Monday, September 13, 2010

Just Another Hyperinflation Post - Part 3


Let's try this one more time. Let's look at it from a purely conceptual angle. Most of the following discussion will not be a proof of the inevitability of hyperinflation, but merely the proper way to view the flow of capital in a panic while analyzing the probability that it will be called "hyperinflation" in hindsight, after the fact. This is what seems to be most lacking in the descriptions I read from those who cannot accept that fiat currencies always end the same way, and that the dollar has reached the end of its timeline.

To get there, I will walk you through several visualized metaphors in an attempt to build a workable mental image of hyperinflation. Hopefully you will be able to use this mental imagery when analyzing the deflationists' claims that it simply cannot happen to the US dollar.

So first, I would like you to imagine two flat, parallel planes. Those that know M theory can envision two membranes, very close to each other but only touching at a single point:


The top plane we'll call "the monetary plane" and the bottom one will be "the physical plane." And just so that we don't get confused with "the flat Earth society," those of you with advanced visualization skills can picture this same scheme as a globe with a membrane (or a Matrix of sorts) wrapped around it but not actually touching:


Now, for the purpose of this visualization exercise, I am going to challenge your definition of the word "money." In all likelihood you think of money as that which is substituted in the middle of a barter exchange. Something like this:


There is no right or wrong definition of the word "money," there are only poorly defined uses and clearly defined uses of the word. In the context of any single discussion, it is better to use a clear definition than to simply rely on everyone's common understanding.

In this discussion I will be talking about "the monetary plane," and in this context the word "money" refers to BOTH the medium of exchange and all forms of wealth reserves that exist in this "monetary plane." That is, "money" in this discussion is the medium of exchange PLUS any store of value that is not found in "the physical plane" of existence. Hopefully this is clear enough so that I don't have to add another three pages of descriptions.

In antiquity, the monetary plane didn't even exist. All wealth was held in the physical plane. In fact, even the medium of exchange was in the physical plane back then. So in that way, it was actually a barter exchange of one physical item for another, even if the other physical item was a chunk of gold. That chunk of gold existed in the physical plane. And for the purpose of this particular discussion, I hope this distinction is clear.

In today's monetary plane, enormous amounts of wealth are held as "someone else's thoughts of value" not value itself. And as ANOTHER once said, "time moves the minds of people to change, and with this, the thoughts of value also change. In this day, as not in the past, the loss of paper value as a concept will destroy the very foundation of wealth that this economic system is built on. This drama has started and is well underway!"

Credibility Inflation

Referring to my post, during times of credibility inflation the monetary plane swells large along with its credibility. One way to picture this is an hourglass, as I did in Gold is Wealth:


The top of the hourglass is the monetary plane and the bottom is the physical plane. And during times of credibility inflation, sand accumulates in great quantities in the top. Here are my pyramids representing the two planes from that same post, stacked on top of each other in a visual similar to the hourglass:


As I said in my Credibility Inflation post, the latest period of credibility inflation ran from 1980 until 2007. Since then, the credibility of the monetary plane has been deflating against the protestations of the Fed and CNBC. That doesn't necessarily mean the sand has gone down the hourglass yet, but its desire to cross the "bottleneck" is growing as the credibility of the top part deflates.

The stage for this was already set when the top swelled too large for the bottom to handle over the past 30 years:


Gravity alone would have brought it down gradually but for the managed perception of credibility that was holding it up, even as pressure built. But with credibility now deflating (that's the REAL deflation) it's anybody's guess when the pressure of over-inflation will bring it exploding downward with a force much greater than gravity alone. It's overdue at this point, kinda like The Big One in LA.

Some of you may have already figured out that hyperinflation, in my visualization, will be the great flood under pressure from the monetary plane back down to the physical plane of existence. And you may have noticed that this great flood must pass through a "bottleneck" of sorts to get where it's going. And perhaps you surmised that, if under enough pressure, this hyper-flow could actually BREAK the fragile neck in the middle of the hourglass.

In my pyramid above, taken from my Gold is Wealth post, I have that "neck" represented by gold. That's because that particular post was more about my #1 topic, Freegold, while this post is about my #2 (of 2) topic, hyperinflation. So for the purpose of this post, I will change that "bridge" between the monetary plane and the physical plane to dollars. For the bottom I'll use physical dollars, since they do actually exist in the physical plane. And I'll change the second layer on the top to "broad money," representing "balance sheet money," M1, M2, M3, MZM, TMS etc…


Now when I say we have already hyperinflated the $IMFS (the Dollar International Monetary and Financial System) over the last 30 years, I am referring to this whole top pyramid:


When deflationists see monetary deflation, they are looking at this part, and they see the value of the dollar in this circle rising:


When they see price deflation, they are looking primarily at this part, and they see the value of real estate and other things in there falling:


But they are missing the significance of the bigger picture; that the credibility of the entire top of the pyramid is deflating. And it was this credibility that was holding all that sand up there in the first place. With the value of the top red circle falling and the value of the bottom red circle rising, the deflationists see "deflation."


But what I see is the beginning of a capital flow, in one particular (and significant) direction:


Legal tender laws mandate the medium of exchange, but they do not and cannot name the store of value. For that they rely on credibility management by institutions like the Fed and CNBC. Jim Sinclair calls this MOPE. And it is the monetary store of value that is on the move, not the medium of exchange. But thanks to legal tender laws the monetary store of value must pass through (and be priced in) the medium of exchange, dollars, whenever it is on the move.

Thanks to our legal tender laws, in order for all that "wealth" at the top of the upper pyramid to escape to the bottom pyramid it must pass through the dollar. But as this occurs, the dollar swells in value. It becomes "more expensive." It'll cost you more derivatives to buy a dollar in order to pass through the neck of the hourglass. The dollar becomes a little bit harder to get, and this starts to look like deflation to the deflationists.

Now I'm really not trying to gross you out in this next little bit. But in order to pass through my next explanation I am going to have to carefully and delicately shift metaphors... without visual aids this time. ;)

As escape pressure builds in the upper regions of the upper pyramid, the legal tender dollar constricts its escape route like a clinching sphincter muscle as its (the dollar's) price rises. And then all that value that escaped the upper region starts collecting and compacting in the large intestine of Treasury Bonds, held in place only by the swollen sphincter that is the swelling dollar.

Not that I hope you can relate to this metaphor – I'm sure some of you can – but what do you think happens when that "flow restrictor" lets go, just a tad? Do you think "just a tad" escapes? Perhaps… at first. But with the Fed shoveling Ex-Lax (QE) into the system like there's no tomorrow, what do you think the end result will be? Will it be a journey back up into the stomach?

I know I haven't proven anything in this post. But I warned you at the beginning that was not the goal. The goal here, as I stated at the top of this post, was to give you the proper way to view the flow of capital during a panic when analyzing the probability that it will be called "hyperinflation" after the fact.

Notice that there is nothing in this view about the addition of new dollars. There is nothing about printing wheelbarrows full of money. All that stuff is secondary to the initial blast that explosively exits through a very small opening.

The lesson I hope you'll take from this story is simple. The next time a deflationist tells you there is no possible mechanism for hyperinflation in the dollar, just show him your sphincter and say, "oh yeah?" ;)

This metaphor even holds for the Weimar hyperinflation. If we think about our 30 years of credibility inflation as "packing the musket" for hyperinflation, then we can view the first year and a half of the Weimar three-year experience in the same light: "packing the musket." From Wikipedia:
It is sometimes argued that Germany had to inflate its currency to pay the war reparations required under the Treaty of Versailles, but this is misleading, because the treaty did not allow payment in German currency. The German currency was relatively stable at about 60 Marks per US Dollar during the first half of 1921.[1]

But the "London ultimatum" in May 1921 demanded reparations in gold or foreign currency to be paid in annual installments of 2,000,000,000 (2 billion) goldmarks plus 26 percent of the value of Germany's exports. The first payment was paid when due in August 1921.[2] That was the beginning of an increasingly rapid devaluation of the Mark which fell to less than one third of a cent by November 1921 (approx. 330 Marks per US Dollar).

The total reparations demanded was 132,000,000,000 (132 billion) goldmarks which was far more than the total German gold or foreign exchange. An attempt was made by Germany to buy foreign exchange with Marks backed by treasury bills and commercial debts, but that only increased the speed of devaluation. The monetary policy at this time was highly influenced by the Chartalism, and was notably criticized at the time from economists ranging from John Maynard Keynes to Ludwig von Mises.[3]

Yes, this is the same quote Mish used. Sounds pretty bad when you read that from August to November, in 1921, the Mark fell to less than one third of a cent! But it sounds less bad when you realize that it fell from only one and two thirds of a cent. That's like saying he fell to the bottom of the Grand Canyon without mentioning he was standing on an applebox at the bottom of the Grand Canyon. To restate: during this period the German Mark fell from 1.67 cents to .33 cents. Only an 80% fall. This was Germany's "packing the musket" phase, similar to our 30 years of credibility inflation.

At this point the Mark looked the same, and it actually stabilized for the next 6 months! But the musket was already packed, just waiting for the collapse of confidence. And the collapse of confidence is what brought hyperinflation to Germany. It came halfway through 1922 after a conference with U.S. investment banker J. P. Morgan Jr. produced no workable solution to Germany's problems. Here's the next part of the Wikipedia article that Mish didn't include:
During the first half of 1922 the Mark stabilized at about 320 Marks per Dollar accompanied by international reparations conferences including one in June 1922 organized by U.S. investment banker J. P. Morgan, Jr.[4] When these meetings produced no workable solution, the inflation changed to hyperinflation and the Mark fell to 8000 Marks per Dollar by December 1922.

This came later, as a reflex to the collapse of confidence

Hyperinflation was the result of the collapse of confidence after the conferences failed. The wheelbarrows that soon followed were the effect of this collapse of confidence, not the cause. The initial printing in 1921 "packed the musket." The loss of confidence in mid-1922 fired the musket. And then the real printing began out of necessity! By November of 1923 wheelbarrows were no longer big enough. The banks were counting their money by the ton.


An Afterthought

I realize that some of you are going to complain about "physical commodities" being on the top pyramid of my visuals. They are there as a class of speculative investments with its value anchored in the industrial use of those commodities which fluctuates along with the health of the economy. This industrial use value will disappear, at least temporarily, during a hyperinflation. And the actual commodities will retain an appropriate value through the hyperinflation out to the other side. But if they are bid up by speculation prior to the hyperinflationary event, their final value on the other side may actually be lower in real terms, even if it is much higher in nominal terms.

A monetary commodity, on the other hand, like gold, will rise because its value is anchored in the MONETARY use of the metal, as seen on the ECB balance sheet. So as you are deciding on a metal in which to ride this thing out, ask yourself in which function, monetary or industrial, is its value anchored. And you might just want to follow in the footsteps of the Giants, because they are clear and large, and easy to follow.

Sincerely,
FOFOA

For more on the gold angle in the above discussion, please read:

All Paper is STILL a short position on gold 3/23/09
Gold is Wealth 11/21/09
and Gold: The Ultimate Wealth Reserve 12/29/09

312 comments:

«Oldest   ‹Older   201 – 312 of 312
Mike said...

i dont think it matters if the 9000 tons of gold does exist in fort knox or not as FOFOA explained already.

from his article "gold man not goldman at bis"

so that being said, the biggest banks all have access to gold either through the cb's or through bb which would go through the miners if needed as the US gov will end up doing with their IOU's if fort knox is empty.

you can read more about this and how it deals with freegold in Confiscation Anatomy – Part 2 and Part 1

Unknown said...

It matters not whether they understand.

All that matters is that they hold gold. And don't let go.

A wise man ought always to follow the paths beaten by great men, and to imitate those who have been supreme, so that if his ability does not equal theirs, at least it will savour of it. Let him act like the clever archers who, designing to hit the mark which yet appears too far distant, and knowing the limits to which the strength of their bow attains, take aim much higher than the mark, not to reach by their strength or arrow to so great a height, but to be able with the aid of so high an aim to hit the mark they wish to reach. - Nicolo Machiavelli

costata said...

Gilligan,

Machiavelli offered brilliant insights into statecraft but that quote demonstrates that physics was not one of his strong points.

Unknown said...

LOL.

Agreed.

Anonymous said...

@FOFOA said "You are all giving the US government far too much credit considering it is about to lose its golden goose ... What you think of as the big domineering federal government is nothing without public confidence in its currency, the physical dollar ... Hyperinflation will be fast.

Yep; really, nothing more need be said. As the old saying goes, "it's all over except for the crying".

One day in the not too distant future, we're going to wake up to discover the Union has dissolved. Individual states and/or regional confederations will have introduced some kind of greenback as they once again take control over base money creation and possibly private credit.

It's all actually happening today, like practically undetectable, miniscule forerunners to a tsunami. Yet for many who still retain a belief in magical thinking, the image of a strong, powerful Oz is hard to shake.

It's why religion is so prevalent - something in our evolutionary past favored those who were willing to suspend disbelief and faithfully embrace whatever the "leaders" were saying. It most likely has to do with allocation of communal food and defense against group violence.

Either way, it manifests itself today in completely illogical fallacies regarding the power of some 'entity' to regulate and control base human instincts as typified in true, open (aka 'black) markets.

When local/state/regional governments take over issuance of un-backed scrip, what will people really accept for valuable physical goods & services?

Mike said...

From USAGOLD....good quote from Randy.

ECB steps up its bond buys amid worries
Sep 20th, 2010 13:02 by News

by Brian Blackstone
September 20 (The Wall Street Journal) — The European Central Bank increased its purchases of government bonds last week amid rising concerns in financial markets about the ability of Greece, Ireland and Portugal to repay their debts.

Bond purchases by the ECB, though higher in recent weeks than during much of the summer, are still a fraction of what they were when the program started in May at the height of Europe’s fiscal crisis.

… The ECB said it spent €323 million on government bonds last week, up from €237 million the previous week and the highest since mid-August. It didn’t provide a country or maturity breakdown.

When the program started May 10, the ECB was much more aggressive, buying more than €16 billion in bonds the first week alone. … By early August, the ECB was buying only about €10 million a week in bonds, leading to speculation at the time that the program would soon end.

… The latest increase in debt purchases “is an illustration that the sovereign-debt crisis is surfacing again, but it’s not as severe as May,” says Carsten Brzeski, economist at ING Bank in Brussels.

… The ECB’s bond purchases “are not serving much of a purpose in their current size,” says Marco Annunziata, chief economist at lender UniCredit in London. … Yet ending the program altogether would add even more instability to already volatile debt markets. “It would create a lot of uncertainty,” Mr. Annunziata says.

[source]

RS View: As the ECB grows the size of the Eurosystem’s balance sheet through domestic bond purchases, a rising price of gold is a natural and welcome means for the value of their reserves to keep pace as a proportion of the total… As it is, whomever said that rising gold prices were antithetical to a central banker’s operational purview is simply woefully out of step with the modern era (i.e., these recent 10 years) of mark-to-market accounting of reserve assets. In this field, gold still has a very very long way to freely and comfortably run. You can count on it; the various international central banks surely are.

Edwardo said...

BTW, the following statement is incorrect.

"It came halfway through 1922 after a conference with U.S. investment banker J. P. Morgan produced no workable solution to Germany's problems."

J.P. Morgan wasn't alive in 1922.

Edwardo said...

BTW, the following statement is incorrect.

"It came halfway through 1922 after a conference with U.S. investment banker J. P. Morgan produced no workable solution to Germany's problems."

J.P. Morgan wasn't alive in 1922.

FOFOA said...

Hi Edwardo,

If you read the quote following that you'll see it was JP Morgan Jr, who died in 1943. But yup, I didn't put the Jr in just above it. Thanks, I'll fix that.

FOFOA

Jenn said...
This comment has been removed by the author.
Jenn said...

|> And trust me, most of you have no idea what I mean when I say Freegold. I can tell by the comments lately.
FOFOA, if I’m not mistaken – you see a quick and vast movement from paper to real things. You recently revealed an idea which continues to echo in my thoughts.


From FOFOA
But they are missing the significance of the bigger picture; that the credibility of the entire top of the pyramid is deflating. And it was this credibility that was holding all that sand up there in the first place.
But what I see is the beginning of a capital flow, in one particular (and significant) direction.



To me – Freegold is when the wealth invested in paper financial instruments realize that paper profits make not food, water, nor shelter, and subsequently ditch paper for real goods. This then causes a surge of settlements in dollars in the futures markets (some by choice, some by counter-party default) which then flow to the bottom of your mirror of Exeter’s Pyramid. Perhaps Freegold is too specific for my interpretation – maybe Freerealthings? Gold being the capstone of the revaluation?
From FOFOA
Good Mike. You're getting close. Follow the trail. If there's less food, where did the rest of it go?


To those that hold physical gold?

Unknown said...

Dollars are not real.

Real things held now have their value. Price in dollars will disappear.

Benefit to be made twice.

Once in conversion to dollars above their value.

Twice in absorpsion of wealth in gold.

Opportunity cost of holding wealth outside gold?

FOFOA said...

Hello Jenn,

You and Mike each get partial credit. Here are my answers to the questions I asked. You've got to go back to the original questions and Desperado's post that prompted them to understand. And I did drop a couple hints. ;)

The original questions were:

Question: Desperado, what's the difference between "inflation protected food stamps" and $10,000 FRN's if an apple costs $10,000?

