Saturday, April 23, 2011

Deflation or Hyperinflation?


Chapter 84 – Bond salesmen's propaganda that "a dollar is a dollar" should be rewritten to say "a dollar is 3¢"

Since most ordinary people, bankers, and company presidents have never studied currency theory, they swallow it hook, line, and sinker when the bond salesmen tell them, "a dollar is a dollar." That piece of propaganda should be rewritten to say "a dollar is 3¢." The nominal dollar is officially worth no more than 14¢ of its 1940 value, unofficially only 3¢.

If computed in 1940 constant dollars, not more than $1,380 exists of the US $46,000 per capita gross public and private debt. More than $44,628 has been destroyed by inflation. But sadly, the owners of this debt do not want to hear about it. They do not wish to know that bonds are issued by governments with the sole purpose of debasement.

To my knowledge, no government in history has paid its debts in currency equal to the purchasing power of the currency lent to them. The people always lose their money on bonds.

It angers me. Bond salesmen should be thrown into the East River.


-The above was written in 1985 by Dr. Franz Pick, in the book "The Triumph of Gold" sent to me by one of my readers. The photos are from Time Magazine.


The whole point of the deflation versus hyperinflation debate is about the denouement, the final outcome of this 100-year dollar experiment. It is about the ultimate end, and the debate has been going on ever since the 70s when the dollar was separated from gold and it became clear that there would be an end. The debate is about determining the best stance someone should take who has plenty of net worth. And I do mean PLENTY. People of modest net worth, like me, can of course participate in the debate. But then it can become confusing at times when we think about shortages or supply disruptions of necessities like food. Of course you need to look out for life's necessities first and foremost. But beyond that, there is real value to be gained by truly understanding this debate.

I want to apologize in advance for the length of this post, but I have to be thorough if I want to have any chance of winning Rick Ackerman over to the hyperinflation/Freegold side. And I think there is a chance. While deflation and inflation are practically polar opposites, deflation and hyperinflation look almost identical on the surface, with the main difference being the wheelbarrows of worthless cash. As I wrote in 2009 in The Waterfall Effect:

There is a quote I like that comes from Le Metropole Cafe. It goes, "we will have deflation in everything we own, and inflation in everything we use". This is partly true. It is true during the run up to the rubber band snapping. It is true until we hit the waterfall. At that point I have my own version of the quote. "We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars."

My latest post on this subject was called Big Gap in Understanding Weakens Deflationist Argument in response to Rick Ackerman's "Big Gap in Logic Weakens Hyperinflation Argument". Rick also received responses from Jim Willie and Gonzalo Lira. Last week, with regard to Lira and Willie, Rick reported to his readers in "Rick's Picks":

I’ve concluded there is little to gain arguing on the one hand with a guy who turns rabid whenever someone contradicts him, even in a friendly way; and on the other, with a preening narcissist who comes to argumentation in the same state of sexual arousal that Jeffrey Dahmer must have experienced hovering over the fresh corpses of teenage boys. These guys are bad news, as lacking in civility and manners as buzzards in a scrum, and you’d do well to avoid them both. You might try tuning instead to the hyperinflation arguments of Steve Saville, Peter Schiff and a few others who seem less concerned with trouncing, slicing and dicing opponents than with presenting facts that might better prepare you for the financial crisis ahead. The very best of them, in my opinion, is FOFOA blogspot, where the essays are erudite, the discussion elevated and the arguments as knowledgeable as any you will find on the web.

I would first like to thank Rick Ackerman, and to also acknowledge his perspicacity in this particular regard. And because he has demonstrated such a discerning acumen in his preference for hyperinflationists (among other things), I will try, once again, to help him see the way. As our own Blondie likes to say (and I paraphrase for clarity), "you don't own your baggage, it owns you." Here is Rick's baggage, in his own words:

My instincts concerning deflation were hard-wired in 1976 after reading C.V. Myers’ The Coming Deflation. The title was premature, as we now know, but the book’s core idea was as timeless and immutable as the Law of Gravity. Myers stated, with elegant simplicity, that “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit. As Myers made clear, however, someone will have to pay. If you understand this, then you understand why the dreadnought of real estate deflation, for one, will remain with us even if 30 million terminally afflicted homeowners leave their house keys in the mailbox. To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit.

Rick repeats what he calls "C.V. Myers' dictum" quite often in his deflation-oriented posts: “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” I'm going to go out on a limb here and say that this dictum is Rick's baggage, his foundational deflation premise, in a nutshell. And it leads him to his "bottom line" or his analytical conclusion:

Rick's Picks Commenter SD1: To my knowledge, no bank has ever made provisions in their lending criteria. So to anyone subscribing to the hyperinflation theory, all I can say is there is nothing I, and millions of other North Americans, would love more than to take $250,000 of worthless, hyperinflated money that we worked a few days to make, to pay off a mortgage that would otherwise have taken twenty-five to thirty years to repay.

Rick Ackerman:That’s the bottom line, as far as I’m concerned.


In this post I will explain the flaw in Myers' dictum. I will go into great detail as to why the missing component in the dictum is the essential (and inevitable) one. I will show how this one flaw in Rick's premise sends his otherwise excellent analysis careening 180 degrees in the wrong direction (with regard to the subject of this post). And I will explain the proper frame of reference from which to view what I am describing. How's that for a kick-off?

First Myers' dictum. “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Rick: "Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit." Me: Yes, someone will pay. But there is a third option that is missing from Myers' dictum. "The hit" can be socialized:

"Human nature has followed this path for thousands of years. You know the old joke about outrunning the bear? Well, these lenders will influence our financial policy as such. They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I. Leaving anyone they can beat to the mercy of the hyperinflation bear eating their remaining fiat assets…"

"…hyperinflation is the process of saving debt at all costs, even buying it outright for cash… because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn!"


(The quotes are from FOA on Hyperinflation and FOA on Currency Styling, Currency Management, Dollar Hyperinflation and End Game Scenarios respectively.)

As many of you know, I came to this debate, with no baggage and no hard opinion, in 2008. And in the "doom and gloom internet community" where I arrived there was definitely an equal helping of both deflation and inflation/hyperinflation talk. Most of it I found less than convincing (on both sides). The "deflation side" is actually bigger than you might think. Most of the peak this or peak that crowd, the majority of the survivalist community, and the Great American Collapse people are all expecting a sort of grand deflation, whether they understand the arguments or not.

If you want to think of a grand deflation as a deflating—or grand contraction—of economic activity that was previously "energized" by massive trade deficits, massive credit expansion, and the massive structural malinvestment that flows from those easy money expansions, well then I too am expecting a sort of grand deflation, in many of the same ways they are. But one thing I have learned from the writer that made the most sense to me, the writer that I found most convincing from within my "past baggage" vacuum, is that "deflationists" as a group still have a big gap in understanding.

Rick became a deflationist in the 1970s by his own account. And he certainly wasn't alone. I wasn't even aware of the existence of such a debate in the 1970s let alone 2007, so I can hardly add the wide perspective necessary in this debate from my own personal experience. What I can do, instead, is to share with you this excerpt from the one that spoke convincingly to me, the one that informed my developing view in 2008.

One point I hope you'll find curious in this excerpt is that deflationists have always fixated on residential real estate. This is one of Rick Ackerman's, almost obsessive, objections to the hyperinflation case, and it clearly has roots in his kind. This was written in 2001, just as the housing bubble was developing. My notes in [brackets]:

Somewhere in the 1970s era I was exposed to the thinking of several different deflationists. It seemed that all of their conclusions came to the same end: that dollar deflation would rule the day, no matter what. Mind you now,,,,,, most of them were split on the finer points of the issue, but for all of them; [de]flation would have its day even if prices would rise somewhat. Deflation was always the final outcome.

One of the central themes in these thoughts was concerning how this coming deflation would impact plain old residential real estate. You see, most of these guys advocated selling excess residential property because it was, sooner or later, going down for the count. Mostly because the mortgage markets would be destroyed in the deflation and nobody could buy [prices would collapse to the cash price].

-- Note: The reader has to understand that these discussions were directed towards people and investors that had plenty of net worth. And I do mean Plenty! The argument wasn't about how to survive; rather how to balance a truly conservative estate portfolio. --

As time has passed we can see several major flaws in their thinking. Flaws that cost them a bunch of credibility, if not personal money. [I want to jump in here with a quick quote from Gary North written in 2002:

"I remember in 1975 hearing C. V. Myers tell attendees at a gold conference, 'If you get this one wrong, you'll lose everything.' He was predicting deflation. He got it wrong. He didn't lose everything."

And now back to FOA] One point, that I have touched on here several times, was in understanding just how much ourselves and our economic structure would and did evolve into accepting fiat money use. Even though it was, "god forbid", separated from gold.

In one area alone, the bond markets, investors reacted far differently than deflationists thought they would. Twenty ++ years ago [again, this was written in 2001], it was expected that just gross increases in money printing alone would be enough to crash the bond markets. Not talking about price inflation here, but money inflation and that should have started a deflationary fall in our credit markets. It almost happened, several times, but never followed through. It seemed that the market function had evolved to accept fiat inflation as a prerequisite to modern economic function. In a like comparison to today's thinking; investors assumed that as long as we had an expanding economic stance [nominal GDP growth, credibility inflation and financial product appreciation], sourced by inflating fiat supply, price inflation would not impact long bond credibility. We saw confirmation of this over many years. We saw that our credit markets, especially long bonds, were used in spite of the price inflation threat. Indeed, there was a ready [highly liquid] market demand for bond purchases.

In hind sight, long term holders of bonds did do very well if their position was part of a balanced holding and they didn't need to sell at bad times. Even now, dollar bonds have gained as rates are pushed lower.

Back to the thought:

This whole IMF dollar system has always been based on an expanding fiat theory that swells [nominal] GDP over time. Investors that bet on deflation coming along, after each of our bouts of inflation, were badly burned as deflation was overcome. Economic function returned, essentially because price inflation could not rout the overall market for long credit.

The flaw in all of this was in the reserve structure of our Dollar IMF money system. The fact that the world had to walk, lock step, with our money policy meant that their goods production would almost always be cheaper than ours; keeping local US price inflation under control. In other words; local US-based price inflation could not get out of hand as long as the rest of the world was willing to use their economic production to control it by selling [products cheaper than we could produce them] into our expanding fiat system.

In this, the dollar [and its securities, and their derivatives] could be inflated without end while our credit markets functioned in a non-inflationary environment.

But there is an end.

A money system like this has a definite timeline and that point is reached when the world can move away from keeping price inflation low in the US. That point is reached when Another money system comes along to challenge the dollar and, in the process, offer these other goods-producing countries a chance to buy some "lifestyle" for themselves.

At first, the show is dull as investors keep right on buying into the dollar argument above: that an expanding fiat base builds non-inflationary [nominal] growth [in both GDP and securities]. This is one reason traders still buy US long credit, not to mention chasing rising dollar exchange rates; they expect more of the last several decades of economic theory to keep right on going. It won't.

The dollar faction saw its match early in the 90s as the Euro was taking shape. To counter this threat, as I have outlined here in several ways, they promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar / IMF system beyond its ability to serve as a real fiat money system, today. [See (my title): Is the Fed selling Hyperinflation Insurance Backed Only by Hyperinflation?]

I mean; that our whole dollar landscape has now become just a trading asset arena: it's now evolving away from any meaningful currency use to trade for real goods. It can head in no other direction because our local economic structure, the USA economic base, cannot possibly service even a tiny fraction of the buying power currently held in dollars worldwide.

So what does this have to do with Real estate?

Take a look at any broad section of the US; Northeast, SouthWest, etc.. If any of the deflationists were correct, their reasoning back in the late 70s and early 80s should have produced at least an average fall in Residential real estate. Can any of you find an "average" of property today, that is lower than early 80s prices?

Of course I'm not talking about the spikes in Hawaii, New York, Denver or San Francisco; those are just blips on an ever rising inflation scale. Even if they fall some from here, it isn't part of a deflationary act playing out. Average home prices will rise all across this country no matter what the future economy holds. A super inflationary stance by the Fed means that even unemployed workers can buy a house and pay for it! Watch how this all comes about. The Dow will not be much different when seen ten years from now; a drop to 5,000 then off again, is a real possibility! [Note: The Dow dropped from 11,000 in 2001 down to 7000 and back up to 12,000 in 2011. Again, FOA wrote this ten years ago in 2001]

The same is true for anything perceived as something real: "even silver" (grin).

The difference is in the drastic ups and downs derivatives will place on all asset markets. My point is that we are on an "end time run" in fiat dollar production that will soon produce a spike in real price inflation that crushes hedge vehicles. One item alone, physical gold, because it is the main wealth asset behind the next currency system [See: RPG #1], will outrun everything by a wide margin. No matter the derivative's hold on it!

As the Euro builds a base [which is happening right now in 2011 – see this, this, this, this, this and this], it will drive an inflationary recognition into our credit markets, then freezing up our derivative markets. That perception will fuel a complete failure of our bond markets and force the Fed to buy up any and all credit; paying in full. [Paying full price for deflating assets? Oh my, would the Fed ever do that? The deflationists never saw it coming!] If needed, Bush and congress will see to it that enough money is printed so we are paid in cash for everything! Don't laugh, this is where we are headed.

[I must insert here the rest of the famous FOA quote from above. I affectionately call it "the front-lawn dump" and it was coined by FOA a full 18 months before Bernanke's famous "Helicopter drop" speech:

"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!"

Okay, now back to the original excerpt…] In the meantime, whether or not our economy is growing, stalling or failing, will have little or no impact on price inflation.

You see, living with real serious price inflation goes something like this:

---- "Honey, I talked to Fred again, he can't sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that's not so bad, we had to jump ours up three times before selling." ----

Inflation runs crazy when a money system is forced to "print out". We will "print out" our dollar, too. Getting there just takes time and an alternative system to cause it.


Now I do realize that it takes a certain talent to distill deep wisdom from a 10-year-old internet forum post. And I can almost hear some of you out there screaming, "but but but… house prices DID collapse… d… d… DEFLATION!" Wrong. Sorry. Residential real estate will ultimately crash to its non-leveraged cash price as credit disappears, just like the deflationists think. But that ultimate cash price, once reached, may actually be higher than today's leveraged prices and be outrunning the availability of cash needed to clear the market! And all the while real estate will keep crashing in real terms (gold).

There is always a shortage of cash during a full-bore, in-your-face hyperinflation, which is why the printer has to keep adding zeros. His press simply cannot keep up with prices at established denominations. It is also why the first to touch the new cash (the "elite") have a very valuable advantage. Hyperinflation is a grand competition for lifestyle retention in the face of forced austerity, just like a race! Here, look at this from the excerpt:

"Honey, I talked to Fred again, he can't sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that's not so bad, we had to jump ours up three times before selling."

