Inflation
It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.–Charles Dickens, 1859, regarding the 1775 French adventure with hyperinflation that lead to the Revolution
From the Roman empire, pre-French Revolution, pre-World War II Germany, whenever governments get a taste for printing free money, they send their citizens on an exciting ride called hyperinflation. But of course, that won’t happen this time…
http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=BASE
The above chart was published by the St. Louis Federal Reserve. Wow, that’s a lot of printing in just two years. To put that in historical perspective, here is the money supply for the past hundred years. That fun little jump at the end, oh let us not concern ourselves with that. We’re only getting started.
St. Louis Federal Reserve Monetary Base 1917-2011
http://www.chartingstocks.net/2009/03/chart-of-the-us-money-supply-1917-2009/
Soon after 1971, when all governments of the world used fiat currency, the temptation to print debt-backed paper money would not be resisted. We are told that inflation today is under control. It is only certain goods whose value is increasing, not the devaluation of the currency. Certain goods like food, energy, housing, and metals. What’s left?
http://crs.org/emergency/global-food-crisis-faq.cfm
The pattern seems to be the same, whether just before the fall of the Roman Empire, pre-French Revolution and seventy years earlier, the Weimar Republic in the 20s before Hitler, Hungary in the 40′s, Chile in the 70s before and during Pinochet’s coup, neighboring Argentina and Peru a decade later, Angola, Yugoslavia, Belarus, and Zimbabwe today, or Greece, Portugal, Ireland, and the United States tomorrow. In the past, governments set price controls. Today we set ‘inflation targets’, print more money to grant loans and bail out banks. We inflate at consistent rates until the debt becomes greater than domestic production and deflation sets in, then devalue fiat currency. Maybe we’ll learn from Iceland and let the banks and their backers fail, but recent history on both sides of the Atlantic tell a tired old story.
Notice, if you will, the 80% drops around 2008, the year the housing bubbles collapsed, M3 money (no longer published in the United States) contracted, and M0 money printing reached over 350% in the United States. In other words, bad money (debt backed fiat) deflated, prices dropped, and the central banks began printing money to bring prices back up. While looking at the identical patterns of these commodity prices, ask yourself, did they all become less valuable, or is the value of fiat (dollars and euros) money itself manipulated?
http://www.mongabay.com/images/commodities/charts/crude_oil.html
Platinum ten year price (notice the exact same 2008 drop)
Palladium 10 years
Rhodium (rare precious noble metal)
Whether because of dwindling supply, higher demand, instability in the middle east, you can’t deny that the price of oil suspiciously matches ‘real money’ namely gold. We are told that the dollar, yen, and euro are not loosing value, only that food, oil, and gold are improving. I suspect Gold did not take as large a hit as other commodities because bankers have be buying up gold as a hedge against fiat collapse.
http://www.goldprice.org/spot-gold.html
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.”–Thomas Jefferson
http://www.calculatedriskblog.com/2011/06/update-real-house-prices-and-price-to.html
The US housing prices increased 900% since the seventies and increased 100% before crashing almost as low in the past ten years.
Quantitative easing (money printing) is used to avoid deflation or when inflation is below target. Japan has been in a deflationary gridlock for decades. With a 0% interest rate, the central bank can not give money away! The United States has reached the peak of credit. Considering there is more debt (M1, Principal + Interest) than money (Principal), then without producing more debt, the money supply will necessarily collapse. Since the central fractional reserve banking system (Federal Reserve) can not loan more money to people (or countries like China) who don’t want it, the US Fed has recently tripled the amount of dollars in circulation to devalue the currency. Since the Fed can not force producers to create goods that consumers know they can obtain at lower prices later (price deflation), the Fed attempts instead to create a situation whereby consumers accept more debt and recklessly spend in fear that their savings will evaporate (70% devaluation – or 30% of the value tomorrow for money earned today).
Wages are not going up, indeed some people are losing their jobs, record high numbers can not find new jobs and are foreclosing on their homes (deflation) while the prices of basic requirements (food and energy) are going up (inflation).