Answer: The stamps MIGHT get you an apple. The $10,000 FRN will get you an apple.

Alternate question: What do "inflation protected food stamps" and price controls have in common during a currency collapse?

Answer: They propel goods and services into the black market where hyperinflation actually unfolds.

These questions were in response to Desperado's comment where he said:

"Under the current regime, I think they will use inflation protected food stamps as the means to keep the sheeple fed, and they will work with large grocery chains to get food delivered. Unfortunately, those who currently don't need food stamps and in the future will, will have the same problem as all those with edollar assets trying to get through the door at once. So the middleclass will rush to get into the same system that the poor already inhabit."

In a post yesterday, Karl Denninger wrote:

"...you will be THROWING your gold at people to defend yourself."

I read Desperado similar to Karl, in that the middle class would be THROWING its gold into the streets while the poor eat like kings on the government dole. Only in this case, it would be dollars thrown in disgust, not gold. The people with dollars would starve while the stores are happy taking in government food stamps.

Well, if the food stamps are worth more than cash, then the government must be backing them with something worth more than cash. And that could only be BIGGER cash.

It will be a dynamically unstable environment, but it's not too hard to see the final outcome.

Hyperinflation will be too quick for the developments many of the commenters are describing. Goods will still be in the system, but they will go where they get the best price.

An apple for $10,000 sounds REALLY expensive. But it's not expensive at all if you realize that same apple also costs an orange. Goods will seek either other goods or cash in amounts that will compensate for the disdain of currency. Government can print all the inflation protected food stamps it wants. But if it is not backing those with $10,000 FRN's the food will go into the black market.

Continued...

FOFOA said...

And by "black market" I don't mean Walmart by candlelight. It will be chaotic and unpredictable.

And this is what will force physical cash hyperinflation. Government workers will only be able to get their families' apples where they spend $10,000 FRN's. Not in the "government cheese" breadlines. You think they'll show up for work for food stamps?

The only way the G can even ATTEMPT some of the scenarios in recent comments is to print FRN's like crazy to pay its stooges and to buy what it needs from the black market.

And as for Freegold, you don't understand it until you understand WHY it will be encouraged, incentivized and demanded by TPTB. This is where most people's perception breaks down. They can't see beyond the dollar reserve system.

Today the dollar is the global reserve currency. That means everyone holds dollars which are the lubrication of the wheels of global trade. This is what really matters to TPTB.

When the dollar no longer functions in this role, there will be but two options of what to hold in reserve. Gold, benefiting your own nation and not benefiting any other nation, or your trading partner's currency, the euro or the yuan. To understand this, you must look at what ARE international reserves? What are their function? And why are they important?

International reserves are not only the reserves held by your CB. They are all reserves (foreign currency holdings and gold) within your zone. The greater the reserves in your zone, the greater the ability to run a deficit. The lower the reserves in your zone, the greater the necessity to run a surplus.

Politicians are great at driving the economy toward deficit. But they struggle with encouraging a surplus. So, unless they can PRINT the global reserve currency, they rely heavily on the gross international reserves within their zone.

And once again, international reserves are either foreign currency or gold. If you hold your trading partner's currency, you give to him the same privilege the world gave the US during the dollar standard, called an "exorbitant privilege" by France in the 60's. If you hold gold, you give no privilege to your trading partner but instead, you raise the relative strength of THE DOMESTIC CURRENCY YOU PRINT!

So, with the dollar no longer the global reserve currency, the printer of the dollar will get MORE BANG FOR HIS BUCK (so to speak) on the international currency exchange, the more gold the people in his zone hold.

This is one of the amazing and inevitable conclusions that come out of Freegold. And gold's tremendous value (by current standards) under this system will be BECAUSE IT IS NEEDED, DEMANDED, AND SUPPORTED by TPTB. They will not be fighting it. Believe it.

Once you understand what is behind what I am saying, then you will understand Freegold.

Sincerely,
FOFOA

Desperado said...

I have a little experiment if anyone else would care to play along.

Assuming a hyperinflation hits the US in the next couple of years, what can everyone agree on would be certain, or at lease highly likely, to occur. Here is my short list:

- The federal government will use the crisis to try to seize more power
- Industrial and agricultural production will collapse
- Many companies will not be able to adapt and will go bankrupt
- Trade partners including oil producers will refuse to accept dollars
- Tax revenue in inflation adjusted terms will collapse
- "Hoarders" will be blamed for "shortages"
- The government will try rationing
- There will be gasoline rationing and long queues
- Most of the middle class will be left destitute, as will the lower class
- The receiving inflation adjusted entitlements or salaries will do well at first, then they too will be overwhelmed

Paul I said...

@Desperado

I agree with most of your short list, with one exception.

If you are in power when;

-production collapses
-power supplies fail
-the economy implodes
-hungry people take to the streets

I don't think you try and gain more political power. I think you try and fade quietly into the background, or seek asylum in an allied country.

That's usually what happens if you look back through history. Figures do rise to gain political power, but they're invariably new faces espousing change (true change) and demonising the old guard.

Hopefully it won't happen, and if it does, hopefully we'll get Ghandi and not Stalin. (yeah right)

Jenn said...

|> And trust me, most of you have no idea what I mean when I say Freegold. I can tell by the comments lately.


FOFOA, if I’m not mistaken – you see a quick and vast movement from paper to real things. You recently revealed an idea which continues to echo in my thoughts.


From FOFOA
But they are missing the significance of the bigger picture; that the credibility of the entire top of the pyramid is deflating. And it was this credibility that was holding all that sand up there in the first place.
But what I see is the beginning of a capital flow, in one particular (and significant) direction.



To me – Freegold is when the wealth invested in paper financial instruments realize that paper profits make not food, water, nor shelter, and subsequently ditch paper for real goods. This then causes a surge of settlements in dollars in the futures markets (some by choice, some by counter-party default) which then flow to the bottom of your mirror of Exeter’s Pyramid. Perhaps Freegold is too specific for my interpretation – maybe Freerealthings? Gold being the capstone of the revaluation?


From FOFOA
Good Mike. You're getting close. Follow the trail. If there's less food, where did the rest of it go?


To those that hold physical gold?

Unknown said...

Fofoa,

I read and understand (at least most of it) what you have posted. But, I believe the barrier to freegold is exactly the
issue that has allowed the true price of gold to be hidden, PEOPLE DON'T WANT TO TAKE PHYSICAL POSESSION OF THEIR GOLD! If
I look back at your video from a few lessons ago (I can't remember the title right now) but it was how fractional gold holders were able to sell more gold than they actually had by selling receipts. How was this possible in the first place? It was possible because people willingly surrendered their gold over to an entity that they precived as "safe" repository. They didn't feel safe holding their gold in their homes. The same issue exists today and until this paradigm shifts, free gold will never be realized and the true price of gold will continue to be hidden. So what is the catalyst that causes this paradigm shift of thinking? Is it possible that it might never happen? I believe this should be considered.

Mike said...

Allen,

if i am not mistaken the general public (most who are in debt and dont have any wealth to preserve) will not need to be involved in this run, only the giants that need to reserve their capital is required. in fact they dont even need to buy anymore, they just need to stop the flow of it.

imo the general public is part of the commodity run for silver which is not the same as the one for gold, the no gamble asset in the minds of those who matter.

Mike said...

as for the catalyst of shift in thinking.

lots of reasons, a failed US bond auction or even in the Euro Zone which is happening now, people realizing you can't bankrupt a casino by playing their game and instead taking away their credits until all they can do is give you cash settlement. even a food commodity shortage can trigger it like wheat.
perhaps a 2nd huge dip in stocks would cause people to run to physical gold as their paper values go worthless. that can also cause the credibility inflation that FOFOA has mentioned from the savers bubble.

but with every passing day the flow for gold gets smaller and smaller and that itself can be the trigger everyone ignores. gold not bidding for dollars anymore in huge amounts.

to me the only people who care about this are the people who have past and future(real things that the world needs) to protect.

Mike said...

to me the only people who care about this are the people who have past and future(real things that the world needs) labor to protect.

golden tube said...

Did everyone catch George Ure's writing today?

he makes some very good points


scroll down to this part

Coping: You Say You Want a Revolution?

Several readers took me to task for recommending president Obama consider either Joseph Stiglitz or Paul Krugman to head up the National Economic Committee ....


http://urbansurvival.com/week.htm

Unknown said...

A question about paper vs physical gold.

You've talked about how gold futures contracts won't be any good because they won't get delivery. I can see how that would happen. Then there are etf's where we don't really know how much gold they have, like gld, as i understand it. But they do have gold. Do you think they'll negate ownership priviledges or something?
Then there is a couple of closed end gold mutual funds, one being PHYS, that hold gold that is supposedly deliverable to the owners. If these funds own the physical gold, are you suggesting that someone will simply steal it from the owners of the funds? Like maybe the US gov't?

Do you think the only gold that counts is the gold you have buried in your back yard?

Jenn said...

I've tried to post twice and it seems neither post has made it through. FOFOA, I know you were having issues with Blogger's spam filters -- did you see either of my attempts?

FOFOA said...

Hello Jenn,

Yes, all your attempts posted. None went in the spam filter. I even answered your comment. Most likely you need to click on "newest" at the bottom. When the comment count passes 200 it starts a new page. And if you don't realize it, then it just looks like nothing is posting.

Sincerely,
FOFOA

Pete said...

FOFOA, the irony is that Jenn probably won't see your response ;)

Perhaps you can edit the second last comment on the first page (mine) and say something in there? Doesn't bother me any, my post had no real content.

ebikeguru said...

@ fofoa

"When a government tries to control an object (think: controlled substance) it sends it into a black market. It loses the control it was seeking. And when that object is the very engine of that government's power (think: physical dollars), it loses that control as well. At that point it must go to the black market to find what it needs. And it will have to pay that black market in the terms of its (the black market's) choosing. You can arrest a man, but you can't arrest a market.

Whether markets are free from government or not (a relativistic question), market forces are always present. Government domination cannot outlaw market forces.

I think you are all giving the US government far too much credit considering it is about to lose its golden goose. To me, you are all thinking like deflationists. You are describing the present situation of the federal government and projecting its present abilities into a future without the dollar. A ludicrous projection!

Soldiers don't fight without a paycheck that at least buys an apple. Even the stooges won't show up for work. And I'm talking about buying an apple at the market where apples are actually being sold. Not the government bread-lines for those with inflation protected food stamps, where you can "afford" all the food your family needs except that there's not enough to go around.

What you think of as the big domineering federal government is nothing without public confidence in its currency, the physical dollar. And confidence is one thing it CANNOT force. Confidence is the ONE thing that must be earned. The entire federal government operation from Pelosi to Private Benjamin will stop on a dime the minute it can't pay its stooges in inflation-adjusted terms.

Blocking (or "gating") electronic capital flight will be the least of its worries when the dollar goes. It'll be the outside world that'll be blocking the dollar at the exits, not the USG! How many zeros to add in the first batch of new bills will be the main question at that point. And the speed capability of the Fed's printing press will be the determining factor in answering that question.

Hyperinflation will be fast. Six months maybe. After that, Freegold. And trust me, most of you have no idea what I mean when I say Freegold. I can tell by the comments lately."


You can say that again. Oh, I guess you just did.

This should be a new post on it's own FOFOA!

Another big mental cog just dropped into place for me after reading this. Thanks again FOFOA.

ebikeguru said...
This comment has been removed by the author.
Dwain said...

Over three fourth's of the U.S.'s money supply takes the form of private credit (digits held within accounting databases), how well do you believe credit will hold up under the collapse in value of the dollar? Can banks (the administrators of digits) withstand a major devaluation? Wouldn't currency devaluation absent wage and credit inflation have the same effect as removing currency from the economy, as it did for Iceland? Speaking of Iceland, didn't all the credit amassed in checking and savings accounts go "POOF!" when their banks failed? If we're talking a mass exodus out of U.S. debt paper, do you think Citi, BoA, JPMC or GS et al will withstand the exodus? If over three fourths of the U.S.'s money supply went !POOF!", as it did in Iceland, how long do you think it will take the government to actually print currency to compensate? If the government is going to print us into hyperinflation, do you think they will bypass the debt mechanism of the Fed to do so? I mean, it would be silly of them to hyperinflate debt while trying to print themselves out of debt, don't you think?

FOFOA said...

Hello Carl,

When a currency devalues like Iceland the cost of everything rises. Yes, Iceland took it in the face, hard. It wasn't exactly the US federal government relative to the rest of the world. When a currency reaches the end of its timeline, like the dollar is, because of the collapse of an impossible debt load, either the banking system or the currency itself must take it in the face, hard. And in our case, it will be the currency first and foremost. The currency will be sacrificed to save the banks. But the banks (esp. Wall Street) will then follow the currency down in relevance.

Pure fiat currency has solved the problem of bank failures. Not that banks don't fail anymore, but that the savers don't lose their nominal savings like they did in the 1930's. In a healthy system those savings are credits from private banks holding fractional reserves from the central bank. In a dying system new central bank reserves are created to replace the private credits going "POOF". It is the reserves in the system that eventually hyperinflate, not the private credit.

One thing is clear and always has been. That the Fed and the US government will sacrifice the relative value of the dollar to keep the banking system and the federal government operational, even if only for a few more months. The alternative, from their perspective, is far worse.

But the important thing to recognize is that the initial devaluation, just like in Iceland, comes from external forces. That is, it is not a direct and proximate effect of their printing. Their printing that must follow this devaluation (to keep their essential parts functioning), is, on the other hand, a direct and proximate effect of the "external" (out of their control) devaluation.

Devaluation causes the price of everything to rise instantly, even the price of governing. This is the onset of hyperinflation. The printing to pay the rising price of governing is the effect, which then feeds back to the initial cause, creating a self-sustaining loop. Circulation velocity initiated by fear and panic (which can shift 180 degrees instantly) is the initial driver at the onset of hyperinflation. This does not require a large money supply.

As for bypassing the debt mechanism, no, I don't think they will. But I think it will be direct monetization between the Fed and Treasury, with no third parties involved. It will be done under an emergency mandate. And they won't be trying to print themselves out of debt, although that will come naturally as the debt will eventually be worthless. They will be printing to make sure the government stooges show up to work.

Sincerely,
FOFOA

costata said...

FOFOA,

Carl chose an interesting example to support his deflation arguments. Iceland is probably the most extreme case study you could find.

Prices for imports hit hyper-inflationary levels overnight and a number of imported goods were apparently just not available fairly quickly. (So where does Iceland fit into a deflation scenario?)

When the Icelandic banks hit the wall their currency went "no bid" immediately according to Chuck Butler. Iceland's government didn't print money and compound the problem. No one wanted their currency, so what would be the point of cranking up the printing presses.

With such a small population (340,000 approx) they retained a high degree of social cohesion and limited scope for a crack up boom, Misean style hyper-inflation. They had to make do with things that were locally available. If necessary the population could have switched to barter very rapidly for these local goods.

Being a small isolated country with no land borders it was hard for the citizens to adopt another currency like the population of Zimbabwe. Although I imagine that the significant number of Icelanders working overseas would have provided some hard currency to relatives in Iceland.

The UK and Dutch governments bailed out the depositors from their countries. They printed the money and paid the bill respectively. In both cases the amounts were easily digested given the size of their economies.

There was also a geo-political element in the offer of emergency loans. Russia offered a multi-billion dollar loan with (according to some observers) their eye on a vacant naval base in Iceland that would have given them a year round forward base in the waters of northern Europe. Apparently this prospect was NOT viewed with equanimity in NATO or Washington.

In addition to these minor discrepancies between the USA and Iceland the Icelanders have weird sounding names and screechy female pop stars.

Dwain said...

[quote]Prices for imports hit hyper-inflationary levels overnight and a number of imported goods were apparently just not available fairly quickly. (So where does Iceland fit into a deflation scenario?)[/quote]

Iceland fits nicely into a deflation scenario because rising prices alone, even if they happen overnight to the extent that occurred in Iceland, is not the whole argument; it takes money to make inflation. Iceland was punished for not having any by countries that did. Rising prices without the money to pursue them just makes you poorer, as it did for the Icelanders, and that’s not inflation, that’s deflation. Price is a moot point when you have no money to spend.

Here’s the lesson of Iceland that appears to be speed skated over; Credit Is Not Money, it is an I.O.U. Money. It’s worse than fiat in that you have nothing to show for it when it goes bad, such is the case of Iceland.

Just because we call credit 'money' or 'dollars' and we can spend it or save it, invest it or swap it, doesn't mean that it will act as if it were 'money' or 'dollars' in a crisis and history has clearly and repeatedly demonstrated that credit does not act as 'money' time and time again. I mean, why else would the FDIC be necessary if not to cover the credit that went "POOF!" in a bank failure? And that's the positive credit; the 'money' people believe they have in excess of debt.

So here we are discussing the fall of the dollar and nary a word about how this would affect the banking structure, the issuers of over three fourths of the U.S.’s ‘Money Supply’, which takes the form of digits held within accounting programs. And it’s not just the U.S. that will be affected, it will be the entire global banking structure because the world’s reserve currency isn’t going to go down alone, it's going to take all credit with it. And that, my friend, is Hyper-Deflation.

