and prints too much currency.   The currency can only be “mass printed” if it’s fiat.

Gold imposes a “discipline” on the creation of money and government spending because governments can’t “print” gold. Governments hate monetary discipline. That’s why they hate gold-based money and delight in fiat currencies.

(How much monetary “discipline” can be attributed to “Helicopter” Ben Bernanke or “Whirlybird” Janet Yellen?)

 

Common Denominators: When comparing the German hyperinflation of the 1920s to the Zimbabwean hyperinflation of the 2000s, we see:

1)      Both nation’s governments had recently emerged from a significant war.

2)      Both nation’s governments were deeply in debt.

3)      Both episodes of hyperinflation were so intolerable that they were fairly brief and lasted only 3 to 6 years.

4)      Both nations’ hyperinflation killed their national currency.

5)      Both nations’ currencies were fiat—neither was backed by gold or silver.

 

US Deflationary Depression of the 1930s:

1)      Deflation was predominant for most of 10 years.

2)      The US dollar not only survived but increased in value.

3)      The US dollar was backed by gold domestically until A.D. 1933 and by silver until A.D. 1968. The US dollar was not a fiat currency during the Great Depression.

 

Strong implications:

1)      Hyperinflation follows war.

2)      Hyperinflation follows great governmental debt.

3)      Hyperinflationary depressions occur when the national currency is fiat and is not backed by gold or silver.

4)      Deflationary depressions occur when the national currency is backed by gold or silver.

 

• Coincidentally

1)      The US government has recently emerged from wars in Afghanistan and Iraq.

2)      The US government is the biggest debtor in the world owing at least $17 trillion, and perhaps over $200 trillion.

3)      The US dollar is a fiat currency. (It’s not backed by gold, silver or anything tangible.)

4)      The US dollar has already lost 95% of its former value.

 

• Predictions:

IF a US depression is coming:

1)      It will be hyperinflationary (because the US dollar is a fiat currency and government’s debt is overwhelming) rather than deflationary (which requires a gold or silver-based monetary system).

2)      Those who store their wealth in the form of cash (fiat dollars) or US bonds will lose most or all of that wealth.

3)      Those who rely on Social Security or other retirement programs denominated in US dollars will see their incomes slashed by 50%, 80%, maybe more.

4)      There’ll be exceptions, but those who store their wealth in the form of paper equities (stocks) denominated in fiat dollars will almost certainly lose most of their assets.

5)      Those who have brains enough to store their wealth in the form of physical gold and silver should see their wealth at least preserved and probably increased dramatically.

 

• There’s a story of a boy who worked as a bellhop in a German hotel prior to the hyperinflation of the 1920s. One day the boy received a one-ounce gold coin as a tip from a rich hotel patron. The boy saved that gold coin. Later, during Germany’s hyperinflationary depression, the boy bought that entire hotel for the one-ounce gold “tip”.

I don’t know if that story is true or apocryphal, but it illustrates what can happen during a period of hyperinflation for those who store their wealth in the form of gold and silver. During a hyperinflationary depression, such people may be fantastically enriched.

Depressions are deflationary if the money is backed by gold or silver and hyperinflationary if the currency is fiat.

The US dollar is fiat. Therefore, if we see another depression, we should also see hyperinflation.

Hyperinflation is virtually impossible with a gold-based money.  Hyperinflation is virtually inevitable with a fiat-based currency.

Got gold?

 

 

 

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29 responses to “The Foundation for Hyperinflation

  1. Pat Fields

    July 13, 2014 at 4:49 AM

    In this present banknote paradigm, a generalized deflation is systemically impossible.

    To understand this, the definition of ‘inflation-deflation’ has to be accurately comprehended and held fast in one’s mind. ‘Inflation’ is increase of money supply … period.

    All banknotes are loaned as principal at interest; the interest servicing banknotes then must be created by new borrowing at new interest. This is a global phenomenon. All that’s ‘different’ from one country to another is the ‘brand label’ pasted to the same bottle of poison. Banknotes and interest co-create each other in an exponential progression, where both reciprocally drive each other’s expansion. This is theoretically infinite.

