A Review on Where We Stand with Regard to
Deflation, Hyperinflation and Stagflation
Well, the good news for everyone is that
nothing seems inevitable here, that there is almost always a choice, but
it is often wrapped up in a nice looking rationale, with all the compulsion
of a necessity, for the good of the people. Us versus them in a battle
for survival and all that.
And clever leaders on the extremes provide the 'them' to be dehumanized and
objectified. The leftist wishes to murder the bankers, and the fascist
the lower classes and outsiders. The extremes of both end up making
life miserable for almost everybody except for a privileged few.
And so I reiterate that in a purely fiat currency, the
money supply is indeed fiat, by command.
People like to make arguments about this or that, about
how so and so has proved that the Fed does not or cannot
do this or that, that banks really create money only by borrowing, that
borrowing must precede this or that.
It's mostly based on a fundamental misunderstanding of
what money is all about, with a laser beam focus on hair-splitting technical
definitions and loquacious arguments more confusing than illuminating, lost
in details. In a simple word, rubbish.
Absent some external standard or compulsion, the only
limiting factor on the creation of a fiat currency is the value at exchange
of the issuers bonds and notes, and currency which is nothing more than a
note of zero duration without coupon.
If I had control of the Fed, unless someone stopped me, I
could deliver to you hyperinflation or deflation without all that much
difficulty from a technical standpoint. The policy reaction of those who
might be in a position to fire or lynch me is another matter. The Fed
not only has the power to influence money creation in the private banking
system. It has the ability to expand its balance sheet and take on
existing debt of almost any type at will and at any price it chooses.
But that is the case as long as the Fed has at least one
willing partner in the primary dealers, and the Treasury is in agreement. And
even that requirement for a primary dealer is not all that much of an issue
given the amounts of existing sovereign and private debts of which the Fed
might avail itself for the forseeable future.
So at the end of the day, a thinking deflationist is
almost reduced to the argument that 'the authorities will not allow it' or
'will choose deflation rather than inflation' And this is technically
correct. However, let us consider my earlier statement about those who might
fire or lynch one for making a highly unpopular choice.
It is economic suicide for a net debtor to willingly
engage in deflation when they have other options at their disposal, and
especially when those decisions involve people outside the system.
That is not to say that the deciders could not
opt for economic suicide, but the people designated to suffer and die for
that choice and cause might not take kindly to it. Deflation favors the
creditors significantly, and those creditors tend to be a minority of
domestic elites and foreign entities. Both the extremes,
hyperinflation and deflation, are choices best implemented in autocratic
governments.
There are those who observe that Franklin Roosevelt 'saved
capitalism' by his actions in the 1930's and I believe they are correct. If
one considers the various other outcomes in large developed nations to the
Great Depression, whether it be Italy, Germany, Russia, or Spain, the US came
out of it fairly intact politically. People conveniently overlook the
undercurrent of insurrection and violence that was festering amongst the
suffering multitudes, and the growth of domestic fascist and communist organizations.
There were several plots to overthrow the elected government by military
means, although the history books tend to overlook them.
So it is really about making the best choice amongst bad
choices. This is why governments choose to devalue their currency, either
with quantitative easing, or explicitly against some external standard as the
US did in 1933. Because when the debt is unpayable, it must be liquidated,
and the pain will be distributed in a way that best preserves the status
quo.
Hyperinflation and a protracted deflation are both very
destructive choices. So therefore no rational government will choose either
option.
They *could* have those choices imposed upon them, either
by military force, political force, or by economic force. Economic force is
almost always the cause of hyperinflation.
So you can see why a 'managed inflation' is the most
likely outcome at least in the US. The mechanism has been in place and
performing this function for the last 100 years.
The problem or twist this time around comes when the
monetary stimulus does not increase jobs and the median wages, because of
some inherent and unreformed tendency in the economy to focus money creation
and its benefits to a narrow portion of the populace. The result of this
is stagflation which although not indefinitely sustainable can be maintained
for decades.
Most third world republics are like this. A vibrant and resilient
middle class is sine qua non for a successful democratic republic, and
this has strong implications for the median wage. The benefits and the
risks of growth and productivity must be spread widely amongst the
participants. Oligarchies tend to spread only the risks, keeping
most of the benefits to themselves.
This is essentially the reasoning that occurred to me when
I looked at the US economy and monetary system in the year 2000.
The one point I remain a little unclear on is how 'hard'
the law is regarding the direct monetization of debt issued by the Treasury.
I am not an attorney, but I am informed by those familiary with federal
statutes that this is a gray area in the existing law but currently
prohibited. But it is easily overcome as I said with the inclusion
of one or two amiable primary dealers who will allow the debt issued by
Treasury to 'pass through' their hands in the market, on its way to the Fed
at a subsidized rate. For this reason, and for purposes of policy
matters, and occasional economic warfare, countries may tolerate TBTF
financial institutions with whom they have 'an understanding.'
I have also come to the conclusion that no one knows the
future with any certainty, so we must rely probability and risk management to
guide our actions.
So really absent new data the argument is pointless, a
matter of uninformed opinions. The dollar will continue to depreciate, and
gold and silver and harder currencies appreciate, until the fundamental
situation changes and the US economic system is reformed.
I think there are other probable outcomes that involve
world government and a currency war, and this also is playing out pretty much
as I expected. Fiat currency can take on the characteristics of a Ponzi
scheme, whose survival is only possible by continuing growth until all
resistance is overcome.
This is the conclusion I came to in 2000. I admit I was
surprised by the Fed's willingness to create a massive housing bubble, and
the willingness of the US government to whore out the middle class in their
deals with mercantilist nations; their hypocrisy knows no bounds.
So that is the basis of much of my thinking and I wanted
to take a moment to share it with you in a compact, highly condensed format.
I remain a little unsettled on the issue of hyperinflation,
because there is the possibility that a large bloc of countries could join
together to repudiate the dollar. Since so much dollar debt is held in these
foreign hands, that is the kind of exogenous force that could
trigger a bout of what might be termed hyperinflation. I don't see the dollar
going to zero in this, but rather the dollar having a couple of zeros knocked
off it, with a new dollar being issued. I have read John Williams case for
hyperinflation several times now, and see nothing more compelling in it.
Indeed I think the reissue of the dollar with a few zeros
gone is inevitable. It is the timing of that event that is
problematic. It could be one year, or it could be fifty years. There is a big
difference there for your investment strategy.
“One day you will go the ATM and the dollars will be
Blue---not Green ---and you will get a few less than you expected.”
And yes, the government could just get medieval on your
asses, and seize all the gold and silver, force you to take the value of the
dollar at whatever they say it should be. (As the MMT crowd has
suggested - Jesse) They could also seize all the farm land,
all the means of production, and tell certain groups of people to get on
freight trains for resettlement in Nevada. I think we can stipulate that
governments can do this, and the people can accept it to varying degrees. If
you wish to make this the dominant assumption in your planning then by all
means.
For those who simply say "I disagree" or
"Go read so and so he has proved this or that" I say that people
believe lots of things, and can find data selectively to support almost any
outcome they prefer, But the market is the arbiter here, and the
verdict so far is beyond all question. The Fed is doing exactly what they
said they would do, so there should be no surprises. And they have more in
their bag of tricks.
If there is new data I would certainly adjust my thinking
but absent that I now consider this settled to my satisfaction, and wish to
turn instead to more thinking on what changes need to occur to prevent the
system breaking down, and restoring it to some semblance of reasonable
functionality.