Dwain said...

Let me rephrase something:

It’s worse than fiat in that you have nothing to show for it when it goes bad, such is the case of Iceland.

It should read:

It’s worse than fiat in that you have nothing to show for it when it goes bad except the debt that created it, such is the case of Iceland.

Dwain said...

Here is what I'm talking about, it starts at about 2:13 :

http://www.youtube.com/watch?v=m_atOvrTtT8&feature=player_embedded


.

FOFOA said...

Hello Carl,

"Iceland fits nicely into a deflation scenario because rising prices alone, even if they happen overnight to the extent that occurred in Iceland, is not the whole argument; it takes money to make inflation."

It may take new money to make inflation, but not hyperinflation. You are missing the key point in these three articles. That "overnight price rise" is the onset of hyperinflation. The response of the government/printer either keeps it going or halts it. In Iceland's case, the printer didn't keeping it going for many reasons, none of which apply to the USG.

The credit money you see disappearing has absolutely NO BEARING WHATSOEVER on hyperinflation. Credit money ALWAYS vanishes during (or just prior to) a hyperinflation. The disappearance of credit money is part of the cause. Hyperinflation is all about base money. 100% base money. Base money velocity. Gov't response. The massive printing does not drive the hyperinflation, it CHASES it.

From Part 1:

"First of all I would like to clear up probably the most common misconception about hyperinflation. What most people believe is that massive printing of base money (new cash) leads to hyperinflation. No, it's the other way around. Hyperinflation leads to the massive printing of base money (new cash).

Hyperinflation, in most people minds, conjures images of trillion dollar Zimbabwe notes. But this image is simply the government's reflexive response to the onset of hyperinflation, which is actually the loss of confidence in the currency. First comes the loss of confidence (hyperinflation), then, and only then, comes the massive printing to keep the government and its obligations afloat."


As a deflationist, your next reply will probably be something about how the USG could never possibly replace all the disappearing credit money fast enough to sustain hyperinflation. But you are still missing the point. The printing CHASES the hyperinflation which is a fear-driven event. And the USG will most definitely respond differently than Iceland because of its own massive need for a constant flow of dollars.

Your thesis seems to be that global price levels are presently and efficiently somewhat properly balanced against a quantity of M3 (or credit money) dollars. Wrong. Prices are WAY suppressed relative to fiat money because of 30 years of Credibility Inflation (see my post). Your thesis seems to be that if 3/4 of the M3 (or M-whatever) disappears then prices must fall because there are suddenly less "dollars". Wrong. Iceland is a perfect example. Prices rose 300% in two weeks (or something close to that) without any new printing. This is the onset of a currency event. It stopped in the krona after a couple weeks but it will not stop in the dollar for, my guess is, 3 to 6 months.

Sincerely,
FOFOA

FOFOA said...

Think of it this way. Hyperinflation is a velocity-driven event, not a quantity-driven. Velocity is a function of fear and panic. The quantity of new base money chases and adds fuel to the velocity (fear of devaluation) but never quite catches it. Fiat value is falling faster than they can print. And then, the more they print, the faster it falls. They can never quite pay their obligations in full once it starts... the USG, that is.

Dwain said...

You contradict your own arguments.

“It may take new money to make inflation, but not hyperinflation.”
“That "overnight price rise" is the onset of hyperinflation.”
“The response of the government/printer either keeps it going or halts it.”
“In Iceland's case, the printer didn't keeping it going.”

So it does indeed take new money injected into the economy to fuel hyperinflation.

If the government doesn’t print to compensate (CHASE prices) then there can be no hyperinflation, rising prices due to the collapse in value of the currency notwithstanding. This establishes the fact that hyperinflation is a monetary event not a pricing event.

Moving on...

Dwain said...
This comment has been removed by the author.
Dwain said...

"Credit money ALWAYS vanishes during (or just prior to) a hyperinflation. The disappearance of credit money is part of the cause. Hyperinflation is all about base money. 100% base money. Base money velocity.”

I agree with this declaration 100%, all credit goes "POOF!" and all debts become due and payable in base money. So, all we have to do is establish the actual base money supply as opposed to promises to pay, i.e. credit money or, we can dispense with the euphemisms and call it by its real nomenclature: Debt Obligations.

Now, if we actually read the Fed balance sheet, we note that the actual base money supply is $899.9 Billion printed Federal Reserve Notes in circulation, $382.6 Billion of which within the U.S. and that, everything above that is a promise to pay. This includes demand deposits, checking and savings accounts, money orders and Reserves held on deposit at the Fed, all of which are promises to pay in base money, debt obligations.

Also, when you look at the numbers, you will note that the Fed and the government haven’t really expanded the real money supply by any meaningful amounts. What they have been doing is expanding and expending credit, debt obligations. And the reason they can do this is because credit as money still works.

"Credit money ALWAYS vanishes during (or just prior to) a hyperinflation.”

It puzzles me that you fail to grasp the magnitude of the consequences involved in that statement because EVERYTHING we do is done via credit money. From unemployment pay and food stamps to multibillion-dollar deals that span the globe, from Wall Street to Main Street, all credit money. And please remember that Wall Street banks have their credit money tentacles intertwined in every economy around the globe as well.

"Credit money ALWAYS vanishes” = GLOBAL HYPER-DEFLATION = All Commerce, All Around The Globe, Comes To A Screeching Halt.

You contradict your own arguments.

“It may take new money to make inflation, but not hyperinflation.”
“That "overnight price rise" is the onset of hyperinflation.”
“The response of the government/printer either keeps it going or halts it.”
“In Iceland's case, the printer didn't keeping it going.”

So it does indeed take new money injected into the economy to fuel hyperinflation.

If the government doesn’t print to compensate (CHASE prices) then there can be no hyperinflation, rising prices due to the collapse in value of the currency notwithstanding. This establishes the fact that hyperinflation is a monetary event not a pricing event.

Moving on...

"Credit money ALWAYS vanishes during (or just prior to) a hyperinflation. The disappearance of credit money is part of the cause. Hyperinflation is all about base money. 100% base money. Base money velocity.”

I agree with this declaration 100%, all credit goes "POOF!" and all debts become due and payable in base money. So, all we have to do is establish the actual base money supply as opposed to promises to pay, i.e. credit money or, we can dispense with the euphemisms and call it by its real nomenclature: Debt Obligations.

Now, if we actually read the Fed balance sheet, we note that the actual base money supply is $899.9 Billion printed Federal Reserve Notes in circulation, $382.6 Billion of which within the U.S. and that, everything above that is a promise to pay. This includes demand deposits, checking and savings accounts, money orders and Reserves held on deposit at the Fed, all of which are promises to pay in base money, debt obligations.

Also, when you look at the numbers, you will note that the Fed and the government haven’t really expanded the real money supply by any meaningful amounts. What they have been doing is expanding and expending credit, debt obligations. And the reason they can do this is because credit as money still works.

continued.....

Dwain said...

"Credit money ALWAYS vanishes during (or just prior to) a hyperinflation.”

It puzzles me that you fail to grasp the magnitude of the consequences involved in that statement because EVERYTHING we do is done via credit money. From unemployment pay and food stamps to multibillion-dollar deals that span the globe, from Wall Street to Main Street, all credit money. And please remember that Wall Street banks have their credit money tentacles intertwined in every economy around the globe as well.

"Credit money ALWAYS vanishes” = GLOBAL HYPER-DEFLATION = All Commerce, All Around The Globe, Comes To A Screeching Halt.

And that, almost became our reality in 2007/08, next time they’re not going to be able to stop it.

So, what velocity do you believe -$0.00 can achieve?

As for myself, I would guesstimate unlimited velocity.

Dwain said...

Sorry about the redundancy, it kept telling me that my post was too long so I kept witling it down and posting chunks.

Thank you google.

FOFOA said...

Hello Carl,

Yes, blogger is a pain. I find that it is best to preview first, then post.

"Credit money ALWAYS vanishes during (or just prior to) a hyperinflation.”

It puzzles me that you fail to grasp the magnitude of the consequences involved in that statement because EVERYTHING we do is done via credit money."


Perhaps I actually understand the magnitude of these consequences better than any hyperinflationist you've ever encountered before now. I agree with most of what you describe. What puzzles me is how deflationists fail to grasp the consequences of the consequences in this political world of the modern dollar.

I'm just curious. Did you read all three of these posts or just part 3? I only ask because I addressed points in the first two that I feel compelled to make again now, which makes me think you probably only read part 3. Also, there was debate that followed in the comments of all three including participation by Mish, in case you didn't see it.

In part 1 I addressed the question, "What is a deflationist?" And I answered it with exactly what I see you doing now:

"What is a deflationist? It is one who looks very closely at the present structure of everything, the laws, the rules, the regulations, what is supposed to happen, who should fail, etc… but ignores the political (collective) will that backs it all up. The same political will that always changes the rules to suit its needs as surely as the sun rises. And it is this political will that makes dollar hyperinflation a certainty this time around."

The following quote from FOA is important because, simple as it is, it really states the crux of the dispute:

""My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

Now you have to understand a nuance in this statement. When he says, "saving debt at all costs" he's not talking about preserving the debtor's obligation to pay. He's talking about nominally saving the savers who have been lulled for decades into holding other people's debt obligations as their "money."

And, along this line of reasoning, I take issue with one point you made:

"...Reserves held on deposit at the Fed, all of which are promises to pay in base money, debt obligations."

Reserves held on deposit at the Fed are "Fed obligations" TO PRINT. Or, as you say, to pay in base money. But the Fed is the only bank that can print its obligations. Which makes them qualitatively different than all others. This also applies to official guarantees, like the new infinite FDIC, or the mega Pension Fund guarantees. They may not be circulating cash yet, but they are essentially obligations TO PRINT by the one entity THAT CAN!

Continued...

FOFOA said...

This process is already well underway. Not the process of making sure the debtor's obligations remain intact, but the process of ensuring that the dollar's financial system in aggregate delivers at face value nominally. This is what they can and will ensure. Nominal delivery to the savers (pensions, foreign reserve holders, etc...) Nominal delivery is all they can guarantee, is what is being guaranteed, and these guarantees are priming the event that will force the USG to force the Fed to print physical cash in higher denominations for its own survival.

Between my publishing Parts 1 and 2, someone else published an article about hyperinflation happening in digital (or electronic) currency, something I absolutely think is 100% impossible. So in part 2 I addressed the question of the transition to physical currency that will be part of the collapse of the dollar. Apologies for the long reprint, but it is the best way to point you to my reference:

"...at some point there is going to be a risk premium for accepting institutional promises of delivery of something physical (physical cash) in the future.

That HK bank knows it will have to cough up the cash today if it accepts the wire transfer, but it may not see the replacement cash for a week. Will that cash in a week be worth the same as the cash going out the door today? Probably. But if there's a chance that it won't, then there is a risk premium to be charged. This is one hidden little corner where that nasty hyperinflation bug may first appear.

Once the time factor begins to present a perceived risk to the institutional banking system, it's all over. The system will need a large infusion of physical cash. Each and every "digital currency unit" is a debt of a physical dollar, backed by a debt, backed by a debt, backed by a debt and so on. It is a very long chain. And like all chains, it is only as strong as its weakest link! And there are a lot of weak links out there. The FDIC says about 800 of them right now if you believe the FDIC.

When one of these weak links breaks, it will not be enough to simply feed the cash to that broken link. The time factor will come into play. The Fed will have to ship physical dollars to ALL the links in the broken chain at once to avoid a panic. This will require a large infusion of physical cash.

Luckily this is possible today! Cash is the reserve, and cash can be created at will!!

Back in the 30's, gold was the reserve, but gold could not be created at will. If it could have been, then they would have just closed the banks long enough to truck enough gold out to the banks. And it's not just the customers lining up outside the banks that forces this action. It’s the interbank settlement process and the interbank confidence that lubricates this process. And eventually it will also include the larger retailers, who operate with a huge degree of confidence in the bank clearing system.

Think about the amount of promises a large grocery chain takes in every day with the confidence that settlement will happen before it needs to pay its obligations. The whole economy is like this. Whether one realizes it or not, the whole economy is operating on the confidence of the ultimate delivery of physical cash in the clearing process.

How about a gas giant like Shell? Think of all the "digital money" promises it takes in with faith in the clearing system to clear all imbalances each night.


Continued...

FOFOA said...

"There will come a point very quickly after confidence is shaken by some event, that physical cash will start to carry a small premium over digital money. This will be the time factor rearing its ugly head. I know of one cigarette shop that advertises a "cash price" in the window! This store charges less if you pay cash! That's not because of the time factor, of course… yet! But at some point those signs will start showing up at more places.

Today most vendors will eat the 2% it costs them to accept digital money. But what about when that cost rises due to the time factor risk premium? If someone pays you in cash today, you can go to the grocery tonight and buy food with it. If someone pays you with plastic, it will take a couple days before Visa deposits 98% of that amount in your bank account. Will your bank have any physical dollars then? So that you can recoup the lost 2%+ by getting the better cash price at the grocery?

Once this time factor settles in it will spread very quickly. The cigarette seller will prefer cash and will give you a discount for it so that he can go quickly and get the cash discount from the grocer. The banks will need loads of physical cash at this point. And they already have some of what they will need, sitting in excess reserves at the Fed.

The First Mechanism for Extra Zeros

How much will the Fed have to print up, and how fast? Unfortunately, $1 trillion in $100 bills is still 10 billion physical notes. If the Fed tried to print that, all in hundreds, in one week, that would require a printing rate of 1 million notes per minute, or 17,000 per second, 24 hours a day for a week. In other words, it is impossible.

But there is a simple solution! It's been used many times before and thus has many precedents. The euro already has €200 and €500 notes, presently trading for $254 and $636 respectively against the dollar. So it wouldn't be a huge leap for the Fed to print $500 and $1,000 notes instead of $50's and $100's in an attempt to hold the banking system together. It's actually a no-brainer. It reduces the printing time by a factor of 10!

Now instead of 1 million per minute, it's only 100,000 per minute. Well, that might be tough too. So it'll probably take a couple weeks and even then be an insufficient amount.

There's another option as well. They've got all those new $100 bills already printed. They could release the new bills at 100:1 on the old bills. Most people don't see this as hyperinflationary. They think of it as "issuing a new currency." So what's the difference between the two? There is NO DIFFERENCE!

Issuing the new $100's at 100:1 would be the same as issuing a $10,000 note. Same exact thing. But you must realize, it's not the notes that are driving the collapse (hyperinflation), it's THE OTHER WAY AROUND.
The hyperinflation is driving the NEED for the notes! So simply issuing the new $100 at 100:1 would not be an instantaneous devaluation of the dollar against all goods and services. No, they are rising at their own rate, REQUIRING a $10,000 note! Whatever you could previously get for $100, like a banana, would still be $100 in old dollars (for a few minutes anyway) after the new currency is issued. Most people don't think about it this way.

They think of the issue of new currency as "solving the problem" or "stopping the collapse." They think it would cause an immediate 100:1 revaluation of all goods and services allowing the monetary authority "to get ahead of the hyperinflation" and stop it dead in its tracks. No, it doesn't work this way. Issuing a new currency is only a very temporary fix and worst of all, it feeds fuel to the fire.

Hyperinflation is very hard to stop once it starts. The only way you can stop it is by switching to a harder currency. But unfortunately for the dollar, this will not be a realistic option.


Continued...

FOFOA said...

"If the dollar tries to peg itself to a new parity with gold (a new "emergency" gold standard) in the middle of the hyperinflation process, it will experience a run on any gold it puts up as backing. Imagine if Zimbabwe had tried to stop hyperinflation by opening a "gold window," selling gold at a fixed price in Zim dollars. (See image at the top!)

In Zimbabwe, they only stopped the hyperinflation by officially switching to a harder currency, the US dollar. But what currency could the dollar switch to? The euro? This is a possibility, but more likely the hyperinflation will simply run its course over a few months and by that point we'll ALL understand Freegold."


Then in the comments it was argued that the USG would resist or try to control this shift into physical currency. My counterargument is best summed up in this comment:

" When a government tries to control an object (think: controlled substance) it sends it into a black market. It loses the control it was seeking. And when that object is the very engine of that government's power (think: physical dollars), it loses that control as well. At that point it must go to the black market to find what it needs. And it will have to pay that black market in the terms of its (the black market's) choosing. You can arrest a man, but you can't arrest a market.

Whether markets are free from government or not (a relativistic question), market forces are always present. Government domination cannot outlaw market forces.

I think you are all giving the US government far too much credit considering it is about to lose its golden goose. To me, you are all thinking like deflationists. You are describing the present situation of the federal government and projecting its present abilities into a future without the dollar. A ludicrous projection!

Soldiers don't fight without a paycheck that at least buys an apple. Even the stooges won't show up for work. And I'm talking about buying an apple at the market where apples are actually being sold. Not the government bread-lines for those with inflation protected food stamps, where you can "afford" all the food your family needs except that there's not enough to go around.

What you think of as the big domineering federal government is nothing without public confidence in its currency, the physical dollar. And confidence is one thing it CANNOT force. Confidence is the ONE thing that must be earned. The entire federal government operation from Pelosi to Private Benjamin will stop on a dime the minute it can't pay its stooges in inflation-adjusted terms.