    At length, though, the … cumulative … interest service burden supersedes investment capacity to produce trade goods … advancing further to overwhelm even production of internal consumables. So much for ‘theory’ at that juncture.

     
    • Dev

      July 13, 2014 at 4:31 PM

      What causes the falling prices of goods that lead to a deflationary depression?

       
      • Adask

        July 13, 2014 at 6:25 PM

        Demand is down because people are unemployed. Manufacturers and distributors hold sales at reduced prices to get some cash flow. Prices fall. Profits fall. Employers lay off more workers. Demand falls further. Prices fall further. Etc. Every time prices fall, the dollar becomes more valuable.

         
      • Dev

        July 13, 2014 at 9:04 PM

        Al, thank you for this article and your answer below. I didn’t see a reply button so am replying here. I still would like to know why people were unemployed, thus causing demand to be down. What was the basic cause of it?

         
      • Pat Fields

        July 14, 2014 at 12:26 AM

        Dev … ” I still would like to know why people were unemployed, thus causing demand to be down”

        The cause of both the deflation (loss of currency in circulation at the base of the economy) and unemployment is Interest Service necessities.

        We don’t question Loan-at-Interest because it’s become endemic. There is, however, an alternative form of conveying credit between sub-producers of goods (normally the vast bulk of credit demand), which the banks have eradicated, called the Real Bill Doctrine. In this method, the cost of credit is handled by Discount from full face value of a Bill over 90 day periods, largely eliminating the deflationary effect of interest on circulation.

        Sufficing a further detailed explanation of Real Bills; since Interest Service erodes availability of Ready Money for trade in a community (deflation), deterioration of trade volume then leads to reduction of employment and panic ‘sales’ in attempts to break even on inventories … causing even greater pressure on meeting Interest Service.

        As I said above … in this credit-‘money’ scheme at length, the … cumulative … interest service burden supersedes investment capacity to produce trade goods … advancing further to overwhelm even production of internal consumables.

         
      • Dev

        July 17, 2014 at 8:15 PM

        Thank you for your answer Pat. I will have to study it out a bit more to fully grasp it, but I truly appreciate you taking the time to answer me!

         
  2. vincecate

    July 13, 2014 at 10:25 AM

    If you want to understand how hyperinflation works I think this is the best thing to read:
    http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html

     
    • Pat Fields

      July 14, 2014 at 1:51 AM

      vincecate … re. your Blog.

      Very interesting research compilation! (I’ve ‘bookmarked)

      The section on Real Bills propagates a false notion that they circulate in sub-unitized notional form. This isn’t true. It’s a conflation (probably by bankers themselves) of Real Bills and Bills of Credit (banknotes, having no time limit on usage).

      An accurate analogy of a Real Bill would be a ’90 day Invoice’, where the time cost factored into the full Face Value including credit charges, isn’t due until Term. A Real Bill is a nearly riskless Investment in future Money Due at Sale of Goods … not present Money Due on Sales. This contorted notion of Real Bills is a variant of Booking Sales before Completion (pre-dating Sales) … an unlawful Fraud in Accounting.

      Real Bills work entirely on Discount. So, if the Discount Rate is 6% at 90 day Term, if paid within 60 days, the time cost is 4% … within 30 days, 2% … if paid immediately (3 days), 0% … or a 6% Discount from Face, since no Time Cost is incurred by the Bill’s Maker (supplier). This concept is one of a simple Carrying Charge on credit extended between initial steps of manufacture and final sale to a consumer.

       
      • vincecate

        July 15, 2014 at 10:57 AM

        Thanks!

        What exactly did I write that makes you say I propagate a ” false notion that they circulate in sub-unitized notional form”?

         
      • Pat Fields

        July 15, 2014 at 12:59 PM

        vincecate … “What exactly did I write that makes you say I propagate a ” false notion that they circulate in sub-unitized notional form”?

