Gold-Eagle.com published an article entitled “The Inflation Imperative” which stated in part that:
“The western welfare states (US, UK, EU etc.) have borrowed more digital currency than can be repaid at current values. The choices are:
“1. Massive inflation: a bad choice.
“2. Default: an even worse choice.”
In fact, these two choices could be more clearly expressed as:
1. Covert debt default by means of massive inflation: a bad choice
2. Overt debt default: an even worse choice.
Note that in both instances, we’re talking about debt default. There’s going to be a debt default. The only question is how will government deal with that problem.
By “covert debt default,” I mean government causing significant inflation (at least 10%) to reduce the value (purchasing power) of the fiat dollar in order to repay the National Debt with much cheaper dollars.
I.e., suppose you loaned government $1 million. Suppose government caused a 10% inflation rate. When the government repaid your “$1 million,” you’d receive the nominal sum of $1 million. However, thanks to 10% inflation, the $1 million you received would only have $900,000 in value (purchasing power) as compared to the $1 million in purchasing power that you loaned to government.
Thanks to 10% inflation, government could reduce the real value of the currency that they used to repay you by 10%. Thanks to that same 10% annual inflation, the government could reduce the real value (purchasing power) of the National Debt by 10%. Per year. If government caused and allowed 10% inflation for three years, the real value of the National Debt could be reduced by roughly 30%.
If government could cause 20% annual inflation, after one year it could reduce the value of the $1 million it owed you to $800,000 in purchasing power. Thanks to 20% annual inflation, government could reduce the real value of the National Debt by 20%. Per year. If government caused and allowed 20% to persist for three years, government could cut the real value of the National Debt by 60%.
• Most people don’t understand that monetary inflation is intentionally caused by government. Most people don’t understand that the primary purpose for inflation is less to stimulate the economy and more to “covertly” default on government debts and thereby rob its creditors (largely, the American people) of the value they’d loaned to the government.
So long as the inflation rate is fairly modest (say, 2%), people might gripe a little but they won’t understand the government’s villainy nor will they riot.
More, most people won’t understand that the inflation was not only cutting the value of the National Debt, but was also cutting the value of the American people’s savings, bank accounts, pension funds, etc. The vast majority of people won’t understand that inflation (especially hyperinflation) is a “covert” means of debt default.
Inflation is a means for debtors to rob creditors. The U.S. government is the world’s biggest debtor. Government wants inflation as a covert means to default on some of its massive National Debt.
But, debt default signals bankruptcy. Inflation is evidence of governmental bankruptcy. However, that evidence is so subtle that few Americans know or care that they’re being robbed by their own government. Inflation is a nearly invisible form of debt default. Modest monetary inflation is a “covert” form of debt default.
• The second choice (“Overt debt default”) is obvious and undeniable. There’s nothing subtle or “invisible” about overt debt default. The government looks you in the eye and says, “Sorry, Charlie, we’re busted, broke, bankrupt and we can’t repay that $1 million that we borrowed from you. Sorry ‘bout that.”
That’s a much “worse choice” than inflation.
Inflation can steal your wealth slowly, covertly, mysteriously, invisibly—and over the course of years. You won’t exactly notice. You’ll probably accept the theft as somehow “tolerable”. Inflation is like cooking frogs. The cook (government) just raises the water temperature a little at a time and the frogs don’t notice until they’re cooked.
But “overt debt default” is sudden, significant or even complete. One day you have a $1 million bond signed by the government. Next day you have nothing but a piece of worthless paper. Overt debt default is like throwing frogs into a pot of boiling water. The frogs will scream (if frogs can scream) and jump every which-way to escape the boiling water. If they have guns, the frogs might even start shooting at government and the Federal Reserve.
An “overt debt default” is an absolute and undeniable admission of bankruptcy. There’s no wiggle-room. No debate. Government is broke. Bankrupt. It’s like the fall of the former Soviet Union. Chaos rules.
But, again, note well that both covert debt default (inflation) caused by government and overt debt default publicly admitted by government are both signals that government is bankrupt (or nearly so) and unable to pay its debts.
• Gold-Eagle.com continues:
“Given the non-sustainability of sovereign debt under current monetary regimes and the necessity for global inflation, there are three possible endgame scenarios facing us now.”
“1. Central banks are finally successful in launching inflation.”
“2. A massive issuance of SDRs (Special Drawing Rights from the IMF) in the multi-trillion-dollar equivalent range.”
“3. The nuclear gold option is the last resort. Central banks and the IMF would peg the price of gold much higher.
“All three of these outcomes have a common denominator: inflation—which is just another word for the destruction of the value of the U.S. dollar.”