Blocking (or "gating") electronic capital flight will be the least of its worries when the dollar goes. It'll be the outside world that'll be blocking the dollar at the exits, not the USG! How many zeros to add in the first batch of new bills will be the main question at that point. And the speed capability of the Fed's printing press will be the determining factor in answering that question.

Hyperinflation will be fast. Six months maybe. After that, Freegold. And trust me, most of you have no idea what I mean when I say Freegold. I can tell by the comments lately."


Sincerely,
FOFOA

Desperado said...

Hello Fofoa,

I am not sure if I should comment here or on the current thread, but here goes...

In Switzerland we use the EC card, which is really an ATM card, to make most purchases. These cards can even be pre-loaded with digital cash. Payments made with these cards are charged a flat fee of a about 30 cents, and are instantaneously deducted from a cash (checking) bank account. If the pre-loaded cash is used, there is no transaction fee. In large parts of Europe, bills are paid either online from a cash account or at the post office where cash can be used to settle the bill. My point is that these transactions occur at the speed of light, and correct me if I am wrong, but the cash appears instantaneously in the proper account of the vendor.

In the US, I believe debit cards function this way. And I believe that with credit cards used for on line purchases and purchases where the vendor has on online electronic credit card reader, the transaction is booked immediately.

Now I understand what you are saying about a time lag in clearing transactions for electronic bank transfers. But don't forget that there is also a time factor involved in cash, first that it has to be physically transported to the place of settlement where e-transactions can be done online.

So I think that for domestic transactions it is entirely feasible that at least through the beginning of hyperinflation that the current electronic money system functions intact. At later stages, all bets are off because as you say it will be come entirely political.

Finally, I have a question about international credit money holders. All these foreign entities holding various dollar denominated debt instruments are obviously at some point try to sell these and go through dollar cash accounts in order to change to instruments denominated in other currencies. If Bernanke is going to keep his interest rate curve flat, he will be forced to buy up a flood of treasuries and corporate bonds. He will not be sending 747 loads of paper dollars overseas to pay for this. How do see all this M1 money coming back to the US for settlement? Is it all just going to instantaneously go up in smoke?

costata said...

Hi Carl,

I was tired when I read your comment about my observations on your choice of Iceland as an example of deflation. So I decided to sleep on it before responding. Having just re-read your comment I find I'm still confused by your thinking.

BTW I watched that video you linked and it explained nothing to me. The commentator presented a series of unsupported assertions as facts.

It would be helpful if you defined your terms. What are your definitions for the following terms?

1. Inflation
2. Deflation
3. Hyper-inflation
4. Hyper-deflation
5. Money

Without these definitions most of your first paragraph makes no sense to me. From your comment:

"Iceland fits nicely into a deflation scenario...."

Definition? Evidence?

"... because rising prices alone, even if they happen overnight to the extent that occurred in Iceland, is not the whole argument; it takes money to make inflation."

"Iceland was punished for not having any by countries that did."

This seems to imply some singular global money that Iceland was lacking.

"Rising prices without the money to pursue them just makes you poorer, as it did for the Icelanders, and that’s not inflation, that’s deflation."

The Icelanders had Icelandic krona before and after their currency crisis. They had enough to bid up prices in krona, on some goods, by 300%.

"Price is a moot point when you have no money to spend."

Can't argue with that last sentence Carl.

Cheers

FOFOA said...

Hello Desperado,

"My point is that these transactions occur at the speed of light, and correct me if I am wrong, but the cash appears instantaneously in the proper account of the vendor."

You are completely missing the point that electronic money, in ANY form, is simply a liability or obligation of one private institution to supply HARD currency to another. Hard currency being physical cash. What is transferred at the speed of light is the obligation, NOT the currency. NOTHING is cleared in electronic transactions (of any kind, prepaid or not). But in physical currency transactions, it is.

Sincerely,
FOFOA

Desperado said...

But Fofoa,

You said: "electronic money, in ANY form, is simply a liability or obligation of one private institution to supply HARD currency to another. Hard currency being physical cash."

Isn't a paper dollar just a debt certificate anyway? If the government guarantees all liabilities of a bank (your private institution), isn't digital cash in your checking account at that bank as good as paper cash in your pocket, since they both would then represent the full promise and power of the federal government backing it?

I guess the question would be would ecash be as readily accepted as paper cash, and in the black market of course not. So I think you and I are really arguing about time frames.

I am convinced the feds early on will try rationing and population control to cling to power. Isn't this already what Obamacare and food stamps are about? This will entail trying to force the entire market of goods and services to use emoney. How long this will last I can't say, but large, organized black markets won't appear over night. Longer term the federal government will collapse as they run out of real money and the states and counties will simply ignore them. Somewhere between the these two interim phases, the Feds will lose control as black markets take over. How long each phase lasts I certainly can't say. But long before they allow bread and/or gasoline prices to rise above monthly salaries they will try rationing, and they will blame hoarders. Did you see this clip of Charles Munger calling gold hoarders "jerks"?

"if you're capable of understanding the world, then you have a moral obligation to become rational. I don't see how you become rational by hoarding gold. Even if it works you're a jerk"

Michael H said...

@ Carl, FOFOA,

I hope that you two can continue the discussion. It does seem that you agree more than disagree, and clearing up definitions and assumptions (as Costata said) would bring your positions together. Or if not together, at least to where you can pinpoint where exactly you disagree.

For example, when Carl says "rising prices alone, even if they happen overnight to the extent that occurred in Iceland, is not the whole argument; it takes money to make inflation," then I get confused. To me, rising prices signal inflation. A 300% rise virtually overnight would be on the verge of hyperinflation, though not quite.

I understand the monetarist arguments that, strictly speaking, inflation is an increase in the money supply. But, as FOFOA said in his 'credibility inflation' post, if we go by that definition of inflation, then we have had inflation of the money supply over the past 30 years, but we haven't had the rising price (of goods, not of financial assets) effect to go with it. Well, the money has been created, and now we'll have our inflation.

Unknown said...

I am not sure if my input is wanted or it if adds to the discussion much, but I thought i might help clarify some things.

It is my understanding that payments made electronically are only paid into the vendor's account once daily when settlement is made, usually some time before midnight and usually at a fixed time.

Once a month, the appropriate "fees" are deducted from the vendor's account calculated from the amount of, and/or percentage of each transaction. Not unlike a kickback or tribute. The difference between debit and credit money, for the vendor, is how the fees are calculated.

The only reason this is stomached, among many at least, is because it is expected and it would cost the vendor business if it wasn't offered.

If you were to add uncertainty of payment, then, well, they might insist on cash.

So it is already preffered today to recieve payment in cash. First, it is cheaper. Second, settlement is made on the spot.

For what it's worth, most people (the masses) do not view physical currency as a debt instrument, but as payment in full. Not only that, but it grants the vendor the ability to keep it out of the system, or hidden from the watchful eyes of some.

Desperado said...

@Gilligan,

I am not certain whether you were discussing debit cards or credit cards, you just discuss electronic payments.

When you drive to a gas station to pay for your tank using a debit card, it displays the amount, verifies your card, and then checks if you are authorized for the amount of the transaction. In Switzerland the central clearing bank Payserv (owned jointly be the Swiss banks) clears the transaction. Your next purchase on that day will be validated against your account balance minus what you just spent. Of this I am sure. How the debit card clearing in the US works I do not know. Perhaps in the US the transaction is sent around in batch files to be run on various systems during the night. It is an important weak point that would prevent a smooth transition to emoney. In any case I am sure that these are the kinds of gaps that our fearless leaders are quickly trying to close in their finance committee's.

True what you say about what people accept as "payment in full". I recently bought a car, payment in full was when the money showed up in his online account, this would be overnight. But I think a tank of gas works differently.

costata said...

Desperado,

I have to agree with Gilligan. Although this statement is true:

"Your next purchase on that day will be validated against your account balance minus what you just spent."

The card transaction is clearly not the same as payment in physical currency if the spending power isn't immediately transferred to the vendor.

The cardholder's bank has merely reserved a portion of their client's account balance pending settlement of the payment instruction.

If a vendor fears that they will not receive the same purchasing power when settlement occurs then a rational businessman will seek cash settlement at the time of purchase.

Extending this thought further, if a cardholder cannot "pay by card" they will go to their bank and seek cash.

How many days supply of cash are banks required to hold? In Australia it's five (5) days. Not much of a buffer in a crisis of confidence in the payment system.

Lord Chimp said...

Oh come on. You are citing Gideon Gono in defense of your position? As if he would ever admit responsibility for causing hyperinflation. The monetary authorities in Germany blamed everyone but themselves too, you know.

Citing this guy to defend your arguments shows that you are a crank.

Dwain said...

"Credit money ALWAYS vanishes during (or just prior to) a hyperinflation.”

It puzzles me that you fail to grasp the magnitude of the consequences involved in that statement because EVERYTHING we do is done via credit money."

”Perhaps I actually understand the magnitude of these consequences better than any hyperinflationists you've ever encountered before now. I agree with most of what you describe. What puzzles me is how deflationists fail to grasp the consequences of the consequences in this political world of the modern dollar.”

And I wonder if hyperinflationists have any concept of time.

Yes, the government is going to respond by printing, while in the interim (intervening time), the people will be fully involved in their own response to having their economy collapse from underneath them. What odds would you give on the government and the Fed surviving their response?

I thank you for agreeing with most of what I discribe.

Quite frankly, your arguments are logically inconsistent and very frustrating to deal with.

As an example, you go from venders giving discounts for cash over credit in normal commerce to the Fed printing $500 and $1,000 denominated notes in response to the higher demand for cash. Why????

If people need $1s, $5s, $10s, $20s, $50s and $100s to gain the cash discounts offered over credit, why would the Fed respond with $500 and $1,000 notes?? The majority of people don’t earn $500 a week, how will printing $500 dollar notes help them? Is this your notion of hyperinflation, wages and prices chasing higher denominated notes?

And then you make another giant leap; instead of the Fed printing $500 and $1,000 notes, the Fed issues new $100s at 100:1 ratio, which sucks available liquidity out of the economy at a 100:1 ratio, so now people have even less money to do business with, which could spark price competition for available cash.

“The hyperinflation is driving the NEED for the notes!”

And there’s the biggest leap of all; you go from venders giving discounts for cash paying customers over credit, to the Fed printing $500 and $1,000 notes in response to higher demand for cash, to the Fed nixing that plan and going with issuing new $100s at a 100:1 ratio, to “The hyperinflation is driving the NEED for the notes!”.

Question; where is the “hyperinflation” in your argument?

Dwain said...

costata, I appreciate your response.

Iceland's banks failed, all credit they had promised went "poof" overnight (hyper-deflation), UK and Dutch governments bailed out the depositors from their countries, Iceland's krona was devalued causing prices to skyrocket, some as mush as 300%, Iceland's government responded to the skyrocketing prices by shutting down some services, and businesses failed, continued deflation in the face of outrageous prices imposed by foreign suppliers because the krona was devalued, not because it was over issued (it wasn't), but because it's banks failed destroying Iceland's credit. And why did they fail? Because they over issued their product, which is credit.

1. Inflation - Increase in the money supply
2. Deflation - Decrease in the money supply
3. Hyper-inflation - Hyper increase in the money supply
4. Hyper-deflation - hyper decrease in the money supply
5. Money - Legal Tender - Federal Reserve Notes & U.S. Minted Coin - Cash.

Dwain said...

Let me add: credit is money for only as long as it works then it goes "poof" leaving nothing behind but debt. At least when fiat fails you have the paper and the debt to remember it by.

FOFOA said...

Hello Carl,

"And I wonder if hyperinflationists have any concept of time.

Yes, the government is going to respond by printing, while in the interim (intervening time), the people will be fully involved in their own response to having their economy collapse from underneath them."


Why is it so hard for deflationists to see that the economy collapses underneath the people in REAL terms anyway (during hyperinflation)? It just won't happen, ultimately, in nominal terms. A hyperinflationary economy looks exactly like a deflationary depression with the addition of wheelbarrows. Think of it as a hyper-deflation in real terms, denominated in gold.

"What odds would you give on the government and the Fed surviving their response?"

About zero for the present government and 50/50 on the Fed. We will still have dollars after the hyperinflation, they just will no longer be the global reserve currency nor a store of value for long periods of time.

"I thank you for agreeing with most of what I discribe.

Quite frankly, your arguments are logically inconsistent and very frustrating to deal with."


Nice comeback!

"As an example, you go from venders giving discounts for cash over credit in normal commerce to the Fed printing $500 and $1,000 denominated notes in response to the higher demand for cash. Why????"

Because cash is the reserve of our present system and in a confidence crisis those reserves must be created super-fast as the whole banking system reverts from fractional to full reserves, but only in nominal terms of course. The $500's and $1000's are initially to support interbank clearing/confidence. As I said, it's a long chain and when one link breaks it's not enough to only support the one link because of the time factor driving the confidence crisis. But the big bills' introduction into the system paves the way for what is accelerating down the tracks.

"If people need $1s, $5s, $10s, $20s, $50s and $100s to gain the cash discounts offered over credit, why would the Fed respond with $500 and $1,000 notes?? "

Answered.

"The majority of people don’t earn $500 a week, how will printing $500 dollar notes help them?"

Remember, it is the prices of necessities that are rising (dollar collapsing) that LEADS this process. I know, you deflationists cannot possibly imagine a transmission mechanism (other than wages) to put those $500 notes in the hands of an impoverished population. You think that the stores will lower their prices to lure the $5 notes out of the hands of the poor people. But look no farther than Zimbabwe for what actually happens.

Goods disappear from the shelves. Stores don't need to lower their prices, they need to raise them. Government action to make the system appear like it is still functioning puts these $500 and $1,000 notes into general circulation, but at a much lower real value. The poor people will ultimately get their hands on a $1,000 note by trading an apple for it. Or maybe a car for 500 $1,000 notes. Or whatever. Hungry people will sell anything to get some food. And once these notes are circulating, thanks to the USG, they are worth less than the old, low-denomination notes previously were.

Continued...

FOFOA said...

"Is this your notion of hyperinflation, wages and prices chasing higher denominated notes?"

No. Forget wages, except for the government stooges (which actually ARE an important part of the transmission mechanism). And forget prices chasing notes. One of my main points in these articles is that the notes are chasing the prices. Not prices chasing notes.

To the casual observer (and the deflationist) there is no difference. But in the self-sustaining feedback loop this distinction is important, because it removes the power to control it from the administration. The only thing the administration can do to stop it at that point is to essentially fall on its own sword and stop printing to stay alive.

"And then you make another giant leap; instead of the Fed printing $500 and $1,000 notes, the Fed issues new $100s at 100:1 ratio, which sucks available liquidity out of the economy at a 100:1 ratio, so now people have even less money to do business with, which could spark price competition for available cash."

What is a giant leap for some is only a small step for others. If they did this during a currency event they would not remove the old bills from circulation. The new bills would simply be the proxy for a $10,000 note. Zimbabwe did this a few times. It's called lopping off zeros.

“The hyperinflation is driving the NEED for the notes!”

And there’s the biggest leap of all; you go from venders giving discounts for cash paying customers over credit, to the Fed printing $500 and $1,000 notes in response to higher demand for cash, to the Fed nixing that plan and going with issuing new $100s at a 100:1 ratio, to “The hyperinflation is driving the NEED for the notes!”.

Question; where is the “hyperinflation” in your argument?"


In the collapsing value of $1 as seen through the skyrocketing price of NECESSITIES.

"3. Hyper-inflation - Hyper increase in the money supply"

If you are stuck on the Austrian School definition of inflation, then maybe it's better to call it a currency collapse, or dollar repudiation, something like that. Hyperinflation, it turns out, is kind of a reversal of the cause and effect from normal inflation.

Sincerely,
FOFOA

FOFOA said...

Dear Mr. Reeder,

"Citing this guy to defend your arguments shows that you are a crank."

I stand in awe that you were even driven to post this comment. I have also quoted Karl Marx to defend private wealth arguments, by the way. Your comprehension of complex positions clearly runs deep. A rebuttal such as yours carries the sting of a true master. Thank you for the honor.

Sincerely,
FOFOA

costata said...

Carl,

Thanks for providing your definitions. Just to recap. Carl's definitions:

"1. Inflation - Increase in the money supply
2. Deflation - Decrease in the money supply
3. Hyper-inflation - Hyper increase in the money supply
4. Hyper-deflation - hyper decrease in the money supply
5. Money - Legal Tender - Federal Reserve Notes & U.S. Minted Coin - Cash."


In relation to (1) and (2) Rothbard really shot the Austrians in the foot when he entrenched the notion that velocity of money is irrelevant. The arithmetic is simple. If a fixed amount of money turns over (velocity) fast enough or slow enough you can mimic the effect of increases or decreases in the money supply as indicated by prices.

By solely focusing on the supply of money (M-whatever) you have a valuable indicator but an incomplete picture.

For (5) I prefer the straight Misean definition of money as including money equivalents such as credit/debt. It better explains how, despite not having even a single dollar in their wallet, a credit card holder (with a $5,000 limit) can spend $5,000 into "existence". Thus increasing, defacto, your definition of the money supply by $5,000.

