Global Stagnation

Dirty Float picked up in 1971 where Fiat 33 left off, and this post picks up in the present, where Dirty Float left off, where there is almost universal agreement among esteemed economists that, lately, the global economy (not to get too technical) sucks. Global stagnation, it is agreed, is the symptom of a mysterious economic disease that we, as a planet, picked up along the way; as for its causes and cures, there is little agreement. But before we dive into the problem ailing the present, let's take a little trip back in time... to 1938.

In 1938, nine years after the stock market crash of 1929, and during the final years of the Great Depression, an American economist named Alvin Hansen, sometimes called "the American Keynes", introduced an economic hypothesis called "secular stagnation". His idea was that fundamental economic forces might have been conspiring in a vicious cycle that prevented economic recovery resulting in permanent high unemployment and low growth.

The main forces in 1938, according to Hansen, were a declining birth rate and over-saving which was keeping people from spending (in Keynesian terms, an oversupply of savings in an aging population was suppressing aggregate demand). Shortly thereafter, however, WWII and the baby boom that followed discredited Hansen's theory, consigning it to little more than an economic footnote.

75 years later, on November 8, 2013, Hansen's secular stagnation hypothesis became popular once again when Larry Summers revived it during a speech at the IMF. [1] He followed that up with an article in the Financial Times:

"Is it possible that the US and other major global economies might not return to full employment and strong growth without the help of unconventional policy support? I raised that notion – the old idea of “secular stagnation” – recently in a talk hosted by the International Monetary Fund…" [2]

Summers' invocation of Hansen's "old idea" as a way to explain the current global stagnation brought comment and criticism from all corners of the Economics sphere. Those weighing in on the idea included names like Richard Koo, Barry Eichengreen, Paul Krugman and Alan Greenspan. The Economist called secular stagnation "a baggy concept, arguably too capacious for its own good." [3]

David Wessel, a prominent Economics journalist, suggested that "today's advocates of secular stagnation are as myopic [as Alvin Hansen was in 1938]," and that "we just have to be patient." [4] And Barry Eichengreen wrote, "Secular stagnation, we have learned, is an economist’s Rorchach Test. It means different things to different people." [5]

Paul Krugman loved the idea:

"I was very annoyed when Larry Summers made a big splash talking about secular stagnation at the IMF’s 2013 Annual Research Conference – annoyed not at Larry but at myself. You see, I had been groping toward more or less the same idea, and had blogged in that general direction (Krugman 2013) – but it wasn’t forceful, and Larry rightly gets credit for making the topic a front-burner issue… In what follows, I’ll lay out four reasons why secular stagnation deserves the buzz it’s now getting." [6]

I think the reason that Krugman finds it so exciting is because, as he writes in his chapter in an e-book titled Secular Stagnation: Facts, Causes and Cures, it may have some radical implications and therefore "requires a major rethinking of macroeconomic policy":

"Suppose that the economy really needs a 4% inflation target, but the central bank says: “That seems kind of radical, so let’s be more cautious and only target 2%”. This sounds prudent, but it may actually guarantee failure. In other words, the problem of getting effective monetary policy, always difficult at the zero lower bound, gets even harder if we have entered an era of secular stagnation.

What about fiscal policy? Here the standard argument is that deficit spending can serve as a bridge across a temporary problem, supporting demand while, for example, households pay down debt and restore the health of their balance sheets, at which point they begin spending normally again. Once that has happened, monetary policy can take over the job of sustaining demand while the government goes about restoring its own balance sheet. But what if a negative real natural rate isn’t a temporary phenomenon? Is there a fiscally sustainable way to keep supporting demand?

In this chapter I’ll leave these questions hanging. The crucial point, for now, is that the real possibility that we’ve entered an era of secular stagnation requires a major rethinking of macroeconomic policy." [6]

There are links down in the footnotes if you would like to study what secular stagnation means to 23 different economists. But for the purpose of this post, I'm going to focus mainly on what it means to Larry Summers, since he brought it up, and to Paul Krugman who largely agrees with Larry and is mostly concerned with today's low inflation.

One thing I should mention is that Larry Summers' "New Secular Stagnation Hypothesis" is a little different from its predecessor. Hansen's secular stagnation hypothesis in 1938 was essentially an observation of (what he thought was) permanent damage (or at least permanent changes) in the economy for which there was no cure. Hansen's "secular stagnation" was simply an explanation for why the economy had entered a state of permanent (or at least indefinitely long term, aka secular) stagnation.