I'll bet the deflationists were thinking in terms of deposit+loan=price, rather than cash. Wrong paradigm. Sorry. When the hyperinflation hits in a reference point purely-symbolic fiat currency paradigm, the market will try to clear for the rising symbolic cash price while the hard currency price (denominated in gold) continues to drop like a stone. Deflationists do have one thing right. Real estate is not a very good investment when preparing for what's coming. That doesn't mean home loan debt won't be hyperinflated away though. It most likely will be. And if you are lucky enough to catch the bottom in the reference point gold paradigm during the crisis, bless you. But it's still a poor investment choice right now, even at 5% down, compared to putting that same cash into physical gold. More on this in a moment.

The point of sharing this FOA excerpt was that deflationists, like other groups that have established encampments cluttered with old baggage, tend to miss what is actually unfolding. And for that, you might want to start with my post The Debtors and the Savers. Understanding the balance necessary to keep the peace between these two groups is fundamental to understanding the political will behind the inevitability of both Freegold and dollar hyperinflation.

Rick seems to have a number of hang-ups when it comes to both gold and hyperinflation. His biggest is obviously real estate and the modern home mortgage. He simply cannot seem to fathom how a system designed and managed by The Power Elites could ever deliver a "windfall" to overleveraged, underwater homeowners or shady, uncouth gold bugs. And, frankly, if you don't make the effort to understand what is actually unfolding, there's a good chance it won't.

To the deflationist, "a dollar is a dollar" just like it is to ordinary people, bankers, company presidents and bond salesmen in the quote at the top. And even though the dollar has already lost almost 99% of its original gold purchasing power, Rick believes The Power Elite will make sure it stays strong until you have worked off every last dollar you owe. Because someone has to pay! (He's right about that.) And it's not going to be "them". (He's mostly right about that too.)

The dollar has a long, storied past. To believe "a dollar is a dollar" is to simply ignore its history. Of course I'm not implying that deflationists are unaware of this chart:


But I am saying that they think the collapse of the dollar's financial system will strengthen the dollar itself and make prices fall in the end. This is a funny notion when you take the totality of the dollar's journey into consideration.

The dollar was once worth 1.555 grams of gold. Then it was reduced to .888 grams of gold. Today it is able to purchase .02 grams of gold, but only at the margin. Notice that I said "able to purchase" instead of "is worth," and I also added "at the margin." That's because the dollar is not worth .02 grams of gold today. Around 60 years into its 100-year life, not unlike the human retirement age, the dollar retired to become a purely symbolic, completely worthless token. And in the big scheme of things, this "retirement from value" is not such a bad thing. Someone emailed me a question the other day and this was my reply:

Hello Mark,

I don’t see much wrong with your grasp of the subject, other than those worthless tokens are actually a good thing. What sets us apart from those monkeys is our ability to divide labor in a way that resists the second law of thermodynamics and allows us to organize our environment.

This division of labor requires us to use a medium of exchange in order to avoid the double coincidence of wants.

The question then becomes, what is better as a medium of exchange? Should it be something of value? Or is it more beneficial to the anti-entropic process for it to be something purely symbolic and worthless?

If you answered “something of value” I would ask, Why? Is it because you want to hoard that thing in the case that you produce more than you consume? And what is the net effect on man’s battle against entropy if the circulation of that valuable medium slows due to hoarding? Conversely, with a worthless medium, why not just exchange it for that same valuable thing if, in fact, you do produce more than you consume? Seems simple enough to me.

Sincerely,
FOFOA


You see, this is where we are today. We are using, as a medium of exchange, a purely symbolic, completely worthless token. The logical action, then, is to exchange surplus worthless tokens for something of value. Yet still today, most everyone hoards up purely symbolic, completely worthless tokens in the form of the debt of more tokens to be worked off and paid by someone else. In fact, globally, this debt far exceeds the ability for it to ever be paid (worked off by future labor), at least not at today's dollar purchasing power of .02 grams of gold. And yet it will be paid by someone, just as the deflationists promise! So the question then becomes, how can an impossible debt be paid?

Answer: if it cannot be worked off by future labor, it will be worked off by past labor, the net surplus of which was erroneously stored in debt and dollars. The icing on the cake is that it is also the past labor of "someone else," if the profits can be capitalized and the losses socialized. Precisely the process we have witnessed over the past three years, for those with eyes to see.

Rick Ackerman's somewhat-myopic focus is on home mortgages as the lynch pin that will keep this worthless, symbolic token valuable while you toil on the chain-gang working off your debt of worthless tokens. So let's take a look at the larger picture to gauge the strength of this pin and the stress it must endure.

Total US mortgage debt is a little over $14 trillion. That number includes you and your neighbors. Of that $14 trillion, about $6 trillion sits on the balance sheets of banks and $9 trillion has been packaged and sold to savers like pension funds. Of that $9 trillion held by savers, about $5 trillion is guaranteed by the US government.

So here's Rick's lynchpin that's going to keep all of you indebted homeowners honest: $14 trillion - $5 trillion guaranteed = $9 trillion. And that $9 trillion lynchpin is so powerful because it is held by politically connected and powerful banksters and pension funds, or so they say. Now in a minute I'll tell you why these two groups would rather have all that debt printed and the cash handed to them than to watch even 20% of you default on your mortgages. But first, let's step back and take a wider look at what might be exerting shear stress on this supposed lynch pin.

Total worthless token debt in the US, both public and private, is around $55 trillion, four times as big as that backed by physical real estate. If we add in the government's unfunded liabilities (which definitely apply shear stress to the dollar's lynch pin), that number comes in around $168 trillion. And that is simply the promises to deliver worthless, purely symbolic tokens, at some time in the foreseeable future, emanating from within the United States. Meanwhile the US produces enough "goods and services" (loosely defined) every year to be purchased by 14 trillion of these purely symbolic tokens at their present level of purchasing power. And with a trade deficit of around $500 billion per year, it appears the US is consuming roughly 103.5% of what it produces every year, in real terms.

So in real terms, that is, in terms of the dollar's purchasing power as it stands today, it would take, let's see… $168T/($14T produced - $14.5T consumed)= x years… hmm… somehow it's going to take us negative 336 years to deliver those promised dollars at today's purchasing power. Remember I said this debt would be "worked off" in the past, without the use of a time machine I might add? Well here you go—past surplus labor foolishly stored in dollars and dollar financial instruments and their derivatives will be tendered. Of course the deflationists want you to know that we will be forced to reduce our consumption to below our production in order to pay those off. And once again, they are correct, though not in the way they think.

Reducing consumption means reducing your standard of living. Some call it austerity. But with forced austerity also comes the competition to avoid reducing your standard of living. And herein lies the inevitability of US dollar hyperinflation.

You see, those Power Elites that Rick thinks are going to support the dollar and its $169 trillion burden (excluding derivatives) simply to make sure you'll work off your $9 trillion dollar mortgage at today's purchasing power are the same ones that will resist personal austerity measures the most. And as all good deflationists know, you simply cannot resist the irresistible without breaking something. And what they will ultimately break in their competition to maintain lifestyle is the value of the dollar, which will actually break quite easily due to the mountainous (think: landslide) shear stress applied to it right now.

Now let's go back to those "banksters" that, along with the politically powerful pension funds, are part of the Power Elite that are going to keep the dollar strong enough so that your mortgage isn't hyperinflated away. Remember, this is roughly $6 trillion, or 3.5% of the dollar's debt problem, that is still sitting on the balance sheet of banks, yet gradually being absorbed and/or guaranteed by the Fed and/or the US government.

This is simple logic: Do you think they'd rather offload that debt onto the Fed's book in exchange for full cash value? Or would they prefer to hold onto those notes while you struggle to pay them off in symbolic tokens over the next 25 years? How about this: Is it better for the health of the bank to take possession of the houses (and then have to sell them) that roughly 20% of the troubled homeowners are walking away from? A 2009 jingle mail study showed that close to a fifth of troubled mortgages in the U.S. involved borrowers who were strategically defaulting. That represents roughly a 10% hit to the asset side of the banks' balance sheets. Yet the banks' liabilities (deposits created when the loans were originated) remain, fully insured by the FDIC which has no money.

Through the magic of commercial bank double-entry bookkeeping, the banks' balance sheets are actually not exposed to decreases in the purchasing power, or present value of purely symbolic, completely worthless token dollars. They are, however, exposed to decreases in the value of their assets and to the risk of default that flows from deflation. Deposits are nominal liabilities that remain when assets deflate. So supporting deflation would be, to a bank, like suffering a masochism fetish.

Rick thinks the banks will defend their assets by keeping the dollar strong. But that only keeps their liabilities that much harder to meet while the effects of deflation tend to shrink their assets making it even harder still. Ignoring the dollar for a moment, and the flaw in Myers' dictum, what happens to a bank's balance sheet if all of the loans are defaulted at the same time? Or if the asset value of all of their collateral collapsed at the same time? It would have precisely the same impact. So would a mixture of the two. The banks have and are experiencing precisely this type of squeeze. How has their "guardian angel" the Fed responded so far?

Rick Ackerman's view of the banks' incentive or preference to prevent (as if they had that control) hyperinflation is exactly bass ackward. A bank's balance sheet becomes severely damaged in deflation, yet it is made whole through hyperinflation.

As for the pension funds, they hold this debt not for its value to maturity, but for its appreciation in a falling interest-rate environment and its liquidity in trade. Pension funds get in trouble when they cannot perform nominally. They hold nominal assets and make nominal promises (like 8% returns) which simply cannot be met in a deflation. However, as disastrous as hyperinflation is for pensioners (the funds' clients), it is a Godsend for the politically-connected pension managers who were being crushed by deflation.

So once again, the incentive or preference of those who hold the note on your mortgage to prevent (as if they had that control) hyperinflation is simply not there. In fact, as I will show in a minute, there will be ample incentive for these politically connected Power Elite Giants to actually encourage the kind of printing that will take an Icelandic-style currency collapse into full-blown Zimbabwe-style wheelbarrow hyperinflation. More on this in a moment.


What you see is the result of the perspective you choose

A small-minded ant's only interaction with Giants may be getting stepped on or sprayed with deadly poison. So from the ant's limited perspective, this activity of killing ants is what Giants live for, what motivates them, and what they spend their time scheming and planning for. Don't limit yourself to the ant's perspective. If you want to find the tasty morsels left by Giants, you've got to start thinking like a Giant. You can read more about ants in my post Life in the Ant Farm.

In his latest of several posts on this subject, Rick Ackerman presented two responses that he found "of particular interest." The second one is so ldo that I won't spend much time on it. It is a comment that explains the old truism, "you can't eat your gold." That's right, gold is not at its highest and best use being spent (circulated) as a currency during a hunger crisis. Instead, if you are one with PLENTY of net worth, gold is the very best way to shuttle your wealth THROUGH a crisis to the other side. If you are forced to deploy this wealth for food during a crisis, then you apparently planned poorly.

And with a little understanding of how a monetary collapse actually unfolds, flipping the switch on illusions and revealing reality, you'll find that the actual crisis itself will be relatively short-lived. My best guess is 6 months maximum—for the worst of it—beginning when the normal distribution of food abruptly stops. So transporting your wealth to the other side should be of great importance to those with significant savings. But if you are one of the ants that cannot distinguish between a monetary collapse and the myriad other problems with our civilization (i.e. you think that when the money collapses everything else goes to permanent sh-t as well—it doesn't by the way, look at history), then you probably think we'll be in a Mad Max wasteland for a generation or more after the dollar finally goes the way of the peso.

In that case, you should probably buy yourself a Texas ranch, a lot of guns, and a few friends to help you shoot those guns, like the Circle K Cowboys. The way I see it, the monetary collapse is going to reverse and ultimately correct many of those myriad other problems because reality will be uncovered and freed to exert its more balanced supply and demand dynamic.

But that's enough on the Texas Rancher's Thunderdome wasteland. The first of the two responses that Rick found "of particular interest" was an email he received from Charles Hugh Smith, the man "Of Two Minds" who is bothered by the "conviction" (or what he perceives as single-mindedness) of others, particularly hyperinflationists. He said as much in the email:

What bothers me is the widespread conviction that hyperinflation is “guaranteed.”

Smith is truly a man of two minds. He likes to stay uncommitted and agile, to trade against the crowd:

I certainly wouldn’t want to debate anyone because my arguments are those of a trader, basically, not an economist. Maybe we will get hyperinflation, I don’t claim to know… This smells like a one-sided trade to me, even if it is more of a meme than a trade.

I am up on a hill with a wide view of the valley. In this post I am attempting to share the framework in which you, too, can see what I see rolling in. It is a tsunami called currency collapse coming in, following a violent financial and economic earthquake, which in our case will end in probably the most devastating hyperinflation the world has ever seen. And the more people that come to see what I see rolling in; the more people that join me safely on higher ground with a view of the valley below, the more the man of two minds likes his contrarian position in the valley below. Did you see that newish video out of Japan? The one I have in mind?

In order to share my view with you, I am going to patiently work my way through Smith's email, correcting errors and explaining the flaws in his perspective as I go:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation?

I think we can safely define Charles Smith's "Elites" by his own words as the Financial (Wall Street) Elites, the politically powerful (including politically connected corporations and unions/union pension funds), the "banksters robbing us blind" and "CONgress" along with all the politicians running this country into the ground; basically everyone running the Dollar International Monetary and Financial System (the $IMFS). And he asks how do "they" benefit from hyperinflation? Well, they will benefit, in the same way that those closest to the printer benefit tremendously in all hyperinflations. But more importantly, Smith's core perspective on "the Elites" is wrong. He makes the same mistake Karl Marx made, which I explained in my post The Debtors and the Savers. [I know, this is the second time I've linked this post. It is intentional. I'll probably do it one more time as well.]

What I described in that post last July is the essential foundation to the framework for understanding why US dollar hyperinflation and Freegold are, simply, unavoidable, or to use Smith's word, "guaranteed." I have been accused of overconfidence in my views. But I specifically and actively limit the scope of this blog to only these two topics. I'm certainly not a know-it-all. I only describe the things that can be clearly seen, and how to ascend to that perspective.

Was the Japanese guy shooting that video up on a hill overconfident about his view of the tsunami rolling in while those still down in their houses had a more rational, balanced opinion? Perhaps they were of two minds; on the one hand, there had just been a Richter scale 9 earthquake and they lived in a tsunami warning zone. On the other hand, they were not exactly ocean-front properties and it would have to be a pretty big tsunami to bring the ocean over that levee. Surely they would hear it coming giving them plenty of time to escape. It's all about perspective. With the proper perspective you can see things more clearly.