Since the terms inflation and deflation no longer refer to monetary inflation (printing money) and since necessities such as energy, food, and metal are excluded from official price inflation calculation, one must assume that inflation and deflation today refers to wages. For why else would the Fed announce concerns over deflation, when clearly prices are going up! …at least in markets not propped up by toxic debt (housing).
The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand — a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending–namely, recession, rising unemployment, and financial stress…The U.S. government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost… Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation… a central bank should always be able to generate inflation, even when the short-term nominal interest rate is zero…
The Fed has the authority to buy foreign government debt … this class of assets offers huge scope for Fed operations because the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt…
–Ben Shalom Bernanke, 2002 (Chairman of the Board of Governors of the United States Federal Reserve as of 2006)
http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm
Germany 1923 Deutsche Mark 1 Billion
Hungary 10 million Pengo
Nicaragua 10 Million
Turkey 5 Million
Yugoslavia 10 Billion
Comments
From March 15th 2011:
“The U.S. economic and systemic-solvency crises of the last four years only have been precursors to the coming Great Collapse: a hyperinflationary great depression. Such will encompass a complete collapse in the purchasing power of the U.S. dollar; a collapse in the normal stream of U.S. commercial and economic activity; a collapse in the U.S. financial system as we know it; and a likely realignment of the U.S. political environment. Outside timing on the hyperinflation remains 2014, but there is strong risk of the currency catastrophe beginning to unfold in the months ahead.”
Quoted from:
http://www.shadowstats.com/article/hyperinflation-special-report-2011
Yeah, so we’ll all end up not having toilet paper. What a mess.
Exchange your fiat for $1 bills, you’ll never be short for something to wipe.
Thanks for the article.
“If any government isn’t paying its debt on time, the rating of that government goes to D. Having said that, we think the [US] government will raise the debt ceiling [before 2 August 2011]. They’ve raised it 78 times more or less since 1960. Often at the very last moment. We think that will be the case this time.”
– John Chambers, managing director of sovereign ratings at Standard & Poor’s
Hello Alex,
Interesting information. Are you familiar with H.S.Dent? Pop economist, but with a great basic hypothesis: it’s the demographics, stupid! This mess doesn’t get cleared up until the baby-boomer’s children start to become big-time producer/earners.
Hi Mo, Long time no chat. I am familiar with Dent. Yes. And it’s true! No ‘stimulus’ is going to get my parents nor anyone in their generation to run out and party, buy new homes, new cars, etc. Give them money and it will go under the bed, pay off debt, or into some very conservative fund. On a similar vein: http://www.bloomberg.com/video/76372300/
The economy will contract, there is no doubt about it, but I highly suspect the Fed will continue to print money before the elections. I do not see any real budget reductions happening any time soon, and the social security and medical obligations dwarf current budgets and will expand. The US will not default on its expanding debt, it will monetize its debt. Interest rates will remain nearly 0% and re-flation will kill us.
While our debt based monetary system has the advantage that deleveraging evaporates M3 rather than accumulating paper in circulation. M3 has collapsed and would have been more profound had the Fed not created more M0 to fill the void.
Europe will continue to monetize bank and sovereign failure and inflation will necessarily rise. Unlike the 80′s when Volcker raised interest rates to curb inflation (stagflation), 15% interest rates today would bankrupt entire nations. This will not end well.
Hello Alex,
I guess what is happening with the economy is a world-wide popular topic now. You seem to have most of the elements nailed down. I just wanted to add that another thing that needs to be factored in, which will throw the best of theories out the window is human meddling. Probably been going on since forever, but the place I believe is most responsible for the magnatude of our problems now is the decision made at the end of WWII not to wind down the war effort as was done after WWI that ‘resulted’ in the Depression. Useless production from that point just asked for corruption to bloom. The US default resulting in going off the gold stndard and Bretton Woods was another major turn. And small wars and the war on drugs have also contributed in a major way.