It also explains how slashing credit card limits decreases the spending power of cardholders without actually reducing the money supply as defined by you.

On (3) we are lightyears apart. My preferred definition of hyper-inflation is a currency crisis, a collapse in confidence in the currency not "high" inflation.

Coming up with a definition for (4) is a real challenge. I cannot find a single example of hyper-deflation (I find your claims about Iceland unconvincing).

The early phase of the Great Depression gives us an example of deflation. At that time, when the US$ was on a gold exchange standard, the purchasing power of the currency rose as indicated by some prices such as consumer staples.

Roosevelt put a stop to that by revaluing gold i.e. increasing the exchange ratio in favour of the FRN. This is a text book example of creating inflation through increasing the supply of "money" by raising the amount of currency that could be issued per each ounce of gold held in the USG/Fed reserves.

I guess if FDR had pushed in the opposite direction we could have seen a hyper-deflation. You seem to be suggesting that "this time will be different". Happily I am in total agreement with you if that is the case.

I think they will dump worthless dollars on everyone's "front lawn" to save the borrowers at the expense of the savers and producers. IMHO all "paper will burn" exactly as A/FOA predicted.

The good news is the designers of the Euro Freegold architecture provided a template for navigating the end of the US$ IMFS. They have severed the store of value role from the fiat Euro and now mark their gold reserves to market.

As the gold market manipulations come to an end Freegold will allow gold to return to the store of value role (along with lesser hard assets) while fiat currency can continue to provide the medium of exchange function.

costata said...
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costata said...
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1.618 said...

If physical goods and/or services become reluctant to be exchanged for money, prices rise with no commensurate rise in money supply.
Iceland had money, their problem was no one wanted it.


Carl said:

"If the government doesn’t print to compensate (CHASE prices) then there can be no hyperinflation, rising prices due to the collapse in value of the currency notwithstanding. This establishes the fact that hyperinflation is a monetary event not a pricing event."

I disagree.
The collapse of the currency simply occurs earlier, with no printing to attempt to delay it.


"So it does indeed take new money injected into the economy to fuel hyperinflation."

To fuel it, yes. To cause it, no.


"The majority of people don’t earn $500 a week, how will printing $500 dollar notes help them?"

They will be earning (much) more, nominally, next week. Those higher denominations will be very useful then.


"Question; where is the “hyperinflation” in your argument?"

Hyperinflation is a process, not an event. It is the continual decline in confidence in the currency. Until it has no confidence remaining, and is no longer accepted at all. It has then completed it's collapse.

costata said...

Blondie,

I like your description of hyper-inflation as a process. I'm visualising water eroding land until the moment of collapse or the build up of snow and ice until the avalanche.

Perhaps this provides qualified support to Carl's definition of hyper-inflation. If you include every excess US$ and the contingent liabilities to deliver them built up since 1971 you could argue that it's roots lie in the hyper-issuing of "money". A huge "fat tail" event.

Lord Chimp said...

FOFOA,

Thanks for your response. I think you misunderstand me. Regardless of the fact that I think you are essentially wrong, I think your Mr Gono quote does nothing at all to add credibility to your position. Just sayin'.

Really, no need to be patronizing. Your ideas really aren't difficult to understand.

1.618 said...

costata,

I suspect that "fat tail" argument would be pretty robust.
I'd include quadrillions of OTC derivatives in there too.

Returning to FOA's quote:

"hyperinflation is the process of saving debt at all costs, even buying it outright for cash"


Fed's toxic asset purchases look like another leaf out of that playbook.

The process of USD hyperinflation has been in motion for some time, just the symptoms associated only with it have yet to appear.

Masses of fuel has been building up for decades.

It's all on, for those with the eyes to see it.

FOFOA said...

Hello Mr. Reeder,

I'm glad you came back!

Quote: "Your ideas really aren't difficult to understand." "I think you are essentially wrong."

Have at it, Sir. As you can see, I am in a rare debating mood.

Sincerely,
FOFOA

Dwain said...

Costa,
I agree with your 1 and 2, and I appologize for taking the shortcut to accomodate a quick response.

On #5, I disagree with the straight Misean definition of money, as credit, can and does, disappear in an economic crisis leaving only the debt to linger.

Credit only works as money for as long as asset values can appreciate and new debt can be added. The moment those two variables cease to function, credit evaporates out of existence and this includes positive credit (credit held in excess of debt). Money, even if its fiat, doesn't do that.

When FOFOA posted the quote from FOA stating: "My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed”, I cringed because; 1) You can hold fiat that is free of debt and 2) Fiat continues to exist regardless of the status of debt. That's the difference between credit and fiat.

Therefore, when you state that:"despite not having even a single dollar in their wallet, a credit card holder (with a $5,000 limit) can spend $5,000 into "existence". Thus increasing, defacto, your definition of the money supply by $5,000", you are incorrect on two counts, 1) The money supply was not increased by $5,000, debt was increased by $5,000 and as we all know, debt is not money, it is an obligation to pay. And 2) In no way does it fit my definition of money as my definition does not include credit.

Also; "It also explains how slashing credit card limits decreases the spending power of cardholders without actually reducing the money supply as defined by you." Again you are incorrect. If the prevailing currency (unit of exchange) in circulation is credit and credit card limits are slashed then there is a decrease of prevailing currency in circulation and what remains unaffected by the slashed spending of credit is the debt incurred. And again; that, in no way, represents my definition of money.

Perhaps it will help you better understand my position if you would consider our monetary system as a "Bi-Currency System" where, under normal circumstances, credit and fiat commingle, appearing to blend seamlessly, until an economic crisis occurs and shakes them apart. Such is the case today.

As for #3: Like "an act of god" is used to explain things that appear to occur for no reason, I think "a collapse in confidence in the currency" is used in that same vain, to explain away a series of events that are far more complicated and diverse than that succinct little quip would lead one to believe.

Do I have a better explination? No, I haven't the time or the resources to come up with one, but on its face "a loss of confidence" has "act of god" written all over it.

Dwain said...

costata,

"Coming up with a definition for (4) is a real challenge. I cannot find a single example of hyper-deflation (I find your claims about Iceland unconvincing)."

Hyper-deflation is a relatively new phenomena made possible by credit becoming the predominate currency (unit of exchange) in circulation.

Regarding Iceland; it's not "my claim" it's a factual descriptive of the event that occurred.

Now, I'm willing to entertain a better descriptive of an entire economy's predominate currency vanishing into thin air overnight, if you have one to offer.

High 5 said...

Carl,

I don't know if I'm worthy to comment on such an intellectually advanced blog but here's my two cents.

"Credit only works as money for as long as asset values can appreciate and new debt can be added. The moment those two variables cease to function, credit evaporates out of existence and this includes positive credit (credit held in excess of debt). Money, even if its fiat, doesn't do that."

Credit only 'becomes' money when and if it is used to purchase something. Once the purchase has occured money is magically brought from the future into the present and placed into the sellers account.

One thing deflationists don't seem to understand is that once credit is used to purchase, money is created and cannot be destroyed by a credit collapse. When Joe buys the house, whether with savings or a mortgage, money is placed into the sellers account. With the mortgage the money is "poofed" into the present by Joes' bank from his future earnings (fractional reserve banking). After the credit collapse the seller still has the money in his account.

The inability or refusal of Joe to use credit in the future does not reduce the money supply but only prevents the supply from increasing due to Joes use of credit.

Deflationists confuse asset deflation with price deflation. When assets deflate there is no reduction in the money supply. If you only look at purchasing power you can easily see that asset deflation is similar to money supply inflation, as the assets purchasing power is reduced much like moneys purchasing power is. This is confusing since asset deflation is actually asset inflation (an increase in assets compared to chasing dollars).

It's helpful to look at assets in the same way you look at money. As people wish to exit assets for money the relative value of assets goes down. The next phase is people wanting to leave money for tangibles where the relative value of money will be reduced; and propbably greatly reduced since there is so much money (almost all the worlds central banks reserves, derivatives, etc.) which will be chasing so few goods.

As assets purchasing power is reduced moneys is increased. This phase is when investors trade assets for the more desireable money. The hyperinflation phase is when money is no longer desired, due to its inherant worthlessness, and people wish to trade it for something more enduring.


"you are incorrect on two counts, 1) The money supply was not increased by $5,000, debt was increased by $5,000 and as we all know, debt is not money, it is an obligation to pay."

You have it bass ackwards. Neither credit nor debt is money. When the card holder borrows the $5,000 the credit becomes money and is deposited in the sellers account.


"As for #3: Like "an act of god" is used to explain things that appear to occur for no reason, I think "a collapse in confidence in the currency" is used in that same vain, to explain away a series of events that are far more complicated and diverse than that succinct little quip would lead one to believe."

It helps to recognize that economics is more psychology than science. Economics is essentially comprised of interactions between human beings and is therefore greatly controlled by fear and greed (both very powerful emotions and hard to model).

I hope this adds to the discussion.

FOFOA said...

Hello Carl,

Regarding the FOA quote, you are too focused on your narrow definition of "fiat" that you completely miss the bigger picture. When you cringe, I cringe, because 1) you think you are disproving FOA's statement by forcing it into your deflationist box, and 2) ... Just let your precise deflationist calculations and rules go for a minute and maybe you'll see something new.

I know about your "difference between credit and fiat" in terms of the common monetary aggregates (M1 etc…). And I know that is your (deflationists in general) argument against hyperinflation. The credit portion of the monetary aggregates disappears leaving only the monetary base, the reserves of the system. I get it! But you are still missing the bigger picture.

If you prefer to stay cooped up in your monetary aggregate quantitative box until hyperinflation sets you free, that is fine with me. But if you'd like to see the bigger picture, I am here to help.

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed"

Let's explore what FOA REALLY meant with this statement…

When a mortgage is originated, the money to pay off the home is conjured on a bank's balance sheet. When that loan is later sliced, diced, repackaged and sold to investors on Wall Street it is no longer thin-air balance sheet money that offsets the original mortgage. It is now money that was actually earned by savers and stored in a Mortgage Backed Security that funded the loan. The bank's balance sheet no longer carries the asset of the homeowner's debt note, nor the backing collateral of the house deed, nor the liability of the conjured dollars. Only those few mortgages that are carried on the originating bank's balance sheet for the life of the loan remain conjured balance sheet money in circulation. The rest is people's savings. And those savings can go POOF when the homeowner defaults.

"As debt defaults, fiat is destroyed"

When a company or a municipality borrows money it creates a debt, or a bond. This money is not just conjured out of thin air, it is provided by savers and pension funds when they buy the bonds. When that company or municipality defaults on its debt, those savers and pension funds' funds can go POOF.

"As debt defaults, fiat is destroyed"

The POINT here is that "fiat" – in the way FOA was using the term – in that quote represents the way people hold their money in today's fiat system. That is, they don't hold the currency unit itself, they hold someone's obligation or debt to source and provide that currency unit either on demand, or under specified conditions.

This POINT was established two years earlier by ANOTHER here: "Do you really hold dollars? It is important to understand that few persons or governments hold US dollars! Look at any investment portfolio and what you will find "are assets denominated in US$". This sounds simple, but it is not."

Now if you have a hard time visualizing " assets denominated in US$" as part of "fiat money" in the way it relates to hyperinflation, consider this quote, also from ANOTHER: "From the start, one thing most thinkers can't quite grasp is that "money does not have to circulate"! The first "world money", gold money that is, could stay locked up and still represent value and wealth."

Continued...

FOFOA said...

In this context, you can think of modern "debt-based assets" being analogous to gold staying locked up in past monetary systems, and our circulating currency being analogous to either circulating silver coin or paper notes representing the vaulted gold. The relationship between the two, value ratio or fractional reserve ratio, is not important in this point. The point is that today the majority of people's money is "stored" in debt instruments, including MBS and corporate and municipal bonds, just to name three.

These things ARE the very foundation of the modern dollar international monetary and financial system (the $IMFS). Without them, it (the $IMFS) goes POOF. Therefore, these things cannot be allowed to fail – NOMINALLY – in aggregate.

So, for the point of explaining a point to a definitionally-tight deflationist, I will use word substitution in FOA's statement so that you can hopefully see the POINT I am making. But when I substitute "bonds" for "debt," that doesn't mean the new word is exhaustive. It is a POINT, a concept I am explaining and I'm trying to substitute words that will be less obstructive to understanding of meaning. And if you are capable of grasping a POINT outside of your tight definitional deflationist world, this may help...

"My friend, bonds (and all kinds of debt instruments) are the very essence of the modern money system. As bonds default, people's savings are destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of guaranteeing people's savings at all costs, even buying those darn bonds outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last MBS and dumping that cash right into your banking system! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

You see, it has nothing to do with M1 or M2. It has to do with people's perceived money. Because "hyperinflation is the process of guaranteeing people's perceived savings," backing it up with the printing press, and ultimately converting perceived money (call it M7 if you want) into M0.

30 years of Credibility Inflation has grown this "M7" into a complex monstrosity. And as the credit system is no longer expanding, the process of "petrifying" these failing debt instruments into non-contractible reserves, or base money, is already well underway. So far it is just here and there, Whack-a-mole style. But ultimately it will be everywhere, all at once.

This is what I call "priming the system for hyperinflation." As I wrote to Mish on this thread, "Our system was primed a little differently; through 30 years of credibility inflation -- that is, the credibility of debtor's debt as a viable wealth reserve.

So we have this 30-year explosion in credit/debt and all that perceived money is sitting there like an anvil hung over our heads. Germany had its own threat hanging over its head. And it SHOWED its willingness to debase its own currency as a "solution" to the war reparations problem. Similar to us, in that way."


That "willingness to debase" to deal with the problem at hand ("M7" is failing) is probably the most proximal flint for the "loss of confidence" spark that will trigger the onset of the actual fire, price hyperinflation (currency repudiation). Then the monetary hyperinflation that will inevitably follow (in the case of the US$) will add fuel the fire and keeps it burning for as long as possible.

Continued...

FOFOA said...

So you see, all the discussions about whether credit is really money in terms of quantitative measurements as they relate to inflation or deflation is simply a distraction from the much bigger picture as it relates to systemic collapse and its inevitable effect, dollar hyperinflation. How about if we consider our monetary system a "Tri-Money system" where, under normal circumstances, credit and fiat commingle in circulation and "paper asset savings" hang overhead like a giant, overshadowing, non-circulating anvil with guarantees up the wazoo. Until an economic crisis destroys credit, drops the anvil, and forces the guarantees (both explicit and implicit) into action. Such is the case today.

As for the collapse of confidence being the unexplained "act of god," I would proffer that the LACK of a collapse thus far is the "unexplained act of god." From Credibility Inflation:

"The difference between today and a few years ago is that a few years ago credibility inflation was being fed by private credit (debt) expansion. Asset values, like homes, were being sustained and driven higher with the arrival of new marks. But today the Ponzi cycle of credibility inflation has peaked, there are no more new marks, and its decline is being managed centrally with the government expansion of new base money to conceal the failures one at a time.

"And as in any Ponzi scheme there comes a point when redemptions can no longer be financed by new marks. I think the tipping point of credibility must come once it is clear that Bernie Madoff, I mean Uncle Sam is writing redemption checks that can never be cashed. The point is, we are already past the tipping point. So timing isn't really a question anymore. The credibility waterfall has already happened. But somehow we still have early marks continuing to stockpile rubber checks as if they are worth something. Does this mean credibility still exists? I think not.

"I suppose this begs the question, is all that dollar debt out there in the world really worth anything anymore? If you answer yes simply because you cashed some of it in today for new underwear, then I say you didn't answer the question. The question is, is all that dollar debt out there in the world really worth anything anymore? The answer is no, it is not. Only at the margin, where you reside, can it still be cashed in for new underwear. But in aggregate, it is worthless, even today."


The $ debt in aggregate is worthless, even today. But that doesn't mean it must collapse in nominal terms. A nominal collapse would mean sudden death to the $IMFS. This is why it will not be allowed, at any cost. Nominally the $ debt can be maintained even as its worthlessness is equally maintained. This is hyperinflation.

Sincerely,
FOFOA

Dwain said...

bailingout, thanks for your comments.

"Credit only 'becomes' money when and if it is used to purchase something. Once the purchase has occured money is magically brought from the future into the present and placed into the sellers account."

No, credit only becomes money when it is exchanged for FRNs(money).

No, credit remains credit unless someone desides to exchange it for FRNs (money). When credit is spent, it becomes debt for the spender and credit in the seller's account.

"One thing deflationists don't seem to understand is that once credit is used to purchase, money is created and cannot be destroyed by a credit collapse."

Wrong, Once credit is used, DEBT is created and the debt cannot be destroyed by a credit collapse.

"One thing deflationists don't seem to understand is that once credit is used to purchase, money is created and cannot be destroyed by a credit collapse."

Wrong. Money is not created, debt is created.

"When Joe buys the house, whether with savings or a mortgage, money is placed into the sellers account. With the mortgage the money is "poofed" into the present by Joes' bank from his future earnings (fractional reserve banking). After the credit collapse the seller still has the money in his account."

Wrong again. No money is being created, just digits moving from one account to another.

"Deflationists confuse asset deflation with price deflation. When assets deflate there is no reduction in the money supply."