        Presuming you’re only recounting research, your blog reads: “In the Real Bills Doctrine a bank can issue as many notes as it wants … as long as it gets assets of real value that could be sold to withdraw the notes.”

        This ‘monetizing’ of incomplete Production in Process is something the American Austro-Libertarian school teaches, which mis-construes the Real Bill Doctrine (ironically) in the ‘Modern Money Theory’ which treats unreal potential as having real substance to be ‘traded’ with a fixed ‘value’ attached.

        The Real Bill Doctrine as passed down by Smith, doesn’t create any virtual ‘asset money’, but rather co-ordinates final projected sales proceeds with time-value necessary in manufacture of goods. Purchase of Rights to the 90 day ‘Discount’ of the Bills involves real money bank-reserves or investment holdings of the bank’s customers.

        The idea is to manage flow of sales proceeds from final consumption of finished goods, back through the chain of Real Bills to the raw commodity producer. What ‘funds’ are there if the end consumers use credit paper? That’s nonsense. All the Resources and Labor are ‘paid’ with debt-credit, which by its nature depreciates over time? Not hardly.

         
  3. Henry

    July 13, 2014 at 12:05 PM

    While you’re collecting lessons from history, here’s another fundamental pattern that no competent overview fails to consider:

    Reserve currencies don’t hyperinflate.

    Is the US dollar looking bearish? It certainly is. Based on relevant precedent, is the US dollar likely to hyperinflate in near future? Certainly not.

    Now the US dollar could cease being the world’s reserve currency, which would set it up for hyperinflation, but this loss of status isn’t going to happen overnight either.

     
    • Adask

      July 13, 2014 at 6:41 PM

      Henry, why don’t you elaborate by specifying the “fundamental pattern that no competent overview would fail to consider”?

      First, tell us how many world “reserve currencies” has the world seen in the past 300 years?

      The dollar is one. The English pound might’ve been another. Were there any others?

      Second, tell us how many world “reserve currencies” have there been that were pure fiat and not backed by gold or silver? Any–other than today’s fiat dollar?

      I don’t know the answer to those questions, but I suspect that the only world “reserve currency” that’s ever been in modern times that was pure fiat and unbacked by gold or silver was today’s fiat dollar. If that suspicion is correct, can there be a “fundamental pattern” that has only a single point or instance?

      Is an “overview” that infers a “pattern” when there’s only one fiat “reserve currency” be truly described as “competent”?

      It may be that reserve currencies backed by gold or silver don’t hyperinflate. But does that prove or even suggest that reserve currencies that are fiat can’t or won’t hyperinflate?

       
      • vincecate

        July 15, 2014 at 10:43 AM

        Henry is either Armstrong or parroting Armstrong. Adask is right.

         
    • Dev

      July 15, 2014 at 9:04 PM

      Henry: if the dollar is only worth about 5% of what it once was and is still the reserve currency, you are asking which comes first, the chicken or the egg. The point is, when the confidence is gone, the rest of the 5% will go with it and that happens very quickly.

       
  4. MPK

    July 13, 2014 at 7:24 PM

    You all don’t get the point’ The US is bankrupted, the money system of the central banking global economy was, has, and will crash certain nations for a major change to occur, You have been hoodwinked, fooled, played, and prayed upon like sheep to the slaughter, and many of you will be slaughtered. Food is the most important item to survive, as during a nation wide monetary collapse of the US dollar, and breakdown shops will shut, no food given, even gold will not buy you a loaf of bread.

    The US government has stocked up to feed the troops and ammunition to deal with though who will disobey to stay off the streets as each person will be deemed a potential looter, either arrested or more likely shot on the spot.

    Either way, your time is short, and its the banks who will close, and all business will shut, and then it will become a waiting game as the US government deals with dissenters, and looters and starve the rest of you.