In The Debtors and the Savers I wrote:

Today we have many fine, intelligent and exacting analysts all looking at the same economic data and coming up with vastly different analyses of the present global financial crisis. What sets them all apart from each other is not intelligence, or math skills, or even popularity. What sets them apart is the foundational premises on which they operate.

And a false premise can skew a brilliant analysis 180 degrees in the wrong direction. Few analysts fully disclose their premises. But Karl Marx did, and in this we can find the one, key flaw that sent his analysis off in a disastrous direction.

Marx writes, "The history of all hitherto existing society is the history of class struggle." He got this part right! What he got wrong was his delineation of the classes.

Marx's classes were:

1. Labour (the proletariat or workers) - anyone who earns their livelihood by selling their labor and being paid a wage for their labor time. They have little choice but to work for capital, since they typically have no independent way to survive.

2. Capital (the bourgeoisie or capitalists) - anyone who gets their income not from labor as much as from the surplus value they appropriate from the workers who create wealth. The income of the capitalists, therefore, is based on their exploitation of the workers.

Simply put, Marx says it's the rich versus the poor. According to Marx the rich exploit the poor to get themselves a "labor-free income", which spawns a class struggle.

This is an attractive perspective because it requires only a cursory, superficial judgment to place someone into one of the two camps, the rich or the poor. If someone is driving a Bentley we immediately know which group they are in, right?

[…]

As I said, Marx got one thing right. History does bear out the dramatic story of centuries of class struggle. But if we eliminate his one small flawed premise, we can see it all much more clearly.

The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. "The easy money camp" and "the hard money camp". History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.

1. Debtors - "The easy money camp" likes to spend (and redistribute) money it did not earn, either by borrowing it, taxing the savers for it, or printing it. They like easy money because it is always and everywhere constantly inflating, easing the repayment of their debts.

2. Savers - "The hard money camp" likes to live within their means and save any excess for the future. They prefer hard money (or in some cases "harder" money) because it protects their savings and forces the debtors to work off their debts.

1789, the French Revolution, "the hard money camp" had been in power since 1720 when John Law's easy money collapsed, and starting in 1789 "the easy money camp" killed "the hard money camp" and took back the power. This is the way "the easy money camp", the Debtors, usually take power... by revolting against the hard repayment of their spending habits…


Obviously I don't want to reprint the whole article here, which is why I linked it three times. So please go read it.

But here's the fatal flaw in this Marxian paradigm; many of we, the modern proletariat, are savers who would prefer hard money like gold to protect our savings. It is we, the savers, that are punished by the current easy money system. That's why I delineated the groups as the Debtors and the Savers, otherwise known as "the easy money camp" and "the hard money camp."

And with the proper view of who Smith's Elite CONspirators really represent—the easy money camp, the debtors, the hungry collective—the answer to his question begins to develop. It is the opposing camp, the savers, that will be most-punished by hyperinflation and it is Smith's Elite that will profit the most during the race to spend.

If you can start to think of the administrators of the $IMFS, the "banksters", politicians and Western Capitalists in charge of the system as being firmly entrenched in the Debtor camp, you are well on your way to a very rewarding enlightenment. I realize this is counterintuitive, and counter also to much of the baggage that accumulates while reading other "hard money" writers on the Internet, which is why I spend so much time on it. But once it clicks, you'll be like, "OMG! WTF was I thinking?" I have conversed via email with many extremely intelligent people that have had this momentous "click", so I am tempted to consider that I may be on to something.

So call me overconfident if that makes you feel better, but I'm not going to be wishy-washy about what I can see. I'm certainly not of two minds on this.

How will "the Elite" profit from hyperinflation? By being the first to spend the bills with new zeros added and thereby outrunning the rest of us in the race to spend and winning the competition to retain standard of living. Hyperinflation is the end result of the dollar-debt timeline, there is no other way it can end. Only the severity is a variable to be considered.

Rick Ackerman and other deflationists agree with me that the unsustainable, unstable mountain of debt must and will collapse. And they view "the Elite" as the capitalist creditors and the rest of us poor working saps as the proletariat debtors. Therefore they believe that when the debt mountain collapses, their version of "the Elite" will not print Zimbabwe-style because, even though they just took a tremendous haircut on their bonds, they want to be sure that the super-saps among us, the proletariat that are still working, will continue to service the remainder with dollars of today's purchasing power.

This is a bass-ackward view in my opinion. The hungry collective provides ample political backing and sufficient naiveté for "the [Western] Elite" to print the full face value of their bonds and dump that worthless paper on the public's front lawn. Furthermore, deflationists like Ackerman as well as practically all mainstream economists provide plenty of cover in the form of plausible deniability that hyperinflation would be the inevitable result.

But the story runs deeper still. The reason I have been putting "the Elite" in quotes or referring to them as "Smith's Elite" is because, not only does he have the delineation wrong, but he is myopically focused on only one quarter of the bigger picture.

Some of you, I know, like to think in terms of grand conspiratorial conflicts, a "Clash of the Titans" (Clash of the Elites if you will), or something like that. Well I can probably help you with that view in this "Debtors v. Savers" paradigm.

We have the West which is roughly only 25% of the world's population, and then we have the rest of the world. And oh yes, they have their own "Elite". You'd probably guess that "the West" represents "the debtors" in this paradigm. But you'd be wrong to assume that the rest of the world is taking "the hard money camp" stance.

It is true, we are at the end of one of the longest-running "easy money camp" regimes. And these things usually swing back to the other side. But history has taught the world that while easy money regimes end in financial collapse, hard money regimes usually end in bloodshed. And it's usually the blood of the hard money campers that is shed. (See: the French Revolution.)

So the rest of the world has taken a different stance this time. It has been "in the works" for several decades.

Q: **Who does BIS really represent?

A: "old world, gold economy, as viewed thru modern eyes" or "way to move from US$ without war".


Those are the words of ANOTHER from my post "The Gold Man" (not Goldman) at the BIS. The BIS truly represents "the rest of the world" from a monetary perspective. It is the "trade union" of their Central Banks. All is not as it seems on the surface.

So how do you view an "old world gold economy" through modern eyes? And how do you move there peacefully with the easy money camp? It's quite simple actually. You let nature take its course, you support that natural course however long it takes (rather than pathologically fighting nature like the dollar system does with its obsessive-compulsive drive to control), and you don't deprive the easy money camp of their precious fiat. It's Freegold. It is about allowing meritocracy to rise like a Phoenix from the ashes of the dollar's inevitable collapse. It's not about a transfer of wealth. It is about a re-born meritocracy. The transfer of wealth that will take place is what blinds most people from seeing its inevitable approach.

More from Charles Hugh Smith via Rick's Picks:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation? The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency. Meanwhile, the Financial Elites would have lost all their financial wealth. Have they really transferred all their wealth out of all financial instruments and totally into gold and land? If so, then [who] owns the $160T in financial wealth?

First of all, it is unclear exactly how much gold there is, but it's probably over $8T by now, and only about 18% of it is owned by central banks, not anywhere near half. That leaves $6.6T in private hands, at today's price.

Smith exposes his ant-like perspective in this paragraph when he implies the Giants that own the lion's share of $160T in financial products should have already crashed the value of those financial products and exploded gold in the stampede from one to the other, if a collapse of the dollar was really on the horizon. On the contrary, you have to think like a Giant to see the best way to move your Giant wealth from one system to the next. True Giants do not panic out like ants, nor like ants imagine that Giants would. True Giants know that if they panicked out, with the weight they carry, they would end up transferring much LESS wealth into the new system.

Viewed from the Giant's perspective, you can see that most all of that dollar value, that $160T will vanish in a flash. And when that happens, the market for paper promises of gold delivery will also collapse and vanish as physical gold gaps up (in my estimation) 40x. That's right, $160T vanishes, and $6.6T worth of gold—in private hands—gaps up to $264T.

Oooh. Now I'll bet I've got the deflationists screaming! "You can't turn $160T into $264T in a flash during a deflationary collapse!" Au contraire, mon frère. What you see is the result of the perspective you choose. Reader "Reven" recently asked this same question, to which I replied:

It is a fallacy to compare a snapshot of gold with a snapshot of "global asset values" because it ignores the time dimension in which gold flows. Even if you are correct about everything in the world (other than gold) being worth [$160T] in 2011 constant dollars, the value of all the gold can be multiples of that amount. It is theoretically unlimited, unlike paper wealth which is self-limiting by its own objective metrics and economic ties. Paper wealth is limited to the upside but unlimited to the downside. Gold is the inverse of paper, unlimited to the upside, limited to the downside. It's not the total stock of gold that matters, but the flow from those that already hold it.

Here are a few snippets from my post How Can We Possibly Calculate the Future Value of Gold?

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.

[...]

This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.

And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequalled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.

[...]

Commodities and paper investments are limited to the upside by economic forces and future earnings metrics respectively. Yet they are unlimited to the downside for the same reasons. Gold, on the other hand, has none of the upside limitations that everything else has. It will only find its point of equilibrium when enough "stock" is reassigned to "flow" to meet demand.

[...]

Lastly, understand that currency flows through assets, not into them. In fact, a limited amount of dollars can flow through the same gold many times, over and over, driving it higher and higher with each pass, as long as new gold stock is not coaxed out of hiding. And the interesting thing in this process is that, as I said above, it actually causes the opposite of the expected supply/demand reaction. With each pass-through of the dollar more "flow gold" is moved into "stock gold", not the other way around like commodities and paper.

This is the feedback loop. It is confirmation to the gold investor that his gold is a good investment. And it also says something very distinct about the alternatives. Namely that they are failing. And with this confirmation, it is from existing gold holders that less supply comes. This is not true of any other investment class because they all have objective metrics for valuation or economically limiting forces. All except gold.

[...]

So, cutting to the chase once again, the biggest fallacy in your model is using "Total above ground gold" as your point of comparison. It's not the stock that matters, it's the flow.

Now, if you have a supercomputer you can try to run this unimaginably complex flow algorithm. But be careful with your assumptions. One wrong assumption can throw the whole thing off by orders of magnitude.


Back to Smith. Here's that same paragraph again. Let's see if we can answer his questions a little more concisely now that we have a new perspective:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation? The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency. Meanwhile, the Financial Elites would have lost all their financial wealth. Have they really transferred all their wealth out of all financial instruments and totally into gold and land? If so, then owns the $160T in financial wealth?

Yes, they've bought the gold and it's still priced at around $6.6T, at least that portion that is in private ownership. No, there will be no gold-backed currency because we aren't going back to "hard money" because "your Elites" wouldn't like that. No, they won't lose all their wealth; they will gain wealth. Here are the steps as viewed, not by ants, but by Gi-ants:

Step 1: Buy up as much physical gold as you can over a couple decades without running the price and without panicking out of your paper, while the Western investor is caught up in all manner of paper including paper gold.

Step 2: Wait patiently for the inevitable financial collapse. As Rick Ackerman himself wrote, "financial collapse is not just likely, but inevitable."

Step 3: When the collapse comes, sell that $XXXT in "financial wealth" to the printer for fresh cash at full face value in the name of "saving the system" and "survival of the country and the Western way of life."

Step 4: Spend the new cash.

Step 5: Adjust your balance sheet from the old paradigm where it used to read $160T paper/$6.6T gold to the new paradigm where it now reads $0 paper/$264T gold. A net gain of $97.4T.

Now I must explain here that I don't view this as a nefarious plan, plot or con. It is simply the way you deal with the inevitable collapse of the global reserve currency at the end of its financial timeline. And if you are a Gi-ant, it's the clearest way to transfer your wealth through the crisis and into the future. You don't do it with a high-yielding bond Con and a sustained deflation. LOL Gimme a break!

And if you think Congress will prevent the Fed from doing what it did in 2008… and 2009, 2010 and 2011… guess again. The USG will face a real, existential shut down this time. Nothing like the charade that happens every few years when it's time to renew the budget or raise the debt ceiling. This will be the real deal. Congress will DEMAND that the Fed print "for the good of the country" (and for their own paychecks).

Back to Smith:

This explanation — that the wealthy have already transferred their financial assets into gold and land and thus they don’t care if all money, bonds, mortgages, derivatives, insurance policies, etc. all go to zero and is wiped off the books as an asset—makes no sense because it doesn’t explain who is the bag holder to all this “fiat-based” wealth. If the wealthy don’t own all these financial assets, who does? Who did they sell it all to? Yet we know that the Financial Elites own all this financial wealth and thus it will not be in their self-interest to see it wiped out. Only debtors, i.e. Central States, want to see hyperinflation to wipe out their debt. But who considers all that sovereign debt an interest-paying asset? The Financial Elites, that’s who, along with politically powerful union pension funds, banks, etc.

Yes, I know I have already addressed everything in this paragraph. But I wanted to show you how silly it starts to read once you have a different perspective. Moving on:

Everyone seems to forget that debt is an asset to the guy on the other side of the trade. The debtor would love hyperinflation but the owner of the debt will resist hyperinflation with every fiber of his being — and that includes the Financial Elite who own the debt.

Okay, here Smith moves into the first of his two strongest complaints about hyperinflationists. Remember up at the beginning of this post I wrote that in 2008 I didn't find many of the arguments convincing on either side of the debate? That is, until I read FOA? Well, clearly Mr. Smith has not read much of my blog, not that I'd expect he had, because his two complaints are completely backward in their reasoning.

Those two complaints are that he views hyperinflationists as i) not considering that debt is an asset to someone else, and ii) that hyperinflationists don't understand that hyperinflation is a POLITICAL event and not a mechanical or "deterministic" event. Once again I had to LOL when I read this backward view.

I think it's time for me to post links to my three part series again, in which I DRIVE HOME these two topics… and how they inevitably end in hyperinflation, not deflation:

Just Another Hyperinflation Post - Part 1
Just Another Hyperinflation Post - Part 2
Just Another Hyperinflation Post - Part 3

If you haven't yet read them, you should probably start with the post I made just prior to those, Credibility Inflation, in order to understand what is actually deflating in our hyperinflation.

Basically, regarding Smith's paragraph above, "the guy on the other side of the trade," if he is well-connected enough to be considered "the Financial Elite who own the debt" would prefer to be relieved of that "asset" at full face value as long as he's getting that cash first. Remember, hyperinflation is a race, not against the bear (you can't outrun the bear) but against your neighbor.

Next:

This is basically a “politics of experience” analysis, and very few are equipped to understand such an analysis, as it’s outside their econometric comfort zone. They prefer a deterministic financial analysis that there are “laws” of economics which lead to hyperinflation, etc. Meanwhile, for me, there are only political choices, a narrow band of which lead to hyperinflation and a bunch of others which do not. This kind of analysis doesn’t lend itself to refutation or confirmation by financial models of the sort being bandied about — it’s a behavioral analysis and a political one.