The other point to consider is kamma. This lifts one right out of the details and gives one a look from a completely different perspective. What is happening is happening to individuals. Some prosper, some fail. Who gets what does not get explained by economic policy. And as an interesting sidelight, the complaints we hear in Occupy Wall Street in terms of kamma can only result in these people suffering more pain. From the point of view of kamma, complaint does not earn wealth, generosity does.
My say.
Hello Again Alex, I hope you don’t mind another couple of third thoughts here:
Recognize that you had already factored in one of my thoughts above, that of meddling, in terms of deliberate inflation.
Something I do not see mentioned is the perception I have that spending is an addiction. While the sudden shift to frugality is clearly present, it may not last. This issue will also create very different problems for those that have wealth vs those that do not. Then, too, if the rich keep spending and the baby boomer’s kids income starts to grow, and China keeps natural inflation low, we may see no real change at all for the forseeable future.
Another aspect of this is tom-foolery. This is an election year. What we are likely to see is the world blossoming again. Everything looks rosy. Happy times are here again. It’s ok to go out and spend.
Last is the thought that in a world wide economy where the dollar is still very dominant hyper inflation is likely to be fought at very high levels. Push comes to shove something like making currency speculation illegal, freezing exchange rates, and other such measures could reasonably be put in place. By ‘reasonably’ I mean that it would be possible, not that it would be reasonable.
Just thoughts on a very interesting and current topic.
PS: You should buy up a bunch of your example currencies and put them in a nice display to sell … um … on the streetcorner when the sky falls!
From Google news 6 minutes after I posted the last.
WASHINGTON (AP) – Consumers boosted their spending in September at three times the pace of the previous month but their incomes barely budged.
Mundell Flemming Model, from Stefan Jovanovich
November 10, 2011
Son of the once head of Harcourt, Brace, Jovanovich, very knowledgable in the history of the US/Europe
Posting on:
http://www.dailyspeculations.com/wordpress/
Neither professor says so explicitly but their model leaves countries with a cafeteria plan of choices regarding their political economies:
1. Maintain Fixed exchange rates – what the European economies now have with each other, what the states in the U.S. have, and what the Chinese enforce for their currency vs. the rest of the world
2. Allow Central bank/sovereign Treasury control over banking reserves and the supply of credit/money – what everyone has
3. Allow Capital market transfers between domestic and foreign currencies – what the Chinese don’t have officially but are actively doing privately and what some in the U.S. Congress would like to restrict (following the Chinese model to “punish” China)
Countries can safely choose any 2 out of 3, but they cannot have all 3.
The Constitutional gold standard worked because the trading countries that allowed 2. and 3. accepted a fixed rate of exchange for all their currencies into gold. (This is why the authors of the Constitution made such a big deal about the regulating the value thereof of foreign coin.)
Reviving that fixed exchange rate agreement is impossible given the certainty that at least some countries will want to have their central banks/Treasuries manipulate their currencies in the mistaken notion that this will somehow increase wealth for their countries.
That leaves the U.S. with the choice of abandoning either 2. and 3.
Those of us who have now read Professor Timberlake’s book (which puts Schwartz and Friedman utterly to shame) would like to see the U.S. choose option 2. However, if history is any guide, the religion of central banking is far more likely to triumph politically than the quaint notion that people should be free to hold their wealth in the money of their choice. The odds are very poor that anyone will be able to drive a stake through the heart of vampire economics, aka IS-LM.
From Wikipedia, the free encyclopedia
The Mundell–Fleming model, also known as the IS-LM-BP model, is an economic model first set forth (independently) by Robert Mundell and Marcus Fleming.[1][2] The model is an extension of the IS-LM model. Whereas the traditional IS-LM Model deals with economy under autarky (or a closed economy), the Mundell–Fleming model describes an open economy.
The Mundell-Fleming model portrays the short-run relationship between an economy’s nominal exchange rate, interest rate, and output (in contrast to the closed-economy IS-LM model, which focuses only on the relationship between the interest rate and output). The Mundell–Fleming model has been used to argue that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. This principle is frequently called “the Unholy Trinity,” the “Irreconcilable Trinity,” the “inconsistent trinity” or the Mundell–Fleming “trilemma.”