    Always be prepared of the worst to happen than to be left dying of something major you did not think, could or dare not think that could happen in the US of A. You can eat food and live, but Gold and Silver man cant not survive on or rely on when the chips are down.

    A wise man said, Ponder what ever either way, but look further and see what may be coming your way sooner than you think.

    MPK

     
    • Pat Fields

      July 14, 2014 at 2:38 AM

      MPK … “central banking global economy … will crash … You have been hoodwinked … like sheep to the slaughter.

      The first of your allegations, I fully agree with, because of the fundamental design structure of the banknote scheme. It’s elemental flaw dooms it to irreconcilable self-destruction, at which juncture we’ve apparently arrived.

      The second, however, doesn’t appear to me to always have been the case. After decades of contemplation, I rather think governments and bankers actually believed at first that a virtual ‘money’ scheme could be made viable by strict centralized control of interest rates (the true ‘reason’ for ‘central banks’), so as to moderate the scheme’s automatic inflation within the variables of economic growth or contraction.

      It wasn’t until cumulative interest service negated interest rate ‘controls’, that governments and bankers became criminalized, by willfully carrying the scheme forward despite the clearly indicated collapse portended. The honest response at that point, would have been to abandon the virtual scheme and re-establish 100% specie, replacing Notes with weights of metal appropriate to their inflationary depreciation. The Chinese did this in 1450, by supplanting all the scrip with copper cash of equal purchase power as the paper. Over the ensuing 300 years, they followed a course of re-building their economy on a silver-centric poly-metallic scheme of copper, silver and gold. Interestingly, the copper cash continued vibrantly current in South-East Asia, right up to 1932.

       
      • Adask

        July 14, 2014 at 5:01 AM

        The problem government’s had since at least A.D. 1971 (when the dollar became pure fiat) and perhaps since A.D. 1933 (when government stopped redeeming paper dollars domestically with gold), is that fiat currency is not truly “money”. To allege otherwise is to lie.

        The government started with a relatively small lie in A.D. 1933 when they stopped redeeming domestic paper dollars with gold. They might even have started with that small lie based on the presumption that that lie might be “good” for the people of The United States of America. If so, that presumption would’ve been a mistake–but, in any case, they might’ve started with seemingly good purposes.

        However, I suspect that over the past 80 years, government has run into a principle observed by Sir Walter Scott in his A.D. 1808 poem Marmion:

        “Oh! what a tangled web we weave
        “When first we practise to deceive!”

        Our government deceived the American people, and then the world, into believing that fiat dollars were “good as gold”. They never really were. Later they invented the “petro-dollar” and essentially deceived the world into believing that fiat dollars were “good as crude” (oil). That belief was always a lie.

        Our government has woven lie upon lie for most of 80 years trying to convince people that fiat currency is real money. The people are beginning to realize and recognize those lies. The lies will fail at some point in the future, public confidence in the fiat dollar will wane or plummet, and the monetary system will be exposed to either inflation or hyperinflation.

        My point in all this is to illustrate that once the government committed to the lie that fiat dollars are “good as gold”–and once the American people accepted that lie–we were doomed. No one in government could successfully advocate going back to a gold-based monetary system without: 1) admitting that government had been lying to Americans and the world since A.D. 1933, and especially since A.D. 1971; and 2) “crashing” whatever part of the economy was based on fiat dollars.

        For example, if someone had successfully advocated restoring gold to domestic circulation in A.D. 1938–just five years after government removed gold from domestic circulation–whatever part of the economy had been based on fiat currency over the previous five years, might collapse. In retrospect, that “collapse” would’ve been tiny compared to the kind of “collapse” we might see today (80 years into the fiat dollar’s regime). But we were in the midst of the Great Depression in A.D. 1938 and I’ll bet that those few who understood the currency were afraid that if they returned to gold in domestic transactions, the resulting “mini-crash” would drive the nation deeper into the Depression and whichever political party successfully advocated a return to gold would be run out of office.