I have yet to see how banks and the Financial Elites would benefit from hyperinflation. Without getting too fancy, it’s obvious that holders of debt, those collecting interest on debt assets, would be wiped out by hyperinflation. Thus as a simple matter of self-interest, we can deduce they will not favor policies that lead to hyperinflation. If the owners of debt (Treasuries, mortgages, corporate debt, commercial paper, etc.) were politically powerless, then we could expect them to be steamrolled by those who would benefit from hyperinflation. But they are not politically powerless — it’s the debtors who are powerless, except for the Central State, and it’s beholden to the Financial Elites who have captured the political and regulatory classes that govern the State.


This is the introduction of Smith's "it's about politics, and hyperinflationists don't get that" argument, which he refined in his next post on his own blog titled "Con of the Decade" or something like that. (By the way, this came out after Smith's blog post, but if there's any truth to it, it pretty much demolishes Smith's con idea and ensures—or insures—hyperinflation.) In that post Charles Hugh Smith pretty much threw down the gauntlet on this issue in the opening paragraph:

I described The Con of the Decade last July (2010). The Con makes me a heretic in the cult religion of Hyperinflation. I consider myself an agnostic about the destruction of the U.S. dollar and hyperinflation (basically the same thing), but my idea that hyperinflation is fundamentally a political process makes me a heretic. I skimmed a few of the dozens of comments posted on Rick's Picks and Zero Hedge after they posted one of my expositions on this dynamic, and didn't see even one comment in favor of this perspective.

Now I'm not sure if this is technically a straw man fallacy if Smith has never read FOA or FOFOA. Perhaps not. In any case, here are a few quotes from my hyperinflation posts:

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.

[…]

As FOA warned 12 years ago, these bailouts were always baked into the cake. They are a mandatory function of the political will that backs the entire system. This is the main element that all of the deflationists miss.

[…]

The political will (which is the same as the collective will in my lexicon) always does whatever will lessen the immediate pain, even if it will most certainly cause greater pain later. This is the part that is as reliable as the sun rising.

[…]

Because we have a purely symbolic currency, a dollar-denominated deflation is impossible... because of the political will I mentioned above!

[…]

But this is also where the political (collective) will comes into play. It will NOT let that savers' balloon deflate. The Fed is helpless against the debtors' balloon and the credit/debt feedback loop, but it is most certainly NOT helpless against the savers' balloon.

The Fed has the power to keep the savers' balloon 100% full if it wants to, and the political will to fully back that action.

[…]

This is an excellent description of what the deflationists see, and also why they don't see the rest of the big picture. They view the monetary world as a machine rather than a human ecology. They underestimate the will of the "politicians and bureaucrats who are playing God." And they also underestimate the power of fear and monetary velocity.


I think you get the picture. But if you really want to get to the heart of this subject and see where Smith and the deflationists (notice I'm not calling Smith a deflationist here) go wrong on cause and effect with regard to hyperinflation and political will, you should read noteworthy deflationist Mish Shedlock's comment under my "Part 3" where he defended his post saying:

"I explicitly said hyperinflation is a political event… The amazing thing is I was agreeing with you…"

And my responding comment where I wrote:

"…Velocity can have the same exact effect as printing. Would you agree with this statement? Fear is the spark that ignites it. And then the government will need to fund itself in this hyperinflationary environment. This will entail THE massive printing that always follows immediately after hyperinflation starts. ***THIS IS THE POLITICAL EVENT THAT I AM TALKING ABOUT*** Not the priming beforehand. That's already done. We are already in the summer of 1922…

…It is this LATER political event that is 100% guaranteed. That our government will debase its currency TO ANY DEGREE to ease its own fiscal pain. And as for the cause, the prime, it's already there. Has been for at least 10 or 12 years now…"


And then Mish's follow-up where he writes:

"…I agree with FOFOA about what starts hyperinflation. I wish I would have made that perfectly clear in my post.

I disagree with him in regards to whether or not "politics" or as FOFOA calls it (loss of faith) makes the US more vulnerable.

It was a very gentle disagreement."


I didn't call Smith a deflationist because I don't know if he is. I haven't read enough of his blog to know if he's ever categorized himself. Usually deflationists are happy to categorize themselves as such, as in the case of Mish and Ackerman. But Smith appears to be a simple skeptic, a man of two minds, as he wrote in closing of that email to Rick Ackerman:

Maybe we will experience hyperinflation after all. I am a skeptic, not a true believer, but I am certainly open to it as a possibility. I think all the financial arguments are somewhat akin to biblical debates about how many angels can dance on the head of a pin. They are fundamentally deterministic and apolitical, while the actual process of setting policies that lead to hyperinflation is entirely political.

I have no econometric arguments against hyperinflation, I only have political ones. But since politics sets policy, then hyperinflation is necessarily a political choice. So a political analysis will trump an econometric one in my view.

But I could be wrong. As a basically poor person, I don’t have much of a stake in either outcome.


If Charles Hugh Smith happens to be reading this post, and I hope he is, I would like to point out that my hyperinflation arguments cover the gamut. And thanks to Rick Ackerman, I now have kudos from both camps, deflation and (hyper)inflation:

Deflation camp: "The very best of them, in my opinion, is FOFOA blogspot, where the essays are erudite, the discussion elevated and the arguments as knowledgeable as any you will find on the web."

[Hyper]Inflation camp: "FOFOA is probably one of the very best analyst in the whole world. The more I read from him, the more I am convinced of his vast superiority over most experts and analysts, probably of the Schiff-Turk caliber… This is one of the very best contributions in the inflation-deflation debate. It is long and detailed, but the topic is extraordinarily complex."

I really despise self-promoting in this way and risking coming across as if I think too highly of myself. The truth is quite the opposite, and I only post these so that skeptics like Smith will at least consider my arguments rather than dismissing them outright. I know my posts are long, and I know that some people think I'm just a crazy gold bug, which I am not. So there has to be a good reason for a skeptic to make that commitment of time and energy. And if he's read this far in my longest post ever, then at least that's something!

Now before I wrap this treatise up, there was one thing I said I would come back to that I haven't yet. And that is, if hyperinflation is guaranteed, why aren't all these hyperinflationists snatching up real estate left and right on the leverage that's still available? I, for one, don't have a mortgage. I don't even have any debt because I don't have an income, other than donations from this blog, to cover the carrying cost. And back when I was following Peter Schiff he was a proud renter too. Perhaps he still is, I don't know. There are literally dozens of answers to this question, almost all of them extremely personal. But the bottom line is that real estate will continue to fall in real terms even more than having an LTV of 95% hyperinflated away would cover.

Even if you accept that hyperinflation is 100% certain, real estate is still a poor investment choice to carry your wealth through. Gold is so much better that real estate shouldn't even be considered an investment choice (choice, as in a new investment) beyond your primary residence. Even with 10x or even 20x presumed leverage in a near-term debt wipeout, unleveraged gold is still a much better choice. And in addition to it being the lesser choice, leveraged real estate also carries a non-zero political risk in hyperinflation. I'm giving this an extremely low probability in today's world, but under any kind of conservative and personal "one percent doctrine" it must be factored heavily into the equation that includes expected leverage and the carrying costs on an unknowable timetable. This is an excerpt from an email I received a while ago:

Today I read a short little book titled Fiat Money Inflation in France by Andrew White (published 1912). My general impression is that there is no law so insane that it can't be enacted during a hyperinflation. As you may know, they even passed a law such that debts increased along with the issuance of further currency, so that for every so many additional assignats printed, one's debts increased by 25%. Thus they took away the one silver lining of currency debasement for the middle class. What a nightmare. I liked this bit:

"All this vast chapter in financial folly is sometimes referred to as if it resulted from the direct action of men utterly unskilled in finance. This is a grave error. That wild schemers and dreamers took a leading part in setting the fiat money system going is true; that speculation and interested financiers made it worse is also true; but the men who had charge of French finance during the Reign of Terror and who made these experiments, which seem to us so monstrous, in order to rescue themselves and their country from the flow which was sweeping everything to financial ruin, were universally recognized as among the most skillful and honest financiers in Europe. Cambon, especially, ranked then and ranks now as among the most expert in any period. The disastrous results of all his courage and ability in the attempt to stand against the deluge of paper money show how powerless are the most skillful masters of finance to stem the tide of fiat money calamity when one it is fairly under headway; and how useless are all enactments which they can devise against the underlying laws of nature."


Okay, last thought on the real estate home front, and then I'll let it go. I have a question for Rick and his commenter SD1 from the top of the post. Remember they wrote:

Rick's Picks Commenter SD1: To my knowledge, no bank has ever made provisions in their lending criteria. So to anyone subscribing to the hyperinflation theory, all I can say is there is nothing I, and millions of other North Americans, would love more than to take $250,000 of worthless, hyperinflated money that we worked a few days to make, to pay off a mortgage that would otherwise have taken twenty-five to thirty years to repay.

Rick Ackerman:That’s the bottom line, as far as I’m concerned.


How close to the business end of the printing press are these millions of North Americans? You guys seem to assume that, during hyperinflation, millions of American mortgage payers will have access to this river of cash early enough to benefit overall. By the time they get their hands on it they may be struggling to meet other skyrocketing expense like property taxes and, uh, food. Wages won't keep up. Most people simply won't be able to keep up. And most of those who do will find that their wealth relative to those closest to the printing press will be declining. Like I said this is about outrunning the next guy, not the bear.

This is why I wrote, "if you don't make the effort to understand what is actually unfolding, there's a good chance [hyperinflation] won't [deliver any windfall in your direction]." If you really want "to pay off a mortgage that would otherwise have taken twenty-five to thirty years to repay," then you'd be best equipped to do so by buying some physical gold right now!


Inevitability

Here is Rick's premise once again: “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” If the borrowers can't pay, at least not in full, and certainly not in real terms (today's purchasing power), and the politically connected lenders won't take the hit, that only leaves the third option which C.V. Myers missed and Rick can't seem to fathom.

How do I know hyperinflation is inevitable? I know that they will do the "front lawn dump" not only because they said they would do it, and then did it, and they continue doing it, but because it makes absolutely no logical sense, from their perspective, to NOT do it in the face of a crushing deflationary collapse like both Rick and I see as inevitable. It will be judged an infinitely better option than immediate total economic collapse. And besides, 75% of the world has been waiting patiently, for a long time, to get off the dollar standard. And it has prepared for this very, inevitable, eventuality. So it won't be fought from abroad.

This is very important: Once hyperinflation commences it is characterized by a running shortage of cash, even though it appears like the opposite to the outside observer. The currency collapses in value against economic goods because the debt and the credit collapsed. There is no credit, only cash, and there is a shortage of cash for everyone, including the Elite and the government. So they, the Elite/government, print and print for their own survival while saying it is for yours.

And for those of you that think they won't do it because they'll be afraid it will end the dollar, end the Fed, or end fiat currency altogether, guess again. Not a chance! After it's all said and done, Bernanke will say some sweet things like his cuddly Zimbabwe counterpart did in this 2009 interview:

Gideon Gono: "I've been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren't in the textbooks…

"There are certain things, policies with the benefit of hindsight, where we could've managed our affairs better… We are [only] human…

"Only a fool does not change course when it is necessary. Because economics is not an exact science, you want to be able to be relevant. The only constant is change and adaptation…

"It's a free market, a business which must be allowed to succeed or fail…

"What keeps me bright and looking forward to every day is that it can't be any worse. And those who have studied the history of economies know that we are down, but that the only thing that can happen is we will move up. That is a certainty…

"I am modestly credited with the survival strategy of my country. The issue is if you want to break Zimbabwe and want it to fall, just deal with one man. You deal with Gideon Gono…

"I'm a normal guy: I miss going to the supermarket. One would like more freedom…

"If you raise the interest rate you'll be friends of people who have access to money. If you lower the interest rate, you'll be the darling of borrowers, but pensioners will curse you to hell. It's never about popularity. At all times you are definitely hurting some people in the economy…

"It's impossible to be directing the course of an entire economy and divorce yourself from politics. Politics are important because the turnaround of the economy hinges on political stability, but I can't tell when that will happen…

"I have been in the trenches during every moment of survival for my country. Any central bank governor is of necessity. When things go bad, we governors are the fall guys. No other governor in the world has had to deal with the kind of inflation levels that I deal with, no other governor has to come up with the gymnastics and strategy for the survival of his country. But let me say that in my bank resides the cutting edge of the country. I'm privileged to be the leader of that team."


Zimbabwe still has a Central Bank, and Dr. Gideon Gono still has a job as its governor. It will likely be no different for Bernanke and the Fed. Extreme times call for extreme measures. And that's how it will be spun. They will print for survival and they will say it was for the survival of America. The dollar will end this thing without reserve currency status, more like the peso. But at least we'll have Freegold!

In our time and for the first time in the modern US dollar history, the US will embark into a classic hyperinflation for the sake of retaining its own lessened dollar for trade use. As destructive as that might be to players in this financial house, it is better than immediate total economic failure. It will evolve in a form much like the course of any other third world country, if its currency too was suddenly deprived of world reserve status. We will, like people the world over, learn to live with it and live in it. Truly, our dollar and economy will not go away, but its function, use and value will change dramatically.

Thank you
FOA/ your Trail Guide


Happy Easter!

Sincerely,
FOFOA



Something filled up
My heart with nothing
Someone told me not to cry

But now that I'm older
My heart is colder
And I can see that it's a lie



Children, wake up
Hold your mistake up
Before they turn the summer into dust

If the children don't grow up
Our bodies get bigger but our hearts get torn up
We're just a million little gods causing rainstorms
Turning every good thing to rust

I guess we'll just have to adjust

With my lightning bolts a-glowin'
I can see where I am going to be
When the reaper, he reaches and touches my hand

With my lightning bolts a-glowin'
I can see where I am going
With my lightning bolts a-glowin'
I can see where I am go-going

You better look out below!

502 comments:

«Oldest   ‹Older   401 – 502 of 502
sean said...

The comments section on this post seems to be undergoing its own curious form of hyperinflation...

Ashvin said...

costata,

"Here you seem to have taken the position that it will be deflation now and HI later."

Jesus, man, I thought this would be clear from my very first posts here, but I'm glad you are finally getting it. Perhaps next time you should ignore your default urges to label any post contrary to your viewpoint as "sophistry", and actually take the time to examine their contents.

My position is it will most likely be deflation now, and HI later on (big difference from "it certainly will be"). Before I can convince you of why this is the case, I must first convince you that short-term deflation is even possible (or conversely short-term HI is not inevitable), given both the supply and demand-side dynamics. That's what I have been trying to do this whole time...

I see that one or two HI people have already admitted it is at least possible, so that's a start. Now it is time for them to consider the various factors that would make it [short term deflation] likely, and that is where the real debate has always been. It's much more nuanced than just saying full-scale monetization will occur, because that's what central banks always do when facing a deflationary threat, no matter what the surrounding circumstances are.