First off; Asset deflation IS a reduction in the PRICE of the asset. In other words PRICE DEFLATION.

Almost all credit exists at the whim of asset values. Asset values go down, available credit goes down. Asset values go up available credit goes up. OH and, "value" means "price".

"When the card holder borrows the $5,000 the credit becomes money and is deposited in the sellers account."

Wrong. No Money Was Created In That Transation.

The rest of your argument I'm not gonna touch.

Angel Eyes said...

""an act of god" is used to explain things that appear to occur for no reason"

...by one whose beliefs do not allow them to acknowledge the reason.

costata said...

Hi Carl,

Given your unshakeable conviction that you are right, that your every assertion is fact and the glaring inconsistencies in your theories let's move on to practical considerations.

What should people in the USA do to protect their wealth and wellbeing faced with the "hyper-deflation" that you tell us is occurring (now?)?

As this "hyper-deflation" runs its course what should people in the USA do to protect their wealth and wellbeing in the future?

I'm really hoping that your suggestions include the purchase of physical gold.

Most of the prominent deflationists that I read suggest US$ and US government bonds. At this blog being positioned in these "safe havens" is anticipated to result in losing your life savings.

Unknown said...

Carl,

Credit is not Money. Credit is a near-money concept. It is the willingness of a putative lender to enter a monetary contract with an individual based on the individual’s history of paying off debt—in other words: Creditworthiness.

If a lender has a fixed amount of non-productive Goods that he wishes to offer in return for future Goods then he may enter negotiations with several putative debtors. Perhaps the lending party has ten hammers to offer. Based on a debtor party’s creditworthiness, he may be willing to offer all ten hammers. However, the debtor party may only need 5 hammers presently. The lender offers that as long as the remaining 5 hammers are available, the debtor can simple extend the existing contract to include all ten. Until such time, the debtor has credit worth 5 hammers with this lender.

Now, a second debtor may come along and take those hammers. If the first debtor subsequently returns to the lender to get those 5 hammers, they are gone, AND SO IS THE DEBTOR’S CREDIT WITH THAT LENDER. Credit is not a function of the debtor, but the lender. It can only exist 1:1 with the Goods that the lender wishes to extend as money. While the credit may have disappeared, as it was converted to money, this is not to say that debtor #1’s creditworthiness is diminished. He can simply seek credit from another lender with the option to convert it to money.

This is how credit and money are related in an honest monetary system. Credit is simply the under-employed Goods that a lender seeks to employ. It can only “collapse” when the lender either pulls back on the Goods he offers or the Goods expire (like milk).

Another important distinction is that Creditworthiness is a function of the Individual, not a Collective. The same applies to Money as it is a function of Individual Human Labor.

Carl, like so many others, predicates his monetary terms of Money and Credit on a fiat fractional reserve system basis. In such a system, a deflationist has no mathematical chance of defending deflation as anything more than a blip that predicates the final (hyperinflationary) collapse of monetary system in which their (faulty) assumptions are based.

Thus, as always, I still stand waiting for Carl to carefully define Money as Credit as independent monetary concepts; independent of themselves and of the fiat fractional reserve system.

High 5 said...

@ FOFOA

Thank you for your insights. A/FOA/FOFOA are becoming the best economics education I've experienced. Truly enlightening.

Please clarify your statement for me as I'm having trouble deciding whether 'credit collapse' removes present money, future potential money, or a combo from money supply.

"Only those few mortgages that are carried on the originating bank's balance sheet for the life of the loan remain conjured balance sheet money in circulation. The rest is people's savings. And those savings can go POOF when the homeowner defaults."

I don't understand how it is that peoples savings go "poof", out of circulation, when the homeowner defaults. Hasn't the money simply been transfered (redistributed) from the saver to the previous seller of the property and/or the trustor (borrower) on the note? Doesn't money "pass thru" the asset and remain in circulation?

The issue of whether or not the money was loaned from savings or fractional reserve seems unimportant at this stage other than the fact that money is created through debt and not through loans of savings. Doesn't the money remain through the credit collapse, regardless?

Is this price deflation due mainly to loss of velocity, from hoarding of USD, or from loss of quantity?

In an extended price inflation are massive amounts of wealth transferred from paper savers to borrowers, most of whom don't even realize it?

I laugh at people who think they were jipped when receiving no down loans for 115% of property values during the bubble. Many refinanced once a year and not only borrowed the max at the top but are still living free of charge in 'their' homes while collecting unemployment and food stamps. Tragic comedy.

Looking forward to your next topic.

FOFOA said...

Hello Bailingout,

"Please clarify your statement for me as I'm having trouble deciding whether 'credit collapse' removes present money, future potential money, or a combo from money supply."

When I read your first comment and Carl's reply I could agree with each of you on certain things. In some ways you were both right, and both wrong.

In our current system anything other than physical cash is not actually money, it is some entity's obligation or liability (let's call it an IOU) to provide money (physical cash) to some other entity. In this, Carl is correct. So electronic currency is not actually money in the true money concept. It is "I owe you money." And the "I" in IOU is ALWAYS a bank or financial institution. The "I" is the end of the tether attached to the taut cable of the dog run and the "U" is attached to the dog's collar (if you recall my recent analogy).

FOA described this nuance in Gold Trail III - The Scenic Overview, where he explained the history of gold and its relation to the introduction and evolution of the monetary concept. He explained that the pure monetary concept is simply the use of one thing to conveniently value all other things. The unit of account or numéraire function. If the unit of account were chickens, you might say "that man's wealth is held in account of 500 chickens at the bank." But the bank would not actually be housing 500 chickens for the man. It may have accepted one form of wealth from the man valued at 500 chickens to be loaned out to someone else and now it holds a liability of 500 chickens in value to the man. No actual chickens need ever be touched for chickens to be money.

This is similar to the liability or obligation (IOU) the bank holds to you when you make a deposit. And when you pay by check or electronically, that obligation is transferred to your counterparty's bank. Your bank is now obligated to your payee's bank to provide cash, and that bank is obliged to your payee. It is a long complex chain of obligations that develops.

Of course with the advent of computers the banks can quickly determine the exact number of obligations that cancel each other out. So no chickens need change hands for those. But for the IOU's left over, something must change hands between the banks. Either cash, or reserves held at the Federal Reserve. Those are the only two options. This is the bank clearing mechanism. It clears the complex chain of obligations to deliver physical cash (or the Fed's obligation for physical cash) each night.

This is what Carl meant by, "No, credit remains credit unless someone desides to exchange it for FRNs (money). When credit is spent, it becomes debt for the spender and credit in the seller's account."

When you take cash out of the bank or the ATM, you have just taken delivery and the bank has performed its obligation. That particular IOU is canceled. That debt is settled. An actual chicken has been delivered!

You said, "once credit is used to purchase, money is created and cannot be destroyed by a credit collapse."

What is created is an IOU to provide physical cash. This IOU is then passed from institution to institution as transactions occur. This is why I say electronic currency is a "tethered" system. It is always tethered to one official institution or another until someone takes cash from the bank.

Continued...

FOFOA said...

That liability that is passed around is long gone from the bank that originated the loan by the time the loan defaults. What happens when the loan defaults (if it is still being carried by the originating bank) is that the bank's balance sheet becomes impaired. It loses value on the asset side of its balance sheet but it still carries the same amount of liabilities (IOU's) as it did before the default. Only these particular liabilities no longer have any connection to that particular loan. So in this case, you are correct, that electronic currency is not specifically destroyed. It is a banking system IOU that carries on, in an impaired banking system.

But what happens is that the banks become stressed, in aggregate, as loans held on their balance sheets default. They have less and less assets to back their liabilities. And a bank simply cannot operate with a badly impaired balance sheet. It becomes like a man who owes everyone money but is living out of a cardboard box on the sidewalk with no assets. Sooner or later people will stop accepting his IOU's at face value.

This is why the banks begged for falsified accounting in 2008. So they could overvalue the vacant houses still shown as collateral on their balance sheet. And it is why these same banks refused to sell those vacant houses all through 2009. Because if they sold them it would suddenly "mark to market" the asset side of their balance sheet. For a bank, it is better to have a vacant house listed on its balance sheet at $500K than the $250K cash it could get from the sale. Both go on the asset side. One just happens to be higher, even if it is an illusion.

But even with this balance sheet lying many banks still couldn't swing it. And that's when the FDIC comes in and shuts them down on Friday evening. But back to those liabilities, the IOU's the bank carries on the liability side of its balance sheet... those are nearly ALL guaranteed today by the FDIC, which has no funds. So they are guaranteed by the Fed printing press. So yes, all those IOU's in the system will survive. All those chickens will be hatched!

The problem is, they are vastly overvalued against everything else in the world today. The first hint of this should be the banks' own balance sheets. If the bank has to lie about its assets, what does that say about the value of its liabilities? And if those liabilities are nominally guaranteed, (because chickens can now be created at will by the Fed), what does it say about the value of the domesticated fowl being used as a numéraire?

"Only those few mortgages that are carried on the originating bank's balance sheet for the life of the loan remain conjured balance sheet money in circulation. The rest is people's savings. And those savings can go POOF when the homeowner defaults."

I don't understand how it is that peoples savings go "poof", out of circulation, when the homeowner defaults. Hasn't the money simply been transferred (redistributed) from the saver to the previous seller of the property and/or the trustor (borrower) on the note? Doesn't money "pass thru" the asset and remain in circulation?"


Here I am not talking about IOU's circulating in the banking system. I'm talking about debt instruments (paper assets) held by savers; Mortgage Backed Securities, bonds, auction rate securities, etc... When the borrower defaults, the value of the debt instrument reverts to the value of any collateral backing the debt. And in many cases, there is no collateral or else the collateral is seriously overvalued. So the savers' savings go POOF when the asset values either take a haircut or disappear altogether. Not so hard to understand, is it?

Continued...

FOFOA said...

But, of course, we already have Federal guarantees of par value on great aggregations of this junk. And in other cases (like ARS) the banks have been forced to buy them back at par. And in yet other cases, the banks WILL be forced to buy them back at par. This will, of course, further impair the banks' balance sheets and, at the very least, the banks' liabilities will be saved through the very generous FDIC. But more likely, the impaired banks will be bailed out by some sort of Fed purchase at par. That is, if the banks in question reside on Wall Street.

"The issue of whether or not the money was loaned from savings or fractional reserve seems unimportant at this stage other than the fact that money is created through debt and not through loans of savings. Doesn't the money remain through the credit collapse, regardless?"

Yes. Explained above. Through the magic of fiat we have solved the problem of those at the back of the line losing their deposits forever, while those at the front get theirs, during one of those nasty little bank runs. This was a big problem in the 30's. Not today. We have solved the problem of them being able to withdraw the same amount as they deposited, but we have not solved the problem of them being able to withdraw the same purchasing power they deposited. Of course the deflationists want you to believe they'll actually get MORE purchasing power. How anyone can reconcile this view with the fact that we've solved the problem of bank runs is beyond me.

"Is this price deflation due mainly to loss of velocity, from hoarding of USD, or from loss of quantity?"

Velocity! Read here:

"...tens of millions of people who are still working have received a huge pay raise, because prices of houses, cars, refrigerators and a lot of other things, have been cut drastically...

So why aren't these tens of millions of people out celebrating? They should be delirious with joy. Why aren't we seeing dancing in the streets?

Because people are scared and afraid to spend the money. And that brings us to what economists call velocity...

Money responds to the law of supply and demand just as everything else does.

If people do not want a particular currency — let's say the British pound — then the value of a pound will fall.

Sellers will demand more pounds in trade for their goods or services, and prices in Britain will rise, even if there has been no change in the supply of pounds.

On the other hand, if the demand for pounds rises, the value will rise and prices will fall even if there has been no change in the supply of the currency.

Velocity is the speed at which money changes hands. When demand for the money is high, money changes hands more slowly, and velocity is low.

When demand for the money is low, velocity is high.

A key point is that velocity and money supply can act as substitutes for each other. A 10% rise in velocity has the same effect as a 10% rise in money supply.

The biggest problem with velocity and money demand is they can turn 180 degrees overnight. If people trust the currency, and suddenly perceive some kind of big threat to their futures, money demand can shoot up.


Continued...

FOFOA said...

That's exactly what happened last year. The supply of dollars certainly did not go down, but when the real estate crash happened, people became so frightened they were afraid to let go of their dollars.

Within a few days, money demand shot up, people stopped spending and held onto their dollars, and this had the same effect as an instantaneous deflation of the money supply.

If you don't spend your money, that's the same thing as taking it out of circulation.

That's what happened in the Great Depression. The Fed was inflating. In 1932, the money supply was $20 billion, and by 1940 it was $38 billion. But fear was so great that velocity was falling faster than money supply was rising.

This is why Franklin Roosevelt said in his first inaugural speech, "The only thing we have to fear is fear itself." People were afraid to spend their money, as they are now, and velocity was falling, which has the same effect as deflation, because if you don't spend your money, it's not in circulation.

And, my key point is, it's all controlled by emotions. By fear.

What are you more afraid of? The dollar becoming worthless? Or losing your job and running out of dollars?

The whole world is constantly shifting back and forth between those two fears, so money demand bounces up and down like a yo-yo, and velocity — the speed at which the money changes hands — does, too.

These wild shifts in money demand and velocity have the same effect as massive, instantaneous shifts up and down in money supply. It's like we're having a huge inflation, then a deflation, every few hours — because our fears change every few hours — because the politicians have all this arbitrary power and we don't know what they're going to do to us!"



"In an extended price inflation are massive amounts of wealth transferred from paper savers to borrowers, most of whom don't even realize it?"

Yes. And looking at this globally: In an extended price inflation massive amounts of real capital (excess production value - production minus consumption) are transferred from global producers to global consumers, most of whom don't even realize it. And the only thing that enables this transfer is the producers' willingness to hold the consumers' paper debt notes as their wealth reserve in exchange for surrendering their excess production value to the consumers.

But sooner or later the consumers' balance sheet becomes so impaired in real terms (not nominal terms) that he becomes like the homeless guy writing non-stop IOU's.

"I laugh at people who think they were jipped when receiving no down loans for 115% of property values during the bubble. Many refinanced once a year and not only borrowed the max at the top but are still living free of charge in 'their' homes while collecting unemployment and food stamps. Tragic comedy."

Exactly! Transfer of real wealth from producers to consumers. Unfortunately for the producers, those paper debt notes will burn and the transfer will be permanent. But luckily for the producers, this will reset the global balance sheet once again and give it a fresh start with a new numéraire.

Sincerely,
FOFOA

Desperado said...

Hello Fofoa,

In your reply to bailingout, you said "In our current system anything other than physical cash is not actually money, it is some entity's obligation or liability (let's call it an IOU) to provide money (physical cash) to some other entity."

A paper dollar since 1933 has been nothing but a meaningless IOU of the Fed, yet it still serves as the premier "numeraire" around the world, whether it is edollars or paper dollars. In the captive United States where dollars are legal tender for taxes and exchange, both paper and edollars have a monopoly despite both being simply an IOU. This is because the government has a monopoly on force and there is insufficient profit or motivation for an alternate currency to develop in spite of the law. This exact same monopoly on force could be used to force emoney over paper money. The government can, and will, play all kinds of games to force certain outcomes when the dollar starts crashing. Do you really think Gates, Buffet, the Waltons, or the other supermarket owners would buck federal pressure and not official follow government policy? Perhaps after states start seceding, but not before.

The sheeple won't care whether an electronic ledger item in a state guaranteed bank that they can spend through their debit card, their foodstamp card, or their credit card is more or less credit money than a money market fund or federal reserve note when all are guaranteed by the federal government (which you yourself say will be the case, that they will have to bail everything out once the first link in the chain breaks). But Walmart will, and if the government mandates an e-discount or a paper tax do you not think that these wall street controlled giant corporations are going to risk the wrath of uncle Sam and his IRS henchmen? They will probably have been integral in the development of the policy in the first case anyway.

In the end I am pretty agnostic as to whether we have deflation or inflation, but I am certain that there will be a collapse in physical output and the great majority of Americans will be much worse off afterwards. As costada already discussed, I have never seen an example of hyperdeflation. But I do know that if they can force the use of emoney the ruling elite will be able to maintain far more control over the populace, especially when a torrent of paper dollars starts finding its way home after the crash.

Dwain said...

Hey Gknowmx, glad to see you here.

Thus, as always, I still stand waiting for Carl to carefully define Money as Credit as independent monetary concepts; independent of themselves and of the fiat fractional reserve system.

Credit is not money, it is an illusion of money, held in place by a structure designed to promote it and provide easy, care free, access to it, for a nominal fee. Credit only works for as long as the system that supports its existence works. And when that system fails, credit is revealed for the illusion that it is.

Whereas with fiat money, you have a tangible product that will continue to exist even if/when that credit system fails.

Besides that, U.S. law does not acknowledge credit’s status as being money although it does state that all debt incurred by its use are valid.

But, I believe we've gone through this before.............

Desperado said...

@Carl,

Money is what people will accept as payment for a service or good. In Zimbabwe money could be dollars, euros, gold or even an IOU, which is what a dollar is anyway, a universally accepted fiat IOU backed by the monopoly of force.

"with fiat money, you have a tangible product that will continue to exist even if/when that credit system fails."