        I suspect that fearing for the economy and their political careers, the politicians did nothing while they waited for “good times” to be restored and promised themselves that then they would act to rectify the currency lies. But then we got into WWII and they didn’t dare restore gold, and then the cold war, and then (A.D. 1968) they stopped redeeming paper dollars with silver, and then France forced Nixon to close the gold window on domestic dollars in A.D. 1971.

        Thus, for one reason of another, the US dollar became increasingly fiat. The US (and even global) economies because increasingly dependent on fiat dollars. A return to honesty and gold that might’ve precipitated a “mini-crash” in A.D. 1938, might precipitate a “Greater Depression” that is so severe that millions might die, social and political chaos might ensue and the United States might even disintegrate much like the former Soviet Union did in A.D. 1991.

        So many lives, so much political power, and perhaps even the survival of the United States are dependent on the lies that support our monetary system that no one in a position of power dares to advocate the truth and a return to gold. Instead, government treats us all to a steady dies of bigger lies, faster lies, more frequent lies, more blatant lies and ever more unbelievable lies as they try to maintain the fundamental lie that fiat dollars are money.

        I’ll bet that almost anyone reading the previous explanation will at least agree that we’re seeing a panic in government, an ever-increasing frenzy to tell more lies, any lies, stupid lies, unbelievable lies as government fights to hold the fiat monetary system together. We can’t even get a straight answer from government as to what the unemployment and inflation rates are.

        Lies are endemic, systemic and frantic. Why? Because government senses an approaching moment when the truth must be faced and government must admit that it’s been lying to the American people for over 80 years. I doubt that the existing government can ever make that admission. Instead, they’ll let the whole system collapse and bet they still have enough power to pick up the pieces, build a new government and blame the collapse on some external force or event.

        But, again, all we’re seeing is an example of Walter Scott’s observation:

        Oh! what a tangled web we weave
        When first we practise to deceive!

        Our national web of lies has become so entangled that even the spider is ensnared.

         
  5. Toland

    July 13, 2014 at 8:06 PM

    Adask asked, “Assuming that we’re heading into an economic depression, how might we predict whether that depression will be deflationary or hyperinflationary?”

    We base our prediction on fundamentals. In this case, the fundamentals tell us there won’t be hyperinflation in the US dollar.

    When someone like the Weimar Republic or Zimbabwe starts a currency printing frenzy, the rest of the world simply drops their currency and switches to substitutes. This type of sudden move away from the currency of an over-printing nation, in preference for other currencies, is a necessary condition of hyperinflation.

    Yet, such a sudden move away from the currency of an over-printing nation, in preference for other currencies, is not possible for the US dollar, at least in the near term. This is because the US dollar is both the world’s reserve currency and, perhaps more importantly, the settlement currency of half of the world’s international trade.

    Thus, no hyperinflation.

     
    • vincecate

      July 15, 2014 at 10:52 AM

      One of the warning signs that hyperinflation will be coming is when less and less people use the dollar for international trade or as a reserve currency. Guess what? Warning bells are starting to ring. Not loud yet, but they are ringing. If inflation picks up then dollar reserves drop in value and become a smaller and smaller portion of bank reserves. If the dollar is not stable, then the Arabs won’t want to price oil 2 years out in dollars. So the move away and the start of hyperinflation can come together and reinforce each other.

       
  6. bhawna oberoi

    July 13, 2014 at 9:58 PM

    Great analysis as usual. Bhawna

     
  7. Roger

    July 14, 2014 at 3:16 AM

    Toland wrote: “. . . the US dollar is . . . the settlement currency of half of the world’s international trade.”

    Yep, though this hugely relevant point goes oddly unmentioned by the dilettante clowns and shilling charlatans who dispense dollar FUD on the internet.

    Its dominant role in global trade prevents the USD hyperinflating. The sudden loss of confidence required for hyperinflation is highly unlikely given the dollar’s entrenched position in the world economy.

    What’s driven inflation in recent years has been credit creation by the commercial banks. Newly printed currency has to be LOANED into circulation, and inflationary spikes in loan demand are not something you expect during an economic depression.