Even if it largely does occur, then you have decide to what extent it will be successful in spiking money velocity, and much of that depends on what the big-time bankers will do with the cash, to what extent the government will use deficit spending to give money directly to the people (in the age of developed world "austerity") and how quickly private debts will be paid down by borrowers who have not been freed of their obligations (non-TBTF people and institutions).

Daniel,

"Since most/all? currency's are debt backed instruments with a infinite duration i am not sure why they would increase in value."

The currency itself represents the asset side of the balance sheet, which matches the liability side. It has been declared by fiat that these currency assets must be accepted as payment for the liabilities. Practically, this is what most creditors require because the debts owed to them are valued in the currency.

Texan,

We obviously have different views of how recent policies are fundamentally influencing the global economy. I do see many countries with loose/aggressive fiscal and monetary policy, but I also see they are operating at different rates with different levels of efficacy. Despite the trillions injected into US banks, I see that currency supply (including credit) still remains contracting and velocity in the general economy is still dismal (perhaps best evidenced by consumer spending levels and long-term unemployment). Housing prices have "double dipped" with a vengeance, and price/equity valuations in the stock market seem to just as bad as they were in 2008 before they crashed.

While QE2 is winding down, I see that countries like Japan and a few in the EU are going to have to push much harder on that "pedal" you reference if they want to make it through the year. I can't help if the erroneous and irrational perception of the US economy being distinct from those still seem to guide financial investment decisions.

DP said...

Hello from Scotland, Art. We have the Scottish results in for your 4 question mini-quiz... I even went today to The Royal Mile and stood before Adam Smith to ask his opinion for you.

1. YES. As a unit of account and medium of exchange, but not as a store of value.

2. YES, when it was used as a store of value.

3. YES, of course.

4. YES. As a unit of account and medium of exchange, but not as a store of value.

The best kind of doctor knows not only how to diagnose the disease you have, but can also offer a cure that he knows will work, if only you will put aside what you think you already know of this cure and open your mind to consider it properly and give it a try without any preconceived beliefs regarding its success or failure.

Ashvin said...

@costata & anyone else interested,

I recommend you take a look at this piece I wrote about a week ago to see a more detailed view of my argument for short-term deflation. I know it won't convince you of anything, but at least it will be more clear where I stand in this discussion.

Art said...

MOTLEY FOOL,


1. Why do you say that I committed the fallacy of arguing from authority? I mentioned that I debated FOA from the the USAGold days only to inform the people who accused me of ignorance re the so-called Freegold argument that I'm familiar with it.

2. Banking losses can be socialized under ANY monetary system - including mine - IF that's what the people want and IF they live in a functioning democracy.

YOU SAID: "People want easy money. So given them fiat to borrow." MY ANSWER: no, the BANKERS want easy money so that they can print it at no cost to them and lend it to you at significant cost to YOU. NO ONE would agree or want to pay something for NOTHING.

YOU SAID: "...the HI argument is...about the Belief in store of value function of the currency collapsing." MY ANSWER: yes, and that's why we cannot have hyperinflation (nor deflation) because the currency we use today has NO VALUE therefore it is not and cannot be a store of value.

YOU SAID: "4. Does not follow." MY ANSWER: FOFOA is on record saying that we should use 'worthless tokens' as money.

YOU SAID: "Facilitation is not the same as causation." MY ANSWER: true. But proscribing the only alternative to fraudulent easy money IS.

YOU SAID: "Perhaps I should change my name from The Fool to The Mental Retard. Haha."

(I didn't say anything.)

Art said...

FREEGOLD = Gold is good therefore fiat is good = FALSE ARGUMENT.

FREEGOLD = literally FREE gold for the bankers who can print worthless fiat at no real cost to them and buy gold with it.

FREEGOLD = Bankers can bid for your valuable goods and services for FREE with the fiat that they create out of thin air.

FREEGOLD = FRAUD

Greyfox "It's the Debt, Stupid" said...

@ Art you said: MY ANSWER: yes, and that's why we cannot have hyperinflation (nor deflation) because the currency we use today has NO VALUE therefore it is not and cannot be a store of value.

Art, you realize that the dollar is not a lasting store of value, however most Americans (99% plus, my best guess) and much of RoW believe in and store their value/wealth/savings in paper assets dominated in dollars. When confidence is lost by the other 99% of believers in dollar value, how can we not have hyperinflation as velocity increases in an effort to purchase other stores of value. Art, have you lost touch with reality or do I greatly misunderstand your position, that if YOU do not believe, therefore it cannot happen despite the fact that the remaining 99% will act out of self preservation.

radix46 said...

I'm really enjoying Art's comedy pieces. Brightening up my day :)

They are written in jest... right?

Blue Donkeyman said...

costata

Thanks for replying


I underand all you wrote but what regarding the Greek issue but I am asking if perhaps fofoa did not take into consideration all the other assets of enduring value when the waterfall effect happens. Perhpas the shift to gold wont be as dramatic are the bell chart suggests?

mortymer said...

// Fofoa, I would like to kindly note that if somebody will ever read these comments it will be quite a job going through 400+ comments. Isn´t it time for a fresh Tribute?

julian said...

test

Ashvin said...

Forgot the link earlier:

http://theautomaticearth.blogspot.com/2011/04/april-23-2011-welcome-to-slaughterhouse.html

J said...

Art, there are other posts here where Freegold is discussed as 'Reference Point Gold'. For me they were helpful in getting my head around things.

The chief 'point' of Freegold, as I see it, is that one day we'll all wake up and recognise that we need gold as the non-stretchy piece of string with which we can measure all currencies. After that, governments/CBs won't be ABLE to 'steal' people's things (or gold) through printing or lending currency into existence. All currencies will be evaluated with respect to gold e.g. on a given day country X's currency is worth 0.001g of gold per unit, while country Y's currency is worth 1g of gold per unit. If country Y then starts fractional reserve banking, or literally printing money, the value of each unit of their currency will drop in gold terms. Gold is thus the REFERENCE POINT.

Wiser contributors, please feel free to correct me, or to expand!

Art said...

GREYFOX,

MONEY is a PREREQUISITE for hyperinflation. If there is no money, there is nothing to hyperinflate. The US dollar is not MONEY. When the world loses its misplaced faith the US dollar, the dollar will simply be EXPOSED for what it is: NOT EVEN NOTHING. (The dollar is certainly not what is legally defined to be - nor is it defined in any other rational manner presently. It is not even an IOU nothing.)

The loss of fantasy about something is not equivalent to the hyperinflation of said thing. YES, the dollar will be repudiated and disappear as a medium of exchange. But it will not be due to hyperinflation because there is NOTHING in the historical space-time coordinates presently occupied by the US dollar EXCEPT fraud.

REALIZATION does not equal hyperinflation nor deflation.

DISAPPEARANCE or elimination of a thing is not the same as the creation of too many of the thing itself.

The US dollar, like all fiat currencies, is NOT a store of value NOR a medium of exchange NOR a unit of account. If people are using them as such it's because people are STUPID. When people wake up, they will simply see that there is nothing there to inflate nor deflate. They will only see that they have NOTHING.

Fiat money is a lie. When a lie is exposed, it does not multiply; it gets annihilated.

The END RESULT is similar to what happens after hyperinflation, yes. But the nature of the beast is different this time. Remember, when hyperinflation occurred in Germany in the 1920s, at least the US was on a gold standard and the dollar was the anchor of the global monetary system. When the dollar is exposed for what it is today, there is NOTHING except gold and silver to take its place. Not the Euro, not this Freegold lie.

What will occur in a few days only will humble man and put him in his place.

Art said...

J,

FREEGOLD STIPULATES fiat or paper money AS money and gold only as a "store of value" but NOT money.

You're wrong about Freegold and it being some sort of a gold standard that restrains central banks and governments from printing too much paper money.

Art said...

RADIX46,

I'm funny, hairy and cuddly but not a clown.

Michael H said...

Art,

Can you please tell me what your definition of 'money' is?

Rui said...

@ ART

You hit the nail on the head. The tone is a bit of harsh but gets the reasonable arguments across nonetheless.

Whoever claiming "people want easy money" still have not grasped the gist of that Petro-Gold story: Producers in this world like Saudis do not want easy leaky FIAT as payment. Producers do not want their payment to be dilutable. Only debtors want easy FIAT since it reduces the burden of their debt.

"People want easy money" might be true in the Western world where consumerism is rampant like a mass plague and borrowers take on so much debt it piles up to their eyeballs. It's definitely not so in the rest of the world where people still live within their means and produce, rather than borrow, to make a living. It's always people who produce wealth fueling the economy growth. A healthy monetary system should therefore tailor it to what producers (rather than debtors/borrowers/consumers) want.

Art said...

MICHAEL H,

Language, like money, is not FIAT. We do not define words whimsically nor unilaterally. We USE words as defined in the dictionary which reflects the history of their collectively accepted meaning. We can unilaterally define how we FEEL about something but not WHAT that thing is, not on our own. We can produce opinions but not facts singlehandedly.

MONEY is a store of value, a medium of exchange and a unit of account. The best money - when convenience and availability is taken into account - is gold and silver.

Casper said...

Hi Ash,

have waited on the sidelines for a few days just observing and reading. The latest post by FOFOA really has brought in a few new commentators willing to critically exchange some thoughts.

In your answer to Costata you state that you expect deflation first and HI later and imply that most here are arguing a straightforward jump to HI.
I'm going on a limb here and will state that most (FreeGold advocates) here are also expecting deflation first and then HI as an answer to a loss of confidence in dollar... as a store of value. I assume you are familiar with the Exter's pyramid?

As capital is moving down the pyramid the price of assets further down below rises. This would mean that sometime in the future dollar would strengthen, but not as a sign of actual strength but more like a death spasm that is a consequence of a global financial market freeze/meltdown.

After reading your post via your link I'm pretty sure you agree. One more thing to remember is that currencies today/yesterday have/had 2 important roles and normally lose/lost both or just one (store of value) of them and retain/ed the second one (unit of exchange).

Casper

Texan said...

Ash,

I don't think we really have different views on how efficacious the various policies are across countries. Not very would be my view.

I was talking more about QE will continue until the morale improves, efficacious or not. It won't be called QE, but more stimulus is in the cards because it's basically the only action they perceive that they can take.

So as the economy slows, more stimulus will be their answer. Because I can't wrap my head around Obama embracing austerity just as he enters an election year. Can you?

Unknown said...

@ Ash

you said-"My position is it will most likely be deflation now, and HI later on (big difference from "it certainly will be"

Why should there be deflation now ? When Greece was on the cusp of default, the Euro fell(INFLATION). Using your logic and a deflationsist logic, the Euro should have risen(DEFLATION) when Greece was on the cuap of default.

Unknown said...

@ J

Thats pretty much correct.

Considering the imbalances in the world economy, we need a little better reference point then the Big Mac index.

Unknown said...

@ Casper

You wrote-"I'm going on a limb here and will state that most (FreeGold advocates) here are also expecting deflation first and then HI as an answer to a loss of confidence in dollar... as a store of value. I assume you are familiar with the Exter's pyramid?"

I am not a freegolder that expects deflation first.

Put the Euro under the Exter's pyramid. Why was the Euro falling when Greece was defaulting last summer ? Using that logic, the Euro should have been rising.

And before yo say the Euro is different....The Euro is China's biggest trading partner, not the US. The Euro has the worlds largest gold hoard, not the US. It is the first non nation state currency. That makes it a more natural world reserve currency then the US dollar.

The Euro will be the currency that capital leaks to which will keep a US dollar rally(deflation)from happening. I believe it is happening now.

Nick said...

Art,

You say: "The US dollar is not MONEY."

Then later you say: "MONEY is a store of value, a medium of exchange and a unit of account."

To me, the US dollar is a medium of exchange (currency), ergo by your definition, it is MONEY.

Nick

Ore em' said...

FOFOA,

Only 425 comments? This post is an embarrassment and a failure (smile).

Pete,

Art doesn't believe in compromise... only capslock.

Amen brother, amen.

Pete said...

@ Everyone

You continue to feed the troll (Art).

He'll keep on going like this forever if you keep feeding him. Can't you see he isn't listening to you?

This fanatical hard-money stance shows that he has learned only some of history's valuable lessons.

Go said...

Hi friends,
Im a long time lurker.


Art-
"The US dollar is not MONEY. ... The US dollar, like all fiat currencies, is NOT a store of value NOR a medium of exchange NOR a unit of account."

I can trade 25 pounds of tomatoes for a $50 bill. I can hide it in my mattress for a week, then trade the same $50 bill for five gallons of gas and receive a $10 bill and $20 bill as change. I can deposit the $20 in a bank and receive a statement showing 20 units of USD held on account for me. I can walk down the street carrying the $10 and asking other pedestrians "Is this $10 bill money?" and be confident ALL of them will say "yes".

According to google "define:money" and from wordnetweb.princeton.edu/perl/webwn -
- the most common medium of exchange
- wealth reckoned in terms of money
- the official currency issued by a government or national bank

The $ fulfills all these definitions.


Art-
"Language, like money, is not FIAT. We do not define words whimsically nor unilaterally. We USE words as defined in the dictionary which reflects the history of their collectively accepted meaning. We can unilaterally define how we FEEL about something but not WHAT that thing is, not on our own. We can produce opinions but not facts singlehandedly."

If you wish to debate here I suggest you use or gracious host's definitions for the words you use as he has rigourously defined them in multiple posts over the years and they have a "collectively accepted meaning." One of the central points of freegold is that one thing cannot simultaneously fulfill both the "medium of exchange" and "store of value" functions and remain stable. Many of the regular posters here will refrain from using the word "money" and instead indicate which particular aspect of money they are using in a given sentance.

I suggest you attempt to reframe your arguments without using the word "money."


Art-
"FREEGOLD STIPULATES fiat or paper money AS money and gold only as a "store of value" but NOT money."

Freegold suggests paper or digital currency as medium of exchange but not store of value.
Freegold suggests gold as store of value but not as medium of exchange.

Digital currency is so much more convienant than gold (or silver) as a medium of exchange. It can easily cross the world and change hands 100 times a minute. UPS charges $55 to move 1 ounce of anything from New York to Los Angeles overnight (or $15 more if you want it insured for $1500). Of course it could be sent UPS Ground but that would take 4 days and if it took that long to make a payment accross country commerce would grind to a halt.

You could suggest we use paper or digital gold but as Motley Fool said earlier:
"Imagine everyone uses the same bank. A deposits 200 ounces. Bank asset sheet- 200 ounces; liabilities- 200 ounces. B loans 100 ounces to buy a house. Bank asset sheet – 100 ounces physical, 100 ounces to be repaid by B; liabilities 200 ounces to repay to A. C receives the payment and deposits it in the bank. Bank assets – 300 ounces( 200 physical, 100 to be repaid by B); bank liabilities – 300 ounces ( 200 to A, 100 to B). After these transactions bank liability sheet has increased by 100 ounces but still only 200 ounces exist. B defaults. Bank has 200 ounces physical and owes 300 ounces. Oh shit."