Fiat as a "tangible product"? Tell me another good one.

Unknown said...

Carl,

The "illusion" is the current monetary system. The concept of Credit is no illusion; as I indicated, it is manifest as the tangible under-employed Goods that a putative lender wishes to offer on the way to creating a private money contract.

Fiat Money that you so dearly like to claim as the only true money (because it is tangible? lawful?) requires an added layer of conceptualization in the definition of money: that money act as a currency, not just a private contract. There can be voluntary currencies and mandated currencies. Fiat money is nothing more than a mandated currency. To the extent that Fiat functions as a voluntary currency does, no harm no foul. However, our present monetary system mandates not only that currency is Fiat, but that it is Fractional Reserve-base. THIS is were the illusions pervade the current functional use of monetary concepts. Instead of defining them de novo, you accept the establishment's definitions of Money, Fiat Money, Credit, etc. As a deflationist, try as you might reasonably, and you excel at reasoning, you have accepted flawed premises to reason from.

The current monetary system (and possibly rule of law) will collapse, it is baked in. Without understanding the fundamental priniciples and concepts we are destine to a 'rinse and repeat' system.

Frankly the deflation/hyperinflation discussion is not very interesting and at worst it serves as a complete distraction of thought.

Carl, I am glad you are here as your steel-trap mind for the facts will serve FOFOA well to flesh out some of the principles and concepts he is advocating.

Dwain said...

@Desperado

"Money is what people will accept as payment for a service or good."

Agreed.

"Fiat as a "tangible product"? Tell me another good one."

Isn't fiat printed on paper? Isn't paper a tangible product?

Unknown said...

@ Desperado

Here are some simple monetary definitions:

Wealth is the value expended Human Labor that is accumulated in durable Consumer Goods.

Barter is the exchange of Goods of non-equal utility value in the present tense. (No money is involved as the Goods once traded are transformed from Capital Goods to Consumer Goods)

Money is the exchange of value of a Present Good for the return of value in the form of a Future Good plus Interest.

Interest is a function of Human Labor to transform, or Consumer Value surrendered, over time by the lending party.

Human Labor transforms an abstract concept of the Mind to a tangible Good (either Capital Good or Consumer Good) by acting on Natural Resources (not man-made) and Capital Goods.

Credit is the willingness of one party to offer a Present Good based on a debtor’s History of extinguishing Money (Creditworthiness).

If one party has excess Durable Consumer Goods, or Wealth in the present tense which is not the object of Human Labor or consumption, that party may offer it to a second party in exchange for the second party’s promise to replace that present Good with a Future Good at a defined time in the future. Since there is no guarantee that the future will exist, even the next millisecond, there is Risk. Thus the party offering the excess capital as a Present Good may ask for a risk premium in addition to the safe return of his (fungible) Present Good. The risk premium is called Interest.

This need not be Usurious Interest; it can be a fixed flat fee. It need not be a ‘rate’ function that is dependent on the agreed upon value of the primary capital, but rather a fix fee based on the productivity, via Human Labor, that the primary party surrenders over the given time in giving up control and use of the Present Good.

"Honest" Interest is a function of Human Labor productivity, not a function of the accumulated labor that defines the value of Present Good. It is Usurious to claim the labor of another man as your own, including the labor of all extant men who’s labor has preceded our own. Thus, the value of the primary party’s Present Good that is offered for money should not be based on the accumulated labor value that created it, but rather the value that the primary party foregoes in either consuming the Present Good (as a Consumer Good) or transforming it (as a Capital Good).

Note, creating a money contract based on this capital is different from outright selling the Present Good to the second party, in which case the seller has the right to whatever price the market will bear where money contracts maybe voluntarily traded, not just created. Thus we see that money is debt that results in the creation of new (Capital or Consumer Goods), not merely the exchange of wealth. Money is a claim on future wealth.

Human Labor is not a collective function, it can only be associated with a Human individual.

Desperado said...

@Gknowmx,

OMFG! I am not going to participate in your naval gazing mental masturbation, it is what has gotten us into this mess in the first place. Gold is honest money, your "monetary definitions" are bullshit.

Dwain said...

Gknowmx,

I see that you are still fixated on tangential nuances.

I appreciate the consideration but I live in this reality and in this reality the establishment's definitions of Money, Fiat Money, Credit, etc. prevail. Now, I can get just as esoteric on the subject as the next guy but it would be an exercise in futility as I don’t think the current establishment would be interested in someone coming up with a whole new way to do things that is counterproductive to their established path.

Unknown said...

@ Desperado

In any monetary system, including one involving Freegold, a key concept, is "free". Thus, I acknowledge that these are definitions that I have accumulated, I am not forcing you to accept them, I humbly offer them freely as discussion points.

What has gotten us into this mess, is the lack of choice and freedom in monetary systems and the lack of courage to contemplate fundamental monetary concepts and principles.

I defend your right to disagree with me, regardless of your tone. Thanks anyway.

Unknown said...

@ Carl,

And you come here to a site dedicated to Freegold and yet you claim to not be interested in someone who has come up with a whole new way to do things?

I am not here to "win" a debate on deflation/hyperinflation, nor to curry favor with the "establishment", nor to find some nugget of information that might allow me to profit at the system's expense, nor even to promote and intransigent philosophical position.

But rather, to explore new monetary concepts and principles and see where they lead. FOFOA's exposition of Freegold is not necessarily a new concept, but it is interesting to see how he has developed it.

However, I am interested to see how FOFOA integrates Freegold with other "esoteric" concepts.

Dwain said...

costata,

"Given your unshakeable conviction that you are right, that your every assertion is fact and the glaring inconsistencies in your theories let's move on to practical considerations."

Your perceptions of my demeanor are irrelevant, however I would appreciate proof of those "glaring inconsistencies" you speak of.

"What should people in the USA do to protect their wealth and wellbeing faced with the "hyper-deflation" that you tell us is occurring (now?)?"

As this "hyper-deflation" runs its course what should people in the USA do to protect their wealth and wellbeing in the future?


I never stated that hyper-deflation IS occurring.

I don't care what people do or don't do to prepare, I'm not here to give people advice, I'm here to challange the hyperinflation theory as it applies to our current or future circumstance.

costata said...

Hi Carl,

"... I would appreciate proof of those "glaring inconsistencies" you speak of."

Happy to oblige. I'll post in due course.

"I don't care what people do or don't do to prepare, I'm not here to give people advice, I'm here to challange the hyperinflation theory as it applies to our current or future circumstance."

Glad to here it.

"I never stated that hyper-deflation IS occurring."

Conceded. So hyper-deflation is not occurring now and there is no recorded episode of hyper-deflation in economic history except for the episode that you assert occurred in Iceland. Agreed?

Desperado said...

@Gknowmx,

I appologize for the nasty tone. I was in a sour mood after being called into work on Sunday for what turned out to be nothing.

I didn't understand that you were posting those definitions for discussion points, and I don't really agree with all of them anyway. They go into far more detail than I am interested in or capable of debating.

Dwain said...

costata,

"So hyper-deflation is not occurring now and there is no recorded episode of hyper-deflation in economic history except for the episode that you assert occurred in Iceland. Agreed?"

Not necessarily. While Iceland represents hyper-deflation on a national scale, hyper-deflation occurs quite frequently on a non-national scale all the time, Bernie Madoff, Lehman Brothers, AIG, Fannie Mae, Freddie Mac and over 100 banks so far are just a few examples of hyper-deflation occurrences. That the government managed to save a few of the institutions or reimburse the funds lost by extending our nation's credit and amassing more debt to compensate, does not negate their occurrences, just as the Dutch and British government’s reimbursement of the credit lost to the Iceland bank depositors does not negate the event.

Dwain said...

FOFOA,

I knew from your response to my first query that it was going to be an uphill battle arguing this subject with you. I mean seriously, do you honestly believe that the gov. is going to maintain the debt-generating link with the Fed and hyperinflate the debt along with the dollar? I think not. I think that, if the government’s desperate intent is to inflate away its obligations, it will de-link from the debt mechanism and start printing, free of further obligation. And it will be at the point of delink, that all confidence in the currency will be lost.

OH look, Carl came up with an actual, plausible explanation for the "loss of confidence in the currency" where everybody else was just mouthing the words. Let's check it: Did the Weimar Republic do this? Yes, they did. Did Zimbabwe do this? Yes, they did. Did Iceland do this? No, they didn't and that's probably why they didn't suffer hyperinflation.

Of course, that's just anecdotal evidence in support of the "loss of confidence" mime. The “loss of confidence” could have just as easily been visually cued by the over supply of printed notes already in circulation, exacerbated by the government’s demonstrated intent to continue printing, which the markets anticipate and raise prices preemptively. OH look, another plausible explanation! In either case, these explanations are better than anything you've offered, which has been little more than regurgitating the mime, with the assumption that everyone will take that leap of faith, that a “loss of confidence in the currency” actually occurs, with you.

I made a comment earlier that I would like to repeat because you continue to make it necessary to critique the incongruent construct of your argumentation.

Quite frankly, your arguments are logically inconsistent and very frustrating to deal with."

To which you responded: “Nice comeback!”

1) It wasn’t a “comeback” to anything; it was a statement of fact.
2) I was attempting to be diplomatic in my choice of words when I stated it.

You then proceeded to prove my point.

To illustrate:

Carl - "As an example, you go from venders giving discounts for cash over credit in normal commerce to the Fed printing $500 and $1,000 denominated notes in response to the higher demand for cash. Why????"

Please note that your premise involves A DEMAND FOR CASH, not a rejection, a demand. Further, you proceeded to state that the Fed responds to that DEMAND by printing $500 and $1,000 denominated notes to which I ask, WHY?

Your response:

FOFOA – “Because cash is the reserve of our present system and in a confidence crisis those reserves must be created super-fast as the whole banking system reverts from fractional to full reserves, but only in nominal terms of course.”

WHAT???

What “confidence crisis” are you referring to? Certainly not in cash, because the demand for cash is up. Certainly not in credit because it is still widely available and in use as illustrated by the vendors ready supply of products which, for the most part, can only be obtained through the use of credit. So, where is this supposed “confidence crisis” ?

You went on to state:

FOFA – “Remember, it is the prices of necessities that are rising (dollar collapsing) that LEADS this process.”

To which I reiterate: WHAT????

You’ve gone from pricing discounts for cash payment and a rising demand for cash to garner those pricing discounts, to the Fed responding to this higher cash demand by printing $500 and $1,000 dollar notes and the reason given for that is “confidence crisis” to “Remember, it is the prices of necessities that are rising (dollar collapsing) that LEADS this process.”

What kind of incongruent mental gymnastics is that??? And you pull this crap though out your entire dissertation.

Moving on……….

Dwain said...

FOFOA,

I knew from your response to my first query that it was going to be an uphill battle arguing this subject with you. I mean seriously, do you honestly believe that the gov. is going to maintain the debt-generating link with the Fed and hyperinflate the debt along with the dollar? I think not. I think that, if the government’s desperate intent is to inflate away its obligations, it will de-link from the debt mechanism and start printing, free of further obligation. And it will be at the point of delink, that all confidence in the currency will be lost.

OH look, Carl came up with an actual, plausible explanation for the "loss of confidence in the currency" where everybody else was just mouthing the words. Let's check it: Did the Weimar Republic do this? Yes, they did. Did Zimbabwe do this? Yes, they did. Did Iceland do this? No, they didn't and that's probably why they didn't suffer hyperinflation.

Of course, that's just anecdotal evidence in support of the "loss of confidence" mime. The “loss of confidence” could have just as easily been visually cued by the over supply of printed notes already in circulation, exacerbated by the government’s demonstrated intent to continue printing, which the markets anticipate and raise prices preemptively.

OH look, another plausible explanation! In either case, these explanations are better than anything you've offered, which has been little more than regurgitating the mime, with the assumption that everyone will take that leap of faith, that a “loss of confidence in the currency” actually occurs, with you.

I made a comment earlier that I would like to repeat because you continue to make it necessary to critique the incongruent construct of your argumentation.

Quite frankly, your arguments are logically inconsistent and very frustrating to deal with."

To which you responded: “Nice comeback!”

1) It wasn’t a “comeback” to anything; it was a statement of fact.
2) I was attempting to be diplomatic in my choice of words when I stated it.

You then proceeded to prove my point.

To illustrate:

Carl - "As an example, you go from venders giving discounts for cash over credit in normal commerce to the Fed printing $500 and $1,000 denominated notes in response to the higher demand for cash. Why????"

Please note that your premise involves A DEMAND FOR CASH, not a rejection, a demand. Further, you proceeded to state that the Fed responds to that DEMAND by printing $500 and $1,000 denominated notes to which I ask, WHY?

Your response:

FOFOA – “Because cash is the reserve of our present system and in a confidence crisis those reserves must be created super-fast as the whole banking system reverts from fractional to full reserves, but only in nominal terms of course.”

WHAT???

What “confidence crisis” are you referring to? Certainly not in cash, because the demand for cash is up. Certainly not in credit because it is still widely available and in use as illustrated by the vendors ready supply of products which, for the most part, can only be obtained through the use of credit. So, where is this supposed “confidence crisis” ?

You went on to state:

FOFA – “Remember, it is the prices of necessities that are rising (dollar collapsing) that LEADS this process.”

To which I reiterate: WHAT????

You’ve gone from pricing discounts for cash payment and a rising demand for cash to garner those pricing discounts, to the Fed responding to this higher cash demand by printing $500 and $1,000 dollar notes and the reason given for that is “confidence crisis” to “Remember, it is the prices of necessities that are rising (dollar collapsing) that LEADS this process.”

What kind of incongruent mental gymnastics is that??? And you pull this crap though out your entire dissertation.

Moving on……….

Dwain said...

FOFOA,

I knew from your response to my first query that it was going to be an uphill battle arguing this subject with you. I mean seriously, do you honestly believe that the gov. is going to maintain the debt-generating link with the Fed and hyperinflate the debt along with the dollar? I think not. I think that, if the government’s desperate intent is to inflate away its obligations, it will de-link from the debt mechanism and start printing, free of further obligation. And it will be at the point of delink, that all confidence in the currency will be lost.

OH look, Carl came up with an actual, plausible explanation for the "loss of confidence in the currency" where everybody else was just mouthing the words. Let's check it: Did the Weimar Republic do this? Yes, they did. Did Zimbabwe do this? Yes, they did. Did Iceland do this? No, they didn't and that's probably why they didn't suffer hyperinflation.

Of course, that's just anecdotal evidence in support of the "loss of confidence" mime. The “loss of confidence” could have just as easily been visually cued by the over supply of printed notes already in circulation, exacerbated by the government’s demonstrated intent to continue printing, which the markets anticipate and raise prices preemptively.

OH look, another plausible explanation! In either case, these explanations are better than anything you've offered, which has been little more than regurgitating the mime, with the assumption that everyone will take that leap of faith, that a “loss of confidence in the currency” actually occurs, with you.

I made a comment earlier that I would like to repeat because you continue to make it necessary to critique the incongruent construct of your argumentation.

Quite frankly, your arguments are logically inconsistent and very frustrating to deal with."

To which you responded: “Nice comeback!”

1) It wasn’t a “comeback” to anything; it was a statement of fact.
2) I was attempting to be diplomatic in my choice of words when I stated it.

You then proceeded to prove my point.

To illustrate:

Carl - "As an example, you go from venders giving discounts for cash over credit in normal commerce to the Fed printing $500 and $1,000 denominated notes in response to the higher demand for cash. Why????"

Please note that your premise involves A DEMAND FOR CASH, not a rejection, a demand. Further, you proceeded to state that the Fed responds to that DEMAND by printing $500 and $1,000 denominated notes to which I ask, WHY?

Your response:

FOFOA – “Because cash is the reserve of our present system and in a confidence crisis those reserves must be created super-fast as the whole banking system reverts from fractional to full reserves, but only in nominal terms of course.”

WHAT???

What “confidence crisis” are you referring to? Certainly not in cash, because the demand for cash is up. Certainly not in credit because it is still widely available and in use as illustrated by the vendors ready supply of products which, for the most part, can only be obtained through the use of credit. So, where is this supposed “confidence crisis” ?

You went on to state:

FOFA – “Remember, it is the prices of necessities that are rising (dollar collapsing) that LEADS this process.”

To which I reiterate: WHAT????

You’ve gone from pricing discounts for cash payment and a rising demand for cash to garner those pricing discounts, to the Fed responding to this higher cash demand by printing $500 and $1,000 dollar notes and the reason given for that is “confidence crisis” to “Remember, it is the prices of necessities that are rising (dollar collapsing) that LEADS this process.”

What kind of incongruent mental gymnastics is that??? And you pull this crap though out your entire dissertation.

Moving on……….

Dwain said...

costata,

I'm still waiting...........


.

Dwain said...

FOFOA – “Regarding the FOA quote, you are too focused on your narrow definition of "fiat" that you completely miss the bigger picture. When you cringe, I cringe, because 1) you think you are disproving FOA's statement by forcing it into your deflationist box, and 2) ... Just let your precise deflationist calculations and rules go for a minute and maybe you'll see something new.”

1) It's not a "deflationist box", it's not a box at all, it's reality, which you continue to deny because it disrupts your theory.