1. Whether central banks can successfully cause enough inflation to eliminate most of the national debt is doubtful. They’ve been trying hard to cause inflation for eight years and haven’t had much success. They may not be able to cause enough inflation to stimulate the economy. But even if government can cause significant inflation, it won’t only diminish the National Debt, it will also destroy the value of the correlative U.S. bonds and thereby destroy much of the paper capital needed to fund loans for businesses, homes, cars, and flat-screen TVs. In our debt-based monetary system, significant inflation destroys paper capital and cripples the economy. It’s unlikely that the government can truly “stimulate” the economy by causing more inflation. It’s more likely that significant inflation will degrade or destroy the economy.
2. The issuance of SDRs from the IMF to back fiat dollars is nothing more than an attempt to back intrinsically-worthless fiat dollars with intrinsically-worthless fiat SDRs. It’s like using Monopoly Money to back fiat dollars. That strategy might fool the yokels for a little while, but long-term success is improbable.
3. Restoring a gold-backed U.S. dollar. That’s the last thing the Federal Reserve or government wants. A gold-backed monetary system would mean government can’t spin currency out of thin air. It would mean smaller and more responsible government. It would mean accountable government and little or no fabricated economic indicators. You can see why government hates gold. But you can also see why, of the three options presented, gold may be the only one what will work. It won’t be fun but, if everything else fails (and everything else will fail), government may be forced to do the unthinkable: back the paper dollar with gold and/or silver.
As for Gold-Eagle’s claim that the “common denominator” between the three options is “inflation” and the “destruction of the value of the U.S. dollar”—I disagree.
The primary common denominator in inflation is destruction of the value of the National Debt. The incidental common denominator is the destruction of the value of all other forms of savings denominated in fiat dollars.
• The Gold-Eagle article proposed several alternatives as likely means to achieve debt default. However, at no point did the article suppose that government would publicly admit that it can’t pay it’s debts. That public admission would constitute “overt” debt default.
I agree with that omission. It is extremely unlikely that the President will ever step up to the podium and expressly admit to the public that government can’t pay its debts and is therefore bankrupt. It could only happen in the most catastrophic circumstances.
There will be no overt debt default.
Nevertheless, given that the National Debt is already too great to ever be repaid in full, there’s going to be a debt default. If that default can’t be overt, it will be covert—and that means we’ll see inflation or even hyperinflation in our near future.
In fact, inflation is not merely in our future, it’s been steady over the past 40 years and is already present.
As evidence, note that, as compared to gold, since A.D. 1971, the fiat dollar has lost over 95% of its value/purchasing power. That’s inflation. Not too much at any one time. Just a little every year. Not enough to make the frogs jump out of the pot and vote for someone like Donald Trump. But, still enough to reduce the real value of whatever debt was owed in A.D. 1971 by 95%. Thanks to persistent, low-level inflation, the value of a $1 million U.S. bond issued in A.D. 1971is now (in 1971 dollars) worth about $50,000. A modest annual rate of monetary inflation has been established government policy for most of your life.
Today, government and the Federal Reserve claim that the rate of inflation is less than a “desirable”/“target” rate of 2%. However, John Williams at Shadowstats.com believes the current rate of inflation is actually about 8.66%. If Williams is right, that 8.66% inflation rate is potentially lethal to your savings, your retirement and also to the nation’s supply of paper capital.
2% inflation is like skimming at a casino. It’s wrong, but it’s not worth starting a mob war.
8.66% inflation (let’s say 9% to make it easy to calculate) means that after 5 years of 9% inflation, the real value (purchasing power) of the $20 trillion National Debt would be reduced by about 45%. Yaaaayy!
But, likewise, over a period of five years of 9% inflation, the real value of the American people’s savings accounts, Social Security payments, pension funds, stocks and bonds denominated in fiat dollars would also be reduced by about 45%. Boooo!
If 2% inflation is seen as “skimming,” 9% inflation should be regarded as theft (that’s why the perpetrators want it concealed). If we catch the responsible villains, we’ll jail ‘em.
20% inflation would be tantamount to armed robbery. Not a jury in the world would find you guilty if you shot the robbers.
Hyperinflation is equivalent to a civil war waged by government-debtors against its citizen-lenders. If it comes to hyperinflation, violence will be one way to stop the plundering. The restoration of a gold-backed dollar would be the other.
• As Gold-Eagle predicts, we’ll see significant inflation or even hyperinflation in the near future. But, that won’t work for long.
Government might then try backing fiat dollars with fiat SDRs, but that’ll also fail.
Sooner or later, government will be forced to return to the only money known to work for several thousand years. Gold.
It’s unlikely to happen easily, painlessly or soon. But another gold-based monetary system is inevitable.