Then you'll say "but thats because of fractional reserve lending" and I'll say rewrite it using time deposits instead (as I can't attribute to an author but read somewhere on this blog) and get the same outcome.

Under freegold it doesn't matter if paper money inflates over forever because noone will store their life savings in it. They'll only hold it long enough to receive a paycheck, but groceries, and exchange the rest for gold.

-Go

Ashvin said...

Casper,


"As capital is moving down the pyramid the price of assets further down below rises. This would mean that sometime in the future dollar would strengthen, but not as a sign of actual strength but more like a death spasm that is a consequence of a global financial market freeze/meltdown."

Yep, I agree completely. I do imagine you're walking out on a pretty fragile limb here though...

The moment between the "death spasm" and complete loss of value could last (or cost) a lifetime for some people, who have not allocated their wealth wisely. That is the reason why us deflationists even bother to debate with people in the HI camp.

Perhaps FOFOA agrees with you and I, but that is certainly not the impression he gives off in his articles.

Matt,

"When Greece was on the cusp of default, the Euro fell(INFLATION). Using your logic and a deflationsist logic, the Euro should have risen(DEFLATION) when Greece was on the cuap of default."

Greece was on the cusp of sovereign default, which is much different from being on the brink (or in the process) of debt deflation in the private economy. In addition, the EU is a monetary union in which individual member countries cannot print euros. If you noticed, the monetary interventions by the ECB/IMF have been the only things keeping its value somewhat stable.

Texan,

When I said "effective", I meant in terms of devaluing the currency by stimulating significant growth and velocity in the money (credit) supply.

Austerity plans may not be a bad move for getting re-elected, but going against the wishes of the banking elites is outright political suicide. Obama isn't the only one in government making budget decisions either. I'm sure he is quickly coming to the realization that he will most likely be a one-term President.

But you know, politics is just the continuation of war by other means (my version), so, when politic games aren't working, just go back to starting more wars...

Pete said...

@ Ash

Sorry for nitpicking a particular piece of text here, but this doesn't seem right to me:

"Austerity plans may not be a bad move for getting re-elected, but going against the wishes of the banking elites is outright political suicide."

Austerity measures means sacking people, reducing wages, paying more taxes, etc?

Since when are austerity measures an election winner? My understanding is that people fight pretty hard against austerity measures - they want to continue to live in excess and to maintain a standard of living. In fact, maintaining the status quo appears to be the election winner. Hence why people like Donald Trump are suggesting naive alternatives, and why Greeks and other Europeans are rioting.

The second part of your sentence, about going against the banking elites, isn't this the point? If the banking elites don't want austerity, then they'll get the alternative - HyperInflation.

Unknown said...

@ Ash

You said-"Greece was on the cusp of sovereign default, which is much different from being on the brink (or in the process) of debt deflation in the private economy.

Why is it any different ? It is all Greek debt denominated in Euro's. No different then state debt denominated in dollars. You think California default will be dollar positive yet Greek default was not Euro positive.

You said-"In addition, the EU is a monetary union in which individual member countries cannot print euros."

^That puts even more holes in your deflation case because the Euro was FALLING even when there was NO MONEY BEING PRINTED.

You said-"If you noticed, the monetary interventions by the ECB/IMF have been the only things keeping its value somewhat stable."

What is your point ? Without the ECB intervention, would the Euro rise or fall ? Using deflation logic, you would say it will rise.

Unknown said...

@ Ash

You said-"The moment between the "death spasm" and complete loss of value could last (or cost) a lifetime for some people, who have not allocated their wealth wisely. That is the reason why us deflationists even bother to debate with people in the HI camp."

Past hyperinflationary episodes do not bare that out.

Ore em' said...

Wendy - That looks awesome, you are evidently quite talented. Care to suggest any places to learn about aquaponics?

Do you know about permaculture? If not, I can 100% guarantee that you'll come to love it with a passion only surpassed by your love of Freegold.

Ashvin said...

Pete,

The word "not" should be taken out of the first part of my sentence. That's what I meant, it "may be a bad move for getting re-elected". I believe the banking elites want to transfer everyone else's wealth to themselves, and that HI is not nearly the most effective way to do so. Planned austerity, on the other hand, is a pretty good way under the current circumstances, or at least it would be perceived as being so to them.

Matt,

"It is all Greek debt denominated in Euro's. No different then state debt denominated in dollars. You think California default will be dollar positive yet Greek default was not Euro positive."

It is different because the "sovereign" state is typically perceived as a backstop for the private economy. When the state itself becomes insolvent, then the "economic recovery" story tends to become much less believable, especially in countries that cannot monetize their own debt. Of course, that's when the ECB steps in to violate the EU charter and start printing, while other states begin a temporary fiscal bailout process via the IMF (with suicidal austerity conditions attached), to calm markets and save the bankers.

And no, according to my (dollar) "deflationist logic", the Euro will be one of the first major currencies to go. Money printing by itself does not necessarily cause HI, especially in this debt-ridden environment (which is the opposite of what many people in the HI camp believe). HI, as FOFOA says, is more a result of a sharp and drastic sociopolitical loss of confidence, and accordingly, a loss of confidence in the currency as a short to medium-term store of value. I believe the EU members are much closer to that tipping point than the US.

As for California, it is perceived as being backstopped by the US federal government, and that is probably accurate at this point in time. However, smaller US states could most likely default on parts of their obligations without triggering HI.

"You said-"The moment between the "death spasm" and complete loss of value could last (or cost) a lifetime for some people, who have not allocated their wealth wisely. That is the reason why us deflationists even bother to debate with people in the HI camp."

Past hyperinflationary episodes do not bare that out."

I was referring to the devastation that would result from severe deflation, especially for people who don't have much excess cash lying around. However, I do not believe HI episodes are necessarily tame by any means... especially in a very large economy where the population is highly dependent on imported energy.

Casper said...

@ Matt

well... EUR is different. :-)

I believe the euro was falling because it never had to play(still doesn't and never will) a role of global store of value. Also the $IMF system was still alive and kicking at that time so the dollar functionality was just fine... sort of. So when fear of "no printing" by the ECB was high there was a high risk of losing it all so the EUR debt was sold for something else. You'll notice that the price of gold was surging measured in EUR.

If I look at the fund the ECB and EMU members established I compare it to the guarantee the state issues for deposits. If that guarantee (which is in essence a promise to print) is removed, deposits/debt would be withdrawn/sold off and capital would most probably be moving to gold.

One more thing about Exter's pyramid. Right above "Gold" there is a "Currency" part of the pyramid, which can also be interpreted not as one currency but several currencies with dollar at the bottom... an inch above gold so to speak.

Casper

Wendy said...

Hi Ore em,

Thank you but it's not about talent. I get a bit bored at times and look for something to relieve it.

I had more free time when I started this project than I do now.

In terms of learning about aquaponics, you won't find anything in north america. Back yard aquaponics or practical aquaponics are 2 forums based in Australia. They are both good for info.

I'm not so familiar with permiculture, I believe samix or satya had an interest .. I'll look into it.

apologies again to FOFOA for wandering from the trail ;)

Oh, Oh, Oh, I almost forgot .... I see we have elected adoph harper as a marjority government with the official NDP opposition. Should be interesting..................

Art said...

GO,

Since you Freegolders stipulate that we should use only 'worthless tokens' as a medium of exchange and NOT money or gold;

Who will determine WHICH worthless tokens are legal tender?

Can't I issue my own worthless tokens and tender them in exchange for YOUR valuable goods and services?

Or can I, under Freegold?

If you're going to tell me I can't, on what basis? Are not my worthless tokens just as worthless as your worthless tokens?

What attribute a worthless token must have in order to be granted medium of exchange status?

Art said...

NICK,

Money is not identical with one of its aspects ONLY just as the limbs, body and head of a man are not individually 'a man'. One part is not the whole nor does the whole functions or even exists without all its parts.

That people are crazy enough to exchange valuable goods and services for a dirty piece of paper does not in anyway comfort me or reassure me that this can continue indefinitely. In fact, it scares me to think what 6 billion madmen and madwomen are capable of.

Piripi said...

Art said:

”Since you Freegolders stipulate that we should use only 'worthless tokens' as a medium of exchange and NOT money or gold;

Who will determine WHICH worthless tokens are legal tender?



Can't I issue my own worthless tokens and tender them in exchange for YOUR valuable goods and services?



Or can I, under Freegold?”




The tokens are assigned value by the market, in accord with their rate of exchange in gold. If tokens (currency) are exchangeable for gold, they will find usage demand from the market. This is what gives them value.

Gold is simply the asset in which value is stored. Value is protected from currency inflation in this way (as you know), and serves to keep the currency honest.

If more currency is printed (currency inflation), its exchange rate in gold will fall, as it now has less value, and vice versa.

You or I could print up our own, theoretically.
The only way the market values them (tokens/currency) is if the market is willing to exchange them for gold.
They are only worthless if they cannot be traded for gold.



”What attribute a worthless token must have in order to be granted medium of exchange status?”

Exchangeability for gold, an attribute only the market can supply.



”Money is not identical with one of its aspects ONLY just as the limbs, body and head of a man are not individually 'a man'. One part is not the whole nor does the whole functions or even exists without all its parts.”

I agree.
However, you keep referring to “money” in your posts, which as Go said, is confusing. For clarity, we have for quite some time been referring to the specific monetary functions instead (unit of account, store of value, medium of exchange).

“Money” is interpreted as the conceptual arrangement that encompasses all three. So technically, gold is money (as store of value), just as it is also not, in that it is only one of the functions (as store of value). Without defining our terms of reference, it is very easy for misunderstandings to occur.

This series of three post which start here may clarify my point.
These are among the most useful of FOFOA’s posts.

I think you may find the mechanism described in these posts makes metallic standards obsolete, in addition to achieving far better results, but I’ll leave that evaluation to you.

The market as dynamic setter of value, rather than Govt.

Indenture said...

Blondie: Congrats on being picked up by Max Keiser. Artificial Scarcity

Michael H said...

Ash,

From FOFOA's "Just Another Hyperinflation Post - Part 1"

http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post.html

"Another consideration is that sometimes there is a "deflationary
head-fake" right before the onset of hyperinflation as the private bank credit money disappears..."

[Followed by 2 graphs that show exaclty that happening in Argentina in the early 2000's.]

"With these charts I am not saying it always looks exactly the same. I am only observing that the common deflationary metrics can fall while credit collapses, but then be immediately followed by a confidence collapse in the currency itself. Deflationists don't see this because they are viewing the economy as if it were a machine. And machines don't flip 180 degrees on a dime like this."

Michael H said...

Carl,

I tried searching for your blog and it took me a couple of tries. I ended up first at

http://randomthoughtswithcarl.blogspot.com/

and then at

http://carlsrandomthoughtsonallthings.blogspot.com/

"Unlike money (by a strict definition), credit itself cannot act as a unit of account. "

This aspect I'm not exactly clear on. One point of confusion is that 1 unit of credit currently has equal value to 1 unit of FRN, so if you accounted for your wealth in either you would get the same result.

Further, the 'unit of account' function is not a legislated function of money. Why couldn't I account for my wealth in chickens if I wanted to?

Carl, how do you expect things to play out?

Let's say that all credit, including Federal Reserve liabilities to deliver FRNs, become worthless overnight. The US economy must now function only on the basis of FRNs in circulation.

(Is this about what you expect to happen?)

What happens next? From a policy-maker's perpsective, this is a national disaster, threat to national security, etc. Extreme measures are called for. You are correct that the Fed's printing press cannot fill the whole.

So, as a policymaker, I would 'temporarily' authorize private banks to issue bearer-paper to work as substitute currency. Then, any depositor who withdraws dollars from the bank would have a piece of paper to take with them.

I would also make sure to fully backstop all banks, so that they will continue to function even when all deposits have been withdrawn.

As an individual in this situation, I would take whatever 'matress money' I had, and go buy whatever food and fuel was available at whatever price it was offered.

Why? Some economist might try to convince me that FRNs should now be much more valuable, and if I wait till next week prices will be much lower. But I will know different -- those store shelves will be bare by tomorrow, nevermind next week. And, without credit, they won't be re-stocked any time soon.

So, the money supply just dropped by orders of magnitude, but the values available for purchase dropped by a further amount, to just what is on the store shelves at that minute.

(I also think that the store shelves would be empties of whatever wasn't bought by looting, further reducing available goods).

I think at this point, the Mencius Moldbug piece has good pointers on what might happen to the value of FRNs:

http://unqualified-reservations.blogspot.com/2011/04/on-monetary-restandardization.html

Ashvin said...

"I am only observing that the common deflationary metrics can fall while credit collapses, but then be immediately followed by a confidence collapse in the currency itself. Deflationists don't see this because they are viewing the economy as if it were a machine. And machines don't flip 180 degrees on a dime like this."

See, I don't know where he gets this from. In a lot of ways, I do view the economy as a machine, but a very complex and dynamic machine that CAN turn on a dime. And I know that I'm not the only deflationist who thinks that way.

For example, Stoneleigh from TAE has always held that a severe deflationary collapse will set up a sharp energy/resource collapse as well as an episode of HI. The point of difference is that the deflationary episode, like the HI one, will not be a period of stagnation or some very slow grind down, such as what we have been experiencing for the last few years (but that is not to say the deflationary environment could not last for a few more years).

Michael H said...

Ash,

I was offering that quote more as an indication that you and FOFOA are probably closer to agreement than you may have thought.

"I do view the economy as a machine, but a very complex and dynamic machine that CAN turn on a dime. And I know that I'm not the only deflationist who thinks that way."

Given this point, maybe we can pinpoint where the disagreement arises?

"severe deflationary collapse will set up a sharp energy/resource collapse as well as an episode of HI. The point of difference is that the deflationary episode, like the HI one, will not be a period of stagnation or some very slow grind down, such as what we have been experiencing for the last few years"

Can you elaborate, or provide a link to further elaboration of these points?

For example, what is meant by "a sharp energy/resource collapse."

Also, if "the deflationary episode ... will not be a period of stagnation or some very slow grind down," what will it be like?

Michael H said...

Ash,

Sorry, I forgot you had already posted a link. I will read that and then see if it answers my questions.

Ashvin said...

Michael,

By all means read the link I posted, but that didn't focus on energy/resource supply collapse or the details of severe deflation. That was more the general implications of elites' preferences and natural dynamics for the Treasury and dollar markets.