2) I will not suspend reality to accommodate your theory.

FOFOA – "I know about your "difference between credit and fiat" in terms of the common monetary aggregates (M1 etc…). And I know that is your (deflationists in general) argument against hyperinflation. The credit portion of the monetary aggregates disappears leaving only the monetary base, the reserves of the system. I get it! But you are still missing the bigger picture."

No, it is precisely my big picture view that allows me to recognize your arguments for what they are, superfluous rationalizations in support of an untenable position.

This is the reality of your premise: The dollar will be devalued, credit currency will collapse, people will lose confidence in the dollar and government will print fast a furiously to compensate, no particular order, all equaling Hyperinflation. Everything else you've written is a repetitive justification/rationalization of that premise, which can be summed up as: The Fed/Gov must print in support of itself and to salvage the promises made to the holders of debt instruments and finally, maybe, the people. That, is the sum of your theory, everything else is redundant filler.

In order to make your theory work, you demand that everyone must suspend the laws of time and the rules of math, skip over the inaccuracies created by the improper use of words, sequencing of events and misrepresentation of terminology, ignore the magnitude of the consequences and logistics that are involved and believe the wild assed assumptions, incongruent rationalizations and the interjection of irrelevant and immaterial subject matter used in support of your theory.

Any time someone challenges your theory along those lines, you launch into a dismissive and overly verbose repetition of your argument, as if that repetition will somehow make your theory true and the challenge false, and I’ve already proven it doesn’t. This is also where the time consuming limitations of Blogging this subject works to your advantage because you can simply cut and paste responses from materials you've already posted or by rote whereas, I have to take the time to wade through your overly verbose and redundant posts, thoughtfully consider the pertinent elements and formulate my responses before I can post anything. Compounding this situation is the fact that, I'm a thinker, not a writer.

So, to further the conversation and to cut down on repetitiveness, I would like for you to assume that I have a firm grasp of your argument, in all of its permutations, as it has been repeatedly presented and all you have to do is address my points with new validating thoughts or valid elaborations to arguments you’ve already made, don’t just cut and paste. Also keep in mind, you’re not going to dazzle me with bullshit so stop trying.

Thank you.

Moving on.......

Dwain said...

Contrary to popular hyperinflationist's myth, currency devaluation and the ensuing price increases, does not increase the available currency supply one single penny. It has exactly the opposite effect, it decreases available currency supply, which is equivalent to INCREASING DEMAND for the currency, especially so in an economy that is already in a recession where unfulfilled demand for additional currency is already pervasive.

This was proven as fact when, in 1985 while the economy was in the midst of a recession, Reagan, in coordination with several other governments, had the dollar devalued in the hopes that it would spur U.S. exports. Well sure enough, prices shot up, available currency declined, making people, who were already struggling, a whole lot worse off, and exports actually decreased. Interesting little side note; not only did prices rise in dollar terms, they rose across all currencies involved. And that's because; you can't jack with the world's reserve currency without jacking with all the others. Which brings us to another related point; while market values of currencies fluctuate on a daily basis, actual currency devaluation is a political event, markets merely react to that event.

Anyway, remember 1992 “It’s The Jobs Stupid”, it took almost 10 years for the economy to recover from that Reagan devaluation fiasco, and its recovery came due to a shift in the Keynesian policy of directing stimulus it the industrial sector, which could no longer facilitate recovery, to the service sector (franchising and Dot.Com booms) and finally, directly to the consumer (credit card and housing booms). Remember, just 25/30 years ago, the vast majority of the population didn’t have or need a credit card. (I still don’t have or need one, but I do carry a debit card.)

The point to all that is: Currency devaluation and the subsequent price inflation does not add currency to the economy, it drains it away which equates to a higher demand for currency, not a loss in confidence in it. So, the only velocity factor involved here is that of people and businesses going broke faster.

Also, you've missed the entire purpose behind the Fed/Gov.'s desire to devalue the currency; they want price inflation because they believe it will force wages higher, force people unto spending their savings and force people into demanding more credit. So they're not going to respond to currency devaluation (which they initiated) and the rising prices with "printing". They're going to let it ride in the hopes that desperate people will do the currency inflating for them, only this time it isn't going to work because they have no carrot to dangle in front of the debt generating machine, consumers, who are already saturated with debt and it will be way too late before they realize it.

In part 2, I will cover credit collapse, which begs the question: Who will be left standing to raise prices or place a value on anything?

- Carl

costata said...

Hi Carl,

You said: "I'm still waiting..........."

Noted. You will continue to do so. As I said "I'll post in due course". Getting back to you is not my No. 1 priority.

Also you continue to add to your list of glaring inconsistencies with each comment you post so the list I am compiling, as time permits, is growing too.

Dwain said...

Costata,

The suspence is killing me, could you at least give me a hint? Are they true inconsistanceies or simply gaps left to be filled?

Dwain said...

FOFOA, et al,

Having confirmed that, indeed I suck as a writer, I’m gonna forgo my rendition of the sequencing of events as they pertain to the hyperinflationist’s argument because I’m too impatient for it and I skip things like mentioning details such as; it is the Keynesian notion of cost push inflation, which is the goal of currency devaluation, as I’ve described. Or that Friedman argued against this notion by stating that cost-push inflation cannot work unless the gov. and central bank accommodates it by increasing the money supply as well, which I’ve also covered. Or that Reagan had to get the countries that had cooperated in the dollar's devaluation (1985 Plaza Accord) to prop up the dollar to stop its continuing fall (1987 Louvre accord). – my, Duh….

Instead, I’m just going to tackle the relevant portions of FOFOA’s arguments as they currently stand and I will assume that because you understand FOFOA’s arguments, you’ll understand mine. Hopefully, you'll come to the realization that FOFOA's thesis centers around convincing you that credit/debt is money, which it is not, and that the Fed/Gov. are Omnipotent, Omnipresent and that they are in possession of a magic dollar printing machine, which, of course, they are not.

Thesis – Antithesis / If – Then / Cause – Effect / Action - Reaction

FOFOA - "First of all I would like to clear up probably the most common misconception about hyperinflation. What most people believe is that massive printing of base money (new cash) leads to hyperinflation. No, it's the other way around. Hyperinflation leads to the massive printing of base money (new cash)."

"Hyperinflation, in most people minds, conjures images of trillion dollar Zimbabwe notes. But this image is simply the government's reflexive response to the onset of hyperinflation, which is actually the loss of confidence in the currency. First comes the loss of confidence (hyperinflation), then, and only then, comes the massive printing to keep the government and its obligations afloat.
"

For hyperinflation to occur it does indeed take new money printing by the government, otherwise it’s just price inflation, which will quickly subside, as it did in Iceland, when producers realize that no new money is forthcoming. This would also indicate that; it’s the actual printing coupled with the anticipation of that printing that drives hyperinflation, not a loss of confidence.

FOFOA - "When a mortgage is originated, the money to pay off the home is conjured on a bank's balance sheet. When that loan is later sliced, diced, repackaged and sold to investors on Wall Street it is no longer thin-air balance sheet money that offsets the original mortgage. It is now money that was actually earned by savers and stored in a Mortgage Backed Security that funded the loan."

No it is not money, it is still credit. Banks and Wall Street are not allowed to create money, that is the sole province of the Federal Reserve, via the government. And no, that is not an argument of semantics, it is a crucially important distinction that must be understood as the whole argument (both sides) revolves around this distinction, or the lack thereof.

Continued…….

Dwain said...

FOFOA - "When a company or a municipality borrows money it creates a debt, or a bond. This money is not just conjured out of thin air, it is provided by savers and pension funds when they buy the bonds. When that company or municipality defaults on its debt, those savers and pension funds' funds can go POOF."

And that perfectly illustrates the fallacy of viewing credit as if it were money. At this critical juncture it becomes important to make these distinctions, which will make the difference between understanding the realities of a subject that affects your entire view of the world or continuing to make the same mistakes in reasoning over and over again.

FOFOA - FOA "As debt defaults, fiat is destroyed"

"The POINT here is that "fiat" – in the way FOA was using the term
"

The point here is that FOA continuously uses the term "fiat" incorrectly. Credit is not fiat; it's merely a promise to pay in fiat.

FOFOA - "in that quote represents the way people hold their money in today's fiat system. That is, they don't hold the currency unit itself, they hold someone's obligation or debt to source and provide that currency unit either on demand, or under specified conditions."

People have been conditioned to believe that their "money" is being stored in debt instruments, which are nothing more than debt posing as promises to pay. There is nothing being stored except the promise to pay on the people’s tendered promise to pay, which originated from a bank’s promise to pay. And your argument proves my point.

FOFOA - "In this context, you can think of modern "debt-based assets" being analogous to gold staying locked up in past monetary systems, and our circulating currency being analogous to either circulating silver coin or paper notes representing the vaulted gold. The relationship between the two, value ratio or fractional reserve ratio, is not important in this point. The point is that today the majority of people's money is "stored" in debt instruments, including MBS and corporate and municipal bonds, just to name three."

What a giant leap of imagination! The only thing debt instruments represent are stored promises to pay that are only valid for as long as the issuer remains solvent and capable of paying. Gold is not a promise to pay, it is final payment, there is no debt attached to it and that's why it is a true store of wealth.

And believing that "money" is stored in debt instruments has been and continues to be a proven fallacy as the instruments often go bust and the promises that they store go POOF, leaving nothing behind but the debt, Still Demanding To Be Paid.

Continued…….

Dwain said...

FOFOA - "These things ARE the very foundation of the modern dollar international monetary and financial system (the $IMFS). Without them, it (the $IMFS) goes POOF. Therefore, these things cannot be allowed to fail – NOMINALLY – in aggregate."

Nonsense, they fail all the time. And they will fail - NOMINALLY - in aggregate, and the kicker is, you've already stated the reason why.

FOFOA - "My friend, bonds (and all kinds of debt instruments) are the very essence of the modern money system. As bonds default, people's savings are destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of guaranteeing people's savings at all costs, even buying those darn bonds outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last MBS and dumping that cash right into your banking system! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

Geez, assume much? Here's an analogy for you, and if you are capable of grasping a POINT outside of your tight myopic hyperinflationist's world, this may help; fill planes with 10's of trillions of knives, fly them up to 10,000 feet then dump them all at the same time, now pretend you're the government and the Fed and all you have to do is print pieces of paper and stick them under each knife before it hits the ground. Not having that bothersome little factor called "time" to worry about, the task shouldn't pose a problem at all.

FOFOA - "You see, it has nothing to do with M1 or M2. It has to do with people's perceived money. Because "hyperinflation is the process of guaranteeing people's perceived savings," backing it up with the printing press, and ultimately converting perceived money (call it M7 if you want) into M0."

Wait a minute, I thought you said hyperinflation was all about a loss of confidence???
Now you say it's about "guaranteeing people's perceived savings"???

OK, so the Fed/Gov. strive to save people's savings, that's about $7Trillion, what about the other $10's of Trillions (the sum of our economic activity spread over the past 30 years), and possibly $100's of Trillions if we include the derivatives markets, in debt instruments, that span the globe, that will be sucking up all available currency and defaulting? Do you expect the Fed/Gov. will be "printing" to cover all of that as well?

FOFOA - "30 years of Credibility Inflation has grown this "M7" into a complex monstrosity. And as the credit system is no longer expanding, the process of "petrifying" these failing debt instruments into non-contractible reserves, or base money, is already well underway. So far it is just here and there, Whack-a-mole style. But ultimately it will be everywhere, all at once."

You must be speaking metaphorically because it is logistically impossible for the Fed to be “everywhere, all at once” with dollars in hand, ready to bail everyone and everything out.

Continued……

Dwain said...

FOFOA - "That "willingness to debase" to deal with the problem at hand ("M7" is failing) is probably the most proximal flint for the "loss of confidence" spark that will trigger the onset of the actual fire, price hyperinflation (currency repudiation). Then the monetary hyperinflation that will inevitably follow (in the case of the US$) will add fuel the fire and keeps it burning for as long as possible."

Here we go again with the ethereal "loss of confidence" mime as the cause, again.

Hyperinflation, if it is to occur, will be sparked by the international devaluation of the U.S. currency (initiated in defense of their currencies and markets against a run-amuck U.S. credit spending binge, (that's where the majority of Fed liquidity programs and QE-1 went)), which causes the price of imported goods to spike high. It is the response of the government to that spike in prices, print/don't print, that determines whether or not hyperinflation will occur. If there is a "loss of confidence in the currency" involved, it will be at the end of the event (if the government decided to print), when people get tired of lugging around bundles of currency just to buy bread, not at its beginning.

(Of course, that scenario is totally dependent upon how many dollars are already in circulation at the time. The fewer there are, the longer it will take.)

The only things that has really been debased thus far are the U.S.'s credit (Measured In Dollars) and credibility.

Now think about this: If the primary currency in use is credit and it suffers repudiation, then, what do you suppose happens to credit? It ceases to function as a currency. What happens to the institutions (banks) that issue and maintain credit? They are instantly wiped out as their whole existence is contingent upon the issuance and maintenance of credit. What about Wall Street? They are instantly wiped out as their entire existence revolves around and is dependent upon the manipulation of credit. What about businesses, from the single proprietor to multi-national corporations? What do you suppose, will happen to them when all of their credited earnings are wiped out and they're unable to conduct business?

Think about that because that's what you're talking about when you talk of "currency repudiation". Remember; "credit money ALWAYS vanishes during (or just prior to) a hyperinflation." Now, what do you suppose will happen to all the printed dollars in circulation when "currency repudiation" (the destruction of credit as a medium of exchange = Hyper-Deflation) occurs? I'll give you a hint, it happened here in 1930/31.

Continued.......

Dwain said...

FOFOA - "So you see, all the discussions about whether credit is really money in terms of quantitative measurements as they relate to inflation or deflation is simply a distraction from the much bigger picture as it relates to systemic collapse and its inevitable effect, dollar hyperinflation. How about if we consider our monetary system a "Tri-Money system" where, under normal circumstances, credit and fiat commingle in circulation and "paper asset savings" hang overhead like a giant, overshadowing, non-circulating anvil with guarantees up the wazoo. Until an economic crisis destroys credit, drops the anvil, and forces the guarantees (both explicit and implicit) into action. Such is the case today."

A multi-trillion dollar hollow anvil of debt comprised of empty promises to pay. Sure, some of that is backed by a government guarantee, but they don't guarantee when it will be paid or if there will be any place capable or available to cash the check when they do.

Let me throw some scale out there for you so you can hopefully grasp just how ludicrous your assumptions are: 180 Million adult population (over 300 million total) spread out over 50 states with 50 individual governments, 100's of cities, 1,000's of towns and 10's of 1,000s of businesses with no credit and $390 Billion printed dollars in circulation between them. The only velocity that $390 Billion will achieve will be how fast it disappears from circulation. You won't be able to give away products that aren't food related, let alone hyperinflate their price. Oh, I forgot to mention, over 80 million of those adults are known to be armed.

Will the government try to "print" our economy back into existence? Without a doubt they'll try. But it will take years, if not decades, just to get back to a semblance of a functional system, especially so if they continue with the dollar/debt paradigm.

Now that I’ve dispensed with the silly notion that a digital credit based monetary system can end in hyperinflation, let me tell what I really think will happen.....

The Republicans will win a majority in both houses, austerity programs will be put into effect, the economy will continue to slowly get worse as prices continue to climb and products start to disappear from the shelves, as the rest of the world decouples from the dollar and start refusing us credit and the U.S. corporations that moved their productive capacity overseas will abandon our economy altogether, as we complete the slow transition of the U.S. into the world's new USSR (United States Socialist Republic), an ostracized, heavily armed, totalitarian police state that is broke.

(The world needs a villain - Tag - We're it.)

Of course, the states could muster the balls to take back their senate, as is their un-amendable, constitutional right, and put a stop to this totalitarian socialist crap and put back onto a free market track. But I don’t see that happening………..

Michael H said...

Hello Carl,

Thank you for describing your position. Can you clarify one issue for me?

When you say that a mortgage origination creates credit and not money, do you mean that all demand deposits at banking institutions are credit? Does your definition of money include only cash?

If so, I can see why you think that there is no way the fed can print into the disappearance of all demand deposits. But this is also why FOFOA says we will need $1,000 and $10,000 bills -- not to buy cigarettes, but to mitigate a bank run as best as possible. In other words, so that people with tens and hundreds of thousands of dollars in savings can withdraw their 'money' without causing a panic.

Dwain said...

Michael H,

There is no money in any bank account of any type anywhere within the U.S. (most likely, every other place on the world as well) they are all credited accounts. Banks will provide cash if asked to do so otherwise, they're just swapping around electronic digits.

It's not my definition:

TITLE 31 > SUBTITLE IV > CHAPTER 51 > SUBCHAPTER I > § 5103. Legal tender

United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.

The law trumps assumptions as to what is and is not money. And you should note that credit is not listed.

Printing $1,000 and $10,000 notes would not mitigate diddly squat, but it would go a long way towards pissing people off more, as they would probably want their money presented in usable form. Thay may as well just write them a check for all the good $1,000 and 10,000 notes would do.

If it really came to this, which it almost did in 2008, The system would probably break down to local and state issued currencies, which is a good subject to google.

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