     
    • Pat Fields

      July 14, 2014 at 5:57 AM

      Roger … “What’s driven inflation in recent years has been credit creation by the commercial banks.”

      I’m sorry to be contrary, but you’re completely wrong about that. Banks only distribute what’s compelled into creation automatically by the banknote ‘monetary’ scheme itself. Also, the entire gamut of ‘negotiable instruments’ are products of Treasury’s ‘Bureau of Engraving’.

      18 U.S. Code § 8 – “Obligation or other security of the United States defined:
      The term “obligation or other security of the United States” includes all bonds, certificates of indebtedness, national bank currency, Federal Reserve notes, Federal Reserve bank notes, coupons, United States notes, Treasury notes, gold certificates, silver certificates, fractional notes, certificates of deposit, bills, checks, or drafts for money, drawn by or upon authorized officers of the United States, stamps and other representatives of value, of whatever denomination, issued under any Act of Congress, and canceled United States stamps.”

      Currency accrues interest and since additional borrowing is the only way to materialize that Interest Service Funding, both impel each other’s expansion in an exponential progression. Banks only ‘manage’ this as best they can in the face of Debt Saturation.

      ‘QE’ has been the act of government ‘borrowing’ and distributing its own Treasury credit (comprising all there is in the ‘Treasury’ to begin with), to supply Interest Service Funds, preventing a domino cascade of loan defaults. By keeping the interest rate near zero, the inflation has been concentrated into bonds and stock equities. From those arenas, what hasn’t been servicing debts has been ‘leaking out’ into peripheral ‘elitist’ assets such as landed estates and favored collectables. It’s that later ‘signal’ giving government impetus to ‘taper’.

       
  8. palani

    July 14, 2014 at 5:49 AM

    https://mises.org/books/inflationinfrance.pdf

    This book (Fiat Money Inflation in France … How it Came, What it Brought, and How it Ended) describes the short 50 year cycle of fiat money in France following their revolution. This information was available to politicians in the U.S. of A. shortly after Lincoln re-invented the concept to fund his war. But then when morality is the issue politicians should never be considered as being overly-endowed with this attribute.

     
  9. Toland

    July 14, 2014 at 6:20 PM

    @Roger > “What’s driven inflation in recent years has been credit creation by the commercial banks.”

    While the commercial banks may be the direct source of recent inflation (because it’s through them that the stock of money, and thus the price of goods and services, was increased), let us not forget that these banks are ultimately controlled by the global banking cartel’s Federal Reserve.

     
  10. pop de adam

    July 16, 2014 at 1:08 AM

    If the producer is feeling shortchanged by the current exchange why would he not simply change the price he offers? I can see that if he continues to handicap the market as such, like a central bank insisting on inflation to stay the wolves of interest, he simply becomes one of them or at least purveys in deed the same results.

    Some value will always depreciate. Cars rust, machinery wears, people age…as a guard against such most attempt to plan steps ahead. The only fault I can find with this is it always becomes fugitive from its origin. Franklin, Jefferson and Madison took a moment to rewrite the rules for themselves. FDR did the same for the generation he was a part of. We may yet say the same for a Bush or an Obama or the next Clinton.

    But at no point would anyone respect my own rejection of the previous power structure. So that you or I may be comfortable in our waning years must we bind our children to it? Why is it that some may reject precedent and others are forbidden from the same?

    All revolutions are illegal except the one that brought the present establishment to power.

    -pop

     
  11. pop de adam

    July 16, 2014 at 1:24 AM

    P.S. I still stand by the idea that dollars even in a numbered account are not the same as those numbered bills in your wallet. The dollars in your wallet actually have numbers upon them. If these wallet dollars with numbers upon them, fell accidentally into a fire, what evidence of a debt would actually exist? Second hand hearsay perhaps? What did you work for if you are not free to destroy it or the results of it? Use is wear, wear is destructive. Do we work to destruction?

     

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