I recommend this article of mine about some dynamics of deflationary collapse - http://theautomaticearth.blogspot.com/2011/03/march-7-2011-financial-threats-to-power.html

And this one about peak oil - http://theautomaticearth.blogspot.com/2011/03/march-17-2011-when-lights-go-out.html

Those are parts II and IV of a series, so you may want to start with part I for the full context of my argument, but that's not necessary.

Essentially, the deflationary process will go something like this, IMO:

I believe we will witness several events on the magnitude of the Lehman bankruptcy in 2008 or worse, and in most of the biggest economies of the world, over the course 1-2 years at least. During this time, credit-dependent international supply chains could break down, and of course, many banks and businesses will be shut down. Unemployment will skyrocket int the developed world to at least the levels seen in the 1930s (but probably higher), and governments will have to pick and choose who they can afford to help out.

Many people will simply die from starvation (malnutrition), untreated disease, an inability to stay warm or violent conflict. Prices for assets and most consumer goods will come down over time in a combination of quick crashes and gradual declines (but not in a linear manner), but these things will still be less affordable on average, since wealth (both productive and credit-based) will be destroyed faster.

There is also a strong possibility of more national and civil wars breaking out across the globe, especially with regards to the West (Europe/US) and the Middle East. It may be hard to imagine all of this crazy stuff happening without immediately triggering HI, but I believe systemic fear of deflation is indeed a powerful force, and not something that can be easily counter-acted with money printing until the process has fully run its course.

Art said...

BLONDIE,

YOU SAID: "The only way the market values them (tokens/currency) is if the market is willing to exchange them for gold...Exchangeability for gold, an attribute only the market can supply."

MY REPLY: The market NEVER willingly decided to exchange gold for worthless tokens. The use of worthless tokens as money was ALWAYS imposed by governments and the bankers that control them.


BLONDIE, YOU REFER TO "The market as dynamic setter of value, rather than Govt."

MY REPLY: the FREE market NEVER asked to use anything other than gold and silver, or currency backed by precious metals, as MONEY or medium of exchange. The market NEVER VALUED anything other than gold and silver as money or as medium of exchange. The market NEVER set the value of worthless tokens or fiat currency as more than ZERO.

So you're wrong and you're propagating false information debunked by history itself.

Go said...

Art-
"Can't I issue my own worthless tokens and tender them in exchange for YOUR valuable goods and services?"

You can certainly try but I don't have to accept them. If I thought I could trade them to the next guy for something else, then I probably would accept them.


Art-
"Who will determine WHICH worthless tokens are legal tender?"

Legal tender is a legal term and only matters to the courts, not the man on the street. If I own a lemonade stand, I don't have to accept your legal tender in exchange for my lemonade. I only accept apples (I'm plotting to take over the apple juice market accross the street). Lets say we enter into a contract stating that I'll give you my glass of lemonade today in exchange for one of your apples tomorrow. Tomorrow comes and you fail to produce the apple. I sue you in court and win because I have the contract as evidence and you have no proof of delivering the apple. The court can't force you to produce the apple since unfortunately your orchard burned down last night. Instead they award me the legal tender equivalent of one apple.

Legal tender doesn't define the medium of exchange only the settlement of debt (unit of account function?).


Art-
"What attribute a worthless token must have in order to be granted medium of exchange status?"

The token must be accepted as a medium of exchange to have medium of exchange status. This is determined by the receiver not the spender. Yes it's a circular argument. I prefer to think of it as a feed forward loop. If something begins to be accepted then it will be accepted more and more. If it stops being accepted then it will be accepted less and less. Part of the hyperinflation argument is that the dollar has been a medium of exchange and will continue to be until suddenly its not.


Art-
"The market NEVER willingly decided to exchange gold for worthless tokens. The use of worthless tokens as money was ALWAYS imposed by governments and the bankers that control them. ... the FREE market NEVER asked to use anything other than gold and silver, or currency backed by precious metals, as MONEY or medium of exchange. The market NEVER VALUED anything other than gold and silver as money or as medium of exchange. The market NEVER set the value of worthless tokens or fiat currency as more than ZERO."

Sure they have. How about corporate bonds or stocks. Especially stocks that pay no dividend. They're just worthless pieces of paper but trade every day as a store of value and medium of exchange. Or baseball cards and comic books. Completely worthless to me but again they're traded every day by kids and adults alike.

-Go

Art said...

GO,

WHO gets the ball rolling in your "feed forward loop" that establishes what money is? You Freegolders are saying that it is the market YET history shows that it is precisely NOT the market that imposed fiat as money. The last person to do so in a way that affected global markets was the American president Nixon - he and the bankers that advised him certainly were not "the market". (The Swiss themselves removed the Franc's gold-backing right around the time when the Euro itself was launched.)

You are in denial of the fact that the market used gold and silver as money practically since the beginning of recorded history and NEVER asked to use worthless tokens as money. The market was FORCED to use fiat as money by the bankers and the governments they control.

YOU SAY that he market uses bonds and stocks as money. First of all, that's incorrect. You have to SELL bonds and stocks (or submit them as collateral to get a loan) and obtain currency for them which then you can use as money - so bonds and stocks certainly are NOT even a medium of exchange. However the part of the market that really counts (foreign governments and central banks) does not even treat bonds as stores of value either; they wield them as weapons of financial (therefore political) blackmail. They do not "invest" in them for their monetary value for they know that they have NONE (bonds are only convertible into worthless tokens and NOT items of economic value). As for collectibles that have value for collectors; those are not money either just because someone is willing to spend money to get them.

Money is that real item for which EVERYONE (not just collectors) is willing to part with the things that he wants to sell.

The problem is not that you already know all this, my friend. The problem is I KNOW that you know.

Dwain said...

@ Texan

I’m sorry but I don’t understand your point, how much clearer can what be?

Dwain said...

@ Motley Fool

Think you for providing my point with illustration.

A reader shouldn’t be made to decipher the writer’s intent behind their misuse of key words.

By the way, if you were to look up the definition of sophistry and straw man, you may discover that your comment perfectly illustrates those as well.

Dwain said...

@ Michael H



My Blog is Random Thoughts

Comments are welcome.

Art said...

ASH said:

"Never-ending economic growth is NOT a given, and has most likely reached its terminal decline, regardless of the monetary paradigm our global society decides to use in the future."

EXCELLENT POINT. Fiat gives you the illusion that it is possible to live beyond your means. The end result is the same as what madmen who jump off a tall building in the belief that they can fly, face at the end of their "flight."

Piripi said...

Art said:

"Fiat gives you the illusion that it is possible to live beyond your means"

Unless it is able to be objectively valued, in which case the charade is over.

A floating market in unencumbered physical gold supplies just this objectivity.

Unknown said...

@ Ash

You said-"It is different because the "sovereign" state is typically perceived ................. especially in countries that cannot monetize their own debt. "

Your whole deflation case is based on debt default "out running" money printing so if a country cannot print(just like the Euro, not the dollar) then shouldn't that make deflation even more likely ? Yes it should but it did not happen.

You said-"And no, according to my (dollar) "deflationist logic", the Euro will be one of the first major currencies to go. Money printing by itself does not necessarily cause HI, especially in this debt-ridden environment (which is the opposite of what many people in the HI camp believe)."

The Euro is a net creditor while the US is the biggest debtor nation in the world. Your deflation case makes less sense for the dollar then it does for the Euro.

You said-"smaller US states could most likely default on parts of their obligations without triggering HI."

But you are saying that these defaults will cause a dollar rally(DEFLATION)!!????

Unknown said...

@ Casper

You said-" So when fear of "no printing" by the ECB was high there was a high risk of losing it all so the EUR debt was sold for something else. You'll notice that the price of gold was surging measured in EUR."

But using your defltionist logic, the fear of no printing will cause a rally.

You said-"If that guarantee (which is in essence a promise to print) is removed, deposits/debt would be withdrawn/sold off and capital would most probably be moving to gold."

Thats right and it is no different for the US dollar. Debt default will not cause the dollar to rally. As far as moving to gold...Lately money has been moving form the dollar to the Euro. Debt default in the US could easily cause a rally for the Euro, not the dollar.

You said-"there is a "Currency" part of the pyramid, which can also be interpreted not as one currency but several currencies with dollar at the bottom."

So the biggest money printing debtor nation in the world arbitrarily holds the position at the bottom of the Eeters pyramid ? Bullshit. It is called Euro freegold for a reason, not dollar freegold.

Art said...

BLONDIE,

What's an objective valuation for a worthless token that people are stupid and ignorant enough to exchange for (fewer and fewer) goods and services for the time being?

To aid you in your calculation, please take note of the fact that our lovely worthless token lost about 80% of its value in the past ten years or so.

FREEGOLDERS,

Do you realize what would happen to the price of gold if everyone did as you suggest and kept their wealth stored in gold? Your beloved fiat wouldn't be able to buy 1/10 of the gold it buys today. Would that inconvenience you in any way at all?

Motley Fool said...

Hi Art

I did not explicitly say it, I implicitly said it. In exactly the same way you did not explicitly do it, but implicitly did it. :P

How exactly? Increasing taxes? You think the masses would prefer that to inflation? Haha.

You should actually be more clear here. It's not so much the banks that want it, it is the governments. Why do they want it? Well it makes for easy elections, since they can give away other people's money to the masses who demand it and get votes in return. Banks do facilitate and gain advantage from this setup and so yes it is in their interest and something they want, but has it ever been otherwise when easy profits were available? Freegold would however minimize those profits.

The important part here is to find the causal factor, and that is the people who vote for governments to enlarge pork belly schemes since they do not have to pay for it. The problem stems from the progressive taxation system actually. I put up a nice piece on mah blog about this factor a year or so ago. If you ask nicely someone should provide you a link. Hehe.

If you had said the currency had no intrinsic value, you could have used it for the base of argument of some point. Currency does have functional value however. To say it has no value is false. Consider, can you buy a bread with some currency? Of course, which means it must have some value. The problem of course is that it is not a very functional store of value( it depreciates), so that in the end (when the currency collapses) it has neither intrinsic nor functional value.

Didn't I agree that he had said that in point 1? Your implication here is this : FOFOA says we should use paper money( currency -as a means of exchange) AND History has proven that fiat money collapses -> FOFOA wants to cause hyperinflation( and is evilly promoting the message by saying gold is good so fiat is good - lmfao). As I have pointed out your argument is false. In this format I should point out that historically Freegold has never been tried, so previous fiat collapses are not relevant. Furthermore these historical collapses happened because the fiat was used as store of value and over time( as it was inflated) it failed in this regard. Under Freegold we remove this mistake of using fiat as store of value. So the depreciation in the currency, which will occur, will not cause a economic collapse.

Tell ya what though. Before either of these ideas can be implemented the current system must first collapse. All we can do in the meanwhile is buy and advocate buying physical gold. FOFOA is looking at this from a pacifist stance, you from a activist stance. Lets rather first get to the current system collapsing, then let the chips fall where they may.

Personally I wouldn't mind your idea. In my lifetime that system should not collapse( as long as we use Real Bills in conjunction with it as per AE Fekete). What I am thinking about is my unborn children grandchildren. Your system would collapse at that point to be replaced by fiat again and then we would start this whole merry-go-round again. This is why I prefer Freegold. But hey, let's cross that bridge when we come to it.

For now, stop arguing with the 1 % of the population that agrees with you we should buy physical gold.

Incidentally I am now done discussing this with you.

Cya

TF

Ps. I don't mind being called mentally retarded. It just makes me wonder that if that is true what does that make most other people?

Unknown said...

@ Art

You said-"Do you realize what would happen to the price of gold if everyone did as you suggest and kept their wealth stored in gold? Your beloved fiat wouldn't be able to buy 1/10 of the gold it buys today. Would that inconvenience you in any way at all?"

There is a reason why FOFOA is urging people to buy gold now. The Swiss are already talking about minting 1 gram coins.

Gold is far to precious for the average wage earner to afford to have some around their neck. Just think of the insane trade and value reference void in the world today, yet a minimum wage earner can afford to buy gold jewelry. Something must give.

DP said...

matt: There is a reason why FOFOA is urging people to buy gold now. The Swiss are already talking about minting 1 gram coins.

I thought it was Swiss coins with an alloy containing 0.1g of gold...? You will probably only dream of being able to buy 1g.

Anonymous said...

Yours truly happened upon this just recently:

WOW - at last, reason and reality.

Admittedly I had to read that inflation essay a couple of times and then you know what?

I felt a little bit stupid for not seeing the bloody obvious.

Also the manner in which it was written warrants a tip of the hat, to a gentleman and a scholar.

Thanks dearly FOFOA, drinks on me old chap.

Art said...

FREEGOLDERS,

Do you realize how much money you will lose and not retain as wealth, if you have to sell your gold and pay fees and commissions to acquire currency every time you have to buy something of some value? That's the price of NOT using gold as money.

Imagine having to do this a dozen or more times a year (probably more if you want to keep as much of your wealth in gold as long as possible to protect it from inflation) at 3-5% cost to you every time you go in and out of gold. You're going to LOSE your wealth instead of preserving it IF you don't use gold as money (no fees or commissions or percentage cuts every time gold changes hands).

And who's going to pocket those fees and commissions and make money off of arbitrage between the commodities and currency markets? Why, people like FOFOA and the bankers, of course. It's their job, excuse me, their God-ordained duty to make money without working.

As I said, FREEGOLD is a SCAM. But new only in NAME.

DP said...

ART,

Do you realize how much of a shortage of money there will be when everyone retains your golden currency as stored wealth? That's the price OF using gold as currency.

Imagine people no longer buying things dozens of times every year (probably more if they were spendthrifts in a previous life). You're going to LOSE your income if you were producing products and services for these no-longer-consumers.

Fortunately, you shall not crucify mankind upon your cross of gold.

DP said...

Imitation is not always the sincerest form of flattery.

Art said...

DP,

You're being silly by feigning to ignore the monetary system that I proposed which does not "crucify mankind upon...a cross of gold".

I said gold is money but we can use currency alongside it AS LONG as the currency is backed by gold at a NON-FIXED rate which FLUCTUATES constantly. This will allow INFLATION to your heart's content but you must acquiesce to put your money where your mouth is and be TRANSPARENT about how much you're inflating your currency. You do that by legislating CONVERTIBILITY of your currency to gold at FLUCTUATING, MARK-TO-MARKET rates. This gives mankind the ability to vote FOR or AGAINST your currency by using it as a medium of exchange or NOT simply based on how much you are taking advantage of people for using your currency.

FREEGOLDERS,

What's your beef with HONESTY? We recognize you the right to use and inflate your "worthless tokens" as much as you want. Just be HONEST about it so that we can value your worthless tokens, sorry, I mean your currency, based on how much you're inflating it. And we will have greater confidence in you and your currency IF you put your gold where your mouth is by acquiescing to part with some of it at MARKET RATES if we are not happy with the way you are managing it.

I don't want people to get crucified on a cross of gold NOR do I want them to go the poorhouse due to financial crises caused by fraudulent monetary systems and the malinvestment they cause.

INFLATE if you must but NO, you don't have the right to hide it nor renounce the consequences.

CURRENCY: OK, a good idea if it's not pure confetti and it's encumbered with a golden check and balance.

INFLATION: OK, if that's what you want and it's done in the open.

HIDING INFLATION: That's a no-no!

DP said...

Art, you appear to have just caved in and put up your advocation of exactly what Freegold is. Thanks, at last.

DP said...

Can you see it yet, Art? If not, perhaps you need to stop talking and start reading...

radix46 said...

So, ART, wHAt yOu arE adVOcAtING is FREEGOLD (in this iteration ArT's wOrLD), but you HATE HATE HATE FREEGOLD and AlL FreEGolD's EViL MiNiOns? (DeVILs, dEViLs I tEllS Ya!)

Come down and visit us here on Earth, the weather's fine.

DP said...

@radix, I think he's been hanging out in his happy place all this time. Awwww, aint he a cutey really?

radix46 said...

Excellent link work there DP, as always.

DP said...

radix, fortunately sometimes things just fall straight in your lap in Youtubeland

radix46 said...

:)

Art said...

DP,

Not at all.

FREEGOLDERS,

WHY do you want to prevent at all cost the use of gold as money that trades alongside your 'pure medium of exchange worthless token' fiat money? WHY must people be forbidden to use gold as money and instead be forced to use YOUR worthless fiat currencies exclusively as money? Why do you call yourselves FREE GOLD-ERS when you are AGAINST gold being freely used as money? There is nothing FREE about taking our freedom to use gold as money if we wanted to do so.

WHY do you tell people what to do, what to use as money, IF you truly believe in free markets? Why won't you allow the market to choose what it wants to use as money?

Why?

radix46 said...

ArT,

Before asking more entirely answered questions, go and do some reading - of the entirely answered questions.

Go through the archives of this blog, all of your questions are answered.

Most other people who are actually interested bother to go through and understand, why should you be an exception.

Have some courtesy and do some reading about the things you criticise, before you criticise them.

DP said...

Art, you can use gold how you like. Nobody's going to be able to stop you bartering today, or any other day.

But no government can enforce contracts with anything except currency. They can't make you provide gold, or any other tangible good, that you have promised but doesn't exist and can't exist. Since currency is a debt, they can always impose a debt on you.

Would it be just if people were able to make contracts with you and then go on to break them, and you had no recourse of any substance in law?

How about if you were just a regular guy, keeping his gold currency at a bank for security and peace of mind, but the bank was lending it out and one day it didn't come back. Where would that leave you? Where will your golden savings come from when you need them back from the bank that doesn't have them?

DP said...

Art, I really wish you would stop talking and instead invest your time in going to read some posts and comments here instead. What you are saying you want, is just about exactly what Freegold is. If you have read it all and you still don't see that, then I'm sorry but I don't know why you can't see it still.

Sincerely,

DP

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

RADIX46, DP, FREEGOLDERS,

FREEGOLDERS,

You are LYING.

Freegolders NEVER explained why they want to use ONLY fiat currencies or worthless tokens as money and not allow gold to trade as money as well. You came up with rationalizations as to why worthless tokens (sic) are better money or mediums of exchange but you NEVER EVER explained why gold CANNOT be used as money ALSO. WHY?

DP,

YOU SAID: "But no government can enforce contracts with anything except currency."

You are DISINGENUOUS. If the law of the land recognizes gold contracts then the government and its courts MUST enforce their payment in gold. That the current government are a bunch of gold-hating traitors who are trampling the Constitution underfoot doesn't change this fact. Yes, the current System wants to keep gold out of the picture but that can be changed.

It's easy for you FREEGOLDERS to prove me wrong. Simply state in ONE sentence WHY only fiat MUST be used as money and NOT gold also ALONG with fiat currencies. (The use of OTHER currencies that trade alongside gold IS OK for me. Why is it not OK for you that gold trades as money FREELY next to YOUR currencies?)

Instead of resorting to personal attacks and accusing me of ignorance WITHOUT any cause, SIMPLY state WHY only fiat must be used as money and NOT gold - especially now that you claim that FOA/FOFOA already answered this question. If you can't or you won't, they you will have proven that you are both LYING.

radix46 said...

ArT,

PROVE iT FOr YOuRsElF. Do YoUR oWN ReADiNg. I HaD TO, DoN'T Be A LAzY BuM. READ.

YoU CrAcK ME UP!

DP said...

Well, Art, I thought this sentence was fairly acceptable. I guess I need some more English lessons so that I can write ProPEr LEJiBuL loYk WoT U duZ iNNit.

They can't make you provide gold, or any other tangible good, that you have promised but doesn't exist and can't exist.

78Rubies said...

@radix64: +1. IMO this the only sensible way to respond to Art the troll. Apart of ignoring him completely.

Art said...

DP,

That someone cannot make you deliver the gold that you don't have - just like they can't make you deliver DOLLARS that you don't have - doesn't explain why gold cannot be used as money.

The government can hold you in debt for dollars OR for gold. For instance, aren't you supposed to deliver GOLD at the COMEX if the counterparty to whom you sold the gold Futures contract decides to take delivery of gold?

Neither gold nor dollars have to be found, created or delivered to the creditor first BEFORE the repayment of the debt (denominated in gold or dollars) itself is imposed on the debtor.

As a further complication for YOU, This argument of yours applies to the usage of your beloved fiat as well. The courts do not print fiat money and pay a defendant's debt to the plaintiff before they order the defendant to repay it - therefore we shouldn't use dollars as money either, according to your logic!

This is a very STUPID argument against the use of gold as money.

DP said...

(sigh) You know what, Art? I'm finally ready to give in and join radix & Wejn today in ignoring you. Life is just too short. You win if you like.

radix46 said...

DP,

I agree.
ArT, YOu WIN!! YoU'rE THe WINNER!!!!
ConGRatULatIOns!!

WoOp WOoP. LiSTeN To ThE ApPLauSE, THe CrOwD LOVeS You MAn!

Motley Fool said...

@Art

Yawn.

Firstly “Freegolders” don't advocate anything. They are simply saying what they see as the natural evolution of the money system. But whatever, troll.

One sentence : Using gold as both store of value and medium of exchange (money) collapses such a system , eventually.

Corollary : Using fiat currency as both store of value and medium of exchange (money) collapses such a system, eventually.

The former situation usually leads to bloodshed and revolution, the latter finally leads to hyperinflation and economic collapse.

Similarly to Triffins dilemma where a world reserve currency leads to conflict between domestic policy and international policy, let's call it, FOFOA's dilemma where one medium is used for both savings and medium of exchange leads to a conflict between debtors and savers.

To resolve this dilemma one can use fiat as currency( for which it is extremely well suited) and gold as store of value( for which it is extremely well suited).

Put that in your pipe and smoke it.

The Fool

Ps. I can't believe I was suckered into wasting my time responding to Art again. What a fool I am. xD

Unknown said...

If there would be an obvious disconnect (some think there is now) between physical silver and paper silver, could that ignite the loss of confidence in paper and usher freegold transition?

Thoughts anyone?

Art said...

MOTLEY FOOL,

Fiat currency causes economic apartheid and hyperinflation AND warfare and bloodshed. This is why:

WHO issues and controls fiat currency? NOT you and I. WHO pays basically NOTHING for fiat currency and creates it out of thin air to bid for all the goods and services available on the planet? NOT you and I. WHO has to work their asses off in order to obtain some of that worthless "medium of exchange" so that they can pay for food and shelter?

YOU and I.

FREEGOLDERS are saying that fiat currency is the BEST form of money = FREEGOLDERS are fomenting economic injustice and political turmoil.

Get it?

radix46 said...

ArT,

LMAO!

Are you for real dude?

Dwain said...

Hyperinflation is a process over time. A collapse in credit as currency is instantaneous by comparison. See: Iceland.

From FOFOA's point of view, the billion or so (measured in dollars) collapse of credit as currency leaving nothing behind but the I.O.U.'s, that resulted in the Great Depression of 1929-1937 should have resulted in hyperinflation. It did not.

When the coming collapse of 100's of trillions (measured in dollars) in credit as currency occurs, leaving nothing behind but the I.O.U.'s, the world will be thrown into yet another Great Depression that no amount of fiat printing will alleviate for years to come.

Replacing failed credit/debt with new credit/debt, notwithstanding.

DP said...

How is QE replacing failed credit/debt with new credit/debt?

My view is QE is the replacement of failed credit/debt, with new base money equity in the system. Diluting out the existing equity holders.

The difference in the 30's was that it was impossible to create new fresh base money, because you had to dig up some gold from somewhere first. Not a problem when the base money today is USD.

This is not your grandfather's debt deflation.

Motley Fool said...

Hi Carl

I'm curious. Do you seem any structural difference between a dollar in 1929 and a dollar today?

TF

Carl said...

Creating new base leverage-able assets that are payable in what is defined by law as the money supply, is not an expansion of the base money supply, which currently stands at about 986 billion FRNs. Remember when Bernanke stood before the press and proclaimed that the Fed's activities was not increasing the money supply? If you understood what, by law, constitutes the "money supply", you would know he wasn't lying (it's the only truth that lying bastard has uttered since this crisis began). The base money supply has increased since Aug. 2007 by about 270 billion, not to finance debt but to supply public demand for FRNs.

Think about that for awhile and see if you can extrapolate the implications as applied to the 10's if not 100's of trillions in potential demand hanging in the balance. Also keep in mind that, just as under the "gold standard", the Fed is limited by law in its ability to supply FRNs, which will only cover a very tiny portion of that potential demand. Viewing the situation in this light, it becomes, by all intents and purposes, an FRN based "Gold Standard" that will limit the Fed's ability to print. Also viewed in this light, Bernanke's threat to "print" is nothing more than a vacuous psychological prod intended to keep the current system of inflationary credit/debt going.

Dwain said...

FOFOA's 'Moneyness' dissertation provides the strongest argument to date, against hyperinflation.

"The big secret is that the people's money is simply credit. And by "the people's money," I mean our money, the real producing economy's money. The monetary base is only the banks' and governments' money, except for that little bit of cash you keep in your wallet for emergencies."

All you have to do is recognize that (central) banks and government haven't been using 'their money' to finance this crisis, they've been using the "people's money", credit.

Oh and by the way, reserves are not money, they represent the potential for money, 'money' being defined as a Federal Reserve Note.

Motley Fool said...

Carl

You latest comment provides the strongest argument to date that you are a unthinking moron.

TF

Dwain said...

That's real funny, coming from someone who is little more than a FOFOA sycophant. You probably haven't had an original thought your entire life, that's why you have so much difficulty recognizing one.

But I'm willing to give you a sporting chance; what part of my comment do you object to and why do you object?

Motley Fool said...

Carl

Please note my observation was not intended as a character slur, merely a recognition.

I'm sorry that my statement of observation distresses you.

Being a self-named fool, your insult means little to me.

"Oh and by the way, reserves are not money, they represent the potential for money, 'money' being defined as a Federal Reserve Note."

You completely missed what FOFOA explained is 'money', being a reference of associated value that is shared by the populace.

Those reserves are money in terms of our referential base.

"All you have to do is recognize that (central) banks and government haven't been using 'their money' to finance this crisis, they've been using the "people's money", credit."

You also seemed to miss the carefully explained effect of the Fed's latest actions, being a expansion of that referential base. The result of such an expansion of base is also explained.

Sadly, I know that my response is in vain, because your intent is not understanding, but a attempt at trying to get recognition for your very own awesomeness.

I will quote for you a simple Zen story.

A Cup of Tea

Nan-in, a Japanese master during the Meiji era (1868-1912), received a university professor who came to inquire about Zen.

Nan-in served tea. He poured his visitor's cup full, and then kept on pouring.

The professor watched the overflow until he no longer could restrain himself. "It is overfull. No more will go in!"

"Like this cup," Nan-in said, "you are full of your own opinions and speculations. How can I show you Zen unless you first empty your cup?"

Peace

TF

Dwain said...

Motley Fool, You are defiantly living up to your nom de plume.

"You completely missed what FOFOA explained is 'money', being a reference of associated value that is shared by the populace. Those reserves are money in terms of our referential base. You also seemed to miss the carefully explained effect of the Fed's latest actions, being a expansion of that referential base. The result of such an expansion of base is also explained"

You're being redundant and I didn't miss a thing. 'Money' is a reference of associated value. Loan Loss Reserves are not money and will not be money until they are actually converted into money. The perception of the 'populace' is not driven by a few economist falsely attributing 'money status' to reserves. Perceptions are being driven by the everyday reality, throughout the economy, that there is a real lack of money/credit to be had and they are suffering.

The only people calling 'reserves' money are know nothing economists and Wall Streeters.

Anything else sport?

Crack said...

DP, Motley Fool,

Please don't feed the unthinking troll. The only people calling 'reserves' NOT money are know-nothing bloggers called Carl.

QE is the very definition of using "their money" to replace failing "credit money".

Oh and by the way, reserves are money, they represent the commitment to provide a Federal Reserve Note.


(Fixed your posts. End of conversation.)

DP said...

@Crack: Agreed!

Dwain said...

Crack,
"they represent the commitment to provide a Federal Reserve Note."

So, 'reserves' are not actual Federal Reserve Notes, they represent a commitment to provide FRNs.
Isn't that what I said?

Separating Fact from Hysterical Fiction.

Reserves are not counted in the M1 money supply because they are not money.

What is counted:
http://www.federalreserve.gov/releases/h6/current/

Pay attention to Table 3, the Fed breaks down exactly what is counted in the M1 money supply. Please note that everything over the actual FRNs in circulation is a promise to pay FRNs upon demand. There are 985.6 billion FRNs in circulation worldwide.

This Fed site:
http://research.stlouisfed.org/fred2/data/M1.txt
Shows the growth of M1 over time.

Your demand deposit accounts are not populated with Federal Reserve Notes, they represent your bank's promise to pay Federal Reserve Notes upon demand, unless they can't. Same goes for your savings account. In point of fact, no bank account of any type anywhere within all of western civilization has any note of any kind in them, they are all computerized ledger accounts.

DP said...

BTW, Crack, is this track on The List, do you think?

It's not really about Freegold per-se, but here at FOFOA's blog it does feel depressingly relevant.

Anthony Alfidi said...

US government statistics can track the wage-price spiral and a key statistical discrepancy for economic growth. This should indicate a transition from stagflation to hyperinflation. http://alfidicapitalblog.blogspot.com/2013/12/measure-wage-price-spiral-and-economic.html

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