Unlike Hansen's dismal outlook, Larry Summers wants you to know that his "New" secular stagnation (SecStag for short [5]) can be cured, by people like himself, by macroeconomists and public servants: "Today, secular stagnation should be viewed as a contingency to be insured against – not a fate to which we ought to be resigned." [2] "Finance is too important to leave entirely to financiers." [1]

Something we should always bear in mind, especially in complex discussions like this one, is the difference between cause, symptom and cure, and similarly, the difference between observation, prediction and prescription. Larry Summers reminds us of the important distinction between prescription and prediction with regard to financial bubbles: "Some have suggested that a belief in secular stagnation implies the desirability of bubbles to support demand. This idea confuses prediction with recommendation. It is, of course, better to support demand by supporting productive investment or highly valued consumption than by artificially inflating bubbles. On the other hand, it is only rational to recognise that low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely." [2]

One of the criticisms of Summers' SecStag theory is that our economic model expectations are simply too high, that this is not stagnation we are experiencing right now, but rather a reversion to the long-term mean. Another criticism is that economic model growth measurement standards are simply outdated and not capable of properly counting Internet technology (IT) innovation as growth. Both make valid points about the shortcomings of economic models, but both also miss the big picture, in my view, which is that there really is a physical plane impairment that has been with us for a very long time, and has simply been masked by the same monetary plane phenomena that causes it.

Back in 1986, Larry Summers, along with Olivier Blanchard who is currently the chief economist at the IMF, noticed a certain ratcheting down in the employment numbers of prime-aged males in Europe starting in the 1970s. It was expected that, following a recession, employment would bounce back to previous levels, but in Europe they saw this "ratcheting down" starting in the 70s. In their 1986 paper titled "Hysteresis and the European Unemployment problem" [9], they coined the term "Eurosclerosis" because they thought it was only a European problem. That was in 1986, but current data shows that, from 1990-2012, that same "sclerosis" was happening in the US and China even more so than in Europe. [10]

The point is, what secular stagnation means to Larry Summers is a long-term economic impairment that extends all around the world. It doesn't necessarily mean zero or negative growth, but it does mean that real (physical plane) growth potential has declined substantially, and that this decline, this "ratcheting down" or "sclerosis" in real economic potential, is due to a monetary plane phenomenon. Summers makes it clear that this is more than just a hangover from the 2008 financial crisis, that it has been happening since at least the 1990s but that it was camouflaged by the stock market and housing bubbles. On this much, Larry and I are in full agreement.

The basis of Summers' hypothesis is that today we have a lack of demand (spending, consumption, capital investment and borrowing) facing a glut of savings (too much saved money flooding the system and driving down interest rates and lending standards as it faces a lack of demand from qualified borrowers). Summers believes that, in general, there is an equilibrium that is reached between savers and investors, and that the real interest rate (the nominal "safe" interest rate that can be earned without risk, minus the rate of inflation) is what shifts investor preferences at the margin from saving money (safety) to investing (risk-taking).

Furthermore, he believes that there is a theoretical real interest rate that corresponds with full employment, i.e., sufficient economic growth. He calls this theoretical rate the FERIR, which stands for the Full Employment Real Interest Rate. Others just call it the "natural" interest rate. Summers argues that this theoretical interest rate, which would be the target interest rate for a CB interested in economic growth and full employment, is now stuck well below zero. And because it is below zero, it cannot be practically reached by conventional monetary policy, including QE, and that's why we're stuck in the land of financial bubbles and secular stagnation. The bottom line is that "SecStag may force policymakers to choose between sluggish growth and bubbles." [5]

I'm sure that some of this sounds familiar to my readers. I have been writing for years about how a glut of passive savings crowds active money out of prudent activities thereby retarding the entire financial system. For years I have made the point that investing requires active specialization, and should therefore not be a passive activity. That naturally-passive, risk-averse savers are a large and distinct group, separate from investors, traders and speculators, and that only in the present dollar-based international monetary and financial system (the $IMFS) are they forced to swim with the sharks.

I have been writing for years about how the $IMFS has an unnecessary and terminal conflict built into its very DNA, like a congenital aneurysm just waiting to burst right when you least expect to die. How using the same medium (the dollar) as both the primary and secondary media of exchange (i.e., using the same unit—or fixed/pegged units—as both the tradable credit unit and the primary monetary reserve/savings asset) leads to friction, an inevitable conflict of interests between the real economy and the financial one.

Also, more than 15 years ago, FOA identified the dollar system itself as the cause of retarded economic growth. He said "the narrow margins it produces [in the real economy outside of the US/dollar-based financial one] shut down entire economies." He wrote, "This brilliant, modern free trade system and all of its benefits cannot be implemented using the US dollar as a reserve currency. It shuts off commerce…" See the quote at the top of this post! He also wrote that the $IMFS leaves "entire countries economically impaired in an effort to maintain the fictional valuations of 'US assets'."

"Shuts off commerce", "economically impaired"; does this sound like the economic stagnation we are experiencing? From the quote at the top: "Commodity usage creates real things and helps the lives of real people. When citizens gain real productive mechanisms, they hold real wealth." He's talking about productive businesses that generate income and create the "demand" for other goods and services that is lacking today when he says they hold real wealth. And the dollar reserve system, says FOA, prevents such "demand" from growing while maintaining "the fictional valuations of 'US assets'."

“Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” said Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.” [11]

That's from the Wall Street Journal reporting on an interview that Alan Greenspan gave at the CFR one month ago in which he was asked about Larry Summers' secular stagnation hypothesis. As I said at the top, there is wide agreement that "effective demand is dead in the water" right now. What there's not much agreement on is why, what to do about it, and whether or not it's a "secular" (long term) problem.

It's easy to believe that saving and investing are merely different ends of a preference continuum of "demand for safe assets" in which an overall shift toward investing spurs economic growth, while a shift toward saving or "safe assets" puts on the brakes. It's what virtually every economist believes. If that's what you believe, then the cause of this economic stagnation must be one of several explanations for the overall shift towards saving and deleveraging. And the cure, depending on whether you believe it to be a secular problem or not, can range from "we just have to be patient" to more government deficit spending and the official embrace of higher inflation rates to encourage spending, consumption and capital investment while discouraging saving.

If you can raise the inflation rate, then that makes the real rate of return on safe assets even more negative, which should cause savers to either spend or invest rather than sitting in "safe assets" that are losing value in real terms. That's the theory anyway, and here are Larry Summers' prescriptions:

What is to be done?

Broadly, to the extent that secular stagnation is a problem, there are two possible strategies for addressing its pernicious impacts.

• The first is to find ways to further reduce real interest rates.

These might include operating with a higher inflation rate target so that a zero nominal rate corresponds to a lower real rate. Or it might include finding ways such as quantitative easing that operate to reduce credit or term premiums. These strategies have the difficulty of course that even if they increase the level of output, they are also likely to increase financial stability risks, which in turn may have output consequences.

• The alternative is to raise demand by increasing investment and reducing saving.

This operates to raise the FERIR and so to promote financial stability as well as increased output and employment. How can this be accomplished? Appropriate strategies will vary from country to country and situation to situation. But they should include increased public investment, reductions in structural barriers to private investment and measures to promote business confidence, a commitment to maintain basic social protections so as to maintain spending power, and measures to reduce inequality and so redistribute income towards those with a higher propensity to spend. [8]

Some economists think that all we need is Summers' second prescription, primarily sufficient fiscal stimulus (i.e., much more government deficit spending), but Paul Krugman particularly likes the first one, the higher inflation rate target, so much so that he gave a presentation titled "Inflation Targets Reconsidered" on May 27, 2014 at an ECB Forum in Portugal. In the presentation, he argued for raising the inflation target from 2% to 4% or even higher. Here is the beginning of that presentation [brackets are mine]:

Inflation Targets Reconsidered

Over the course of the 1990s many of the world’s central banks converged on an inflation target of 2 percent. Why 2 percent, rather than 1 or 3? The target wasn’t arrived at via a particularly scientific process, but for a time 2 percent seemed to make both economic and political sense. On one side, it seemed high enough to render concerns about hitting the zero lower bound mostly moot; on the other, it was low enough to satisfy most of those worried about the distortionary effects of inflation. It was also low enough that those who wanted true price stability — zero inflation — could be deflected with the argument that official price statistics understated quality change, and that true inflation was in fact close to zero.

And as it was widely adopted, the 2 percent target also, of course, acquired the great advantage of conventionality: central bankers couldn’t easily be accused of acting irresponsibly when they had the same inflation target as everyone else.

More recently, however, the 2 percent target has come under much more scrutiny. The main reason is the experience of the global financial crisis and its aftermath, which strongly suggests that advanced economies are far more likely to hit the zero lower bound than previously believed, and that the economic costs of that constraint on conventional monetary policy are much larger than the pre-crisis conventional wisdom. In response, a number of respected macroeconomists, notably Blanchard (2010) and, much more forcefully, Ball (2013), have argued for a sharply higher target, say 4 percent.

But do even these critics go far enough? In this paper I will argue that they don’t — that the case for a higher inflation target is in fact even stronger than the critics have argued, for at least three reasons.

First, recent research and discussion of the possibilities of “secular stagnation” (Krugman 2013, Summers 2013) and/or secular downward trends in the natural real rate of interest (IMF 2014) suggests not just that the probability of zero-lower-bound episodes is higher than previously realized, but that it is growing; an inflation target that may have been defensible two decades ago is arguably much less defensible now.

Second, there are actually two zeroes that should be taken into account in setting an inflation target: downward nominal wage rigidity isn’t as hard a constraint as the interest rate ZLB, but there is now abundant evidence that cuts in nominal wages only take place under severe pressure, which means that real or relative wage adjustment becomes much harder at low inflation. Furthermore, we now have reason to believe that the need for large changes in relative wages occurs much more frequently than previously imagined, especially in an imperfectly integrated currency union like the euro area, and that such adjustments are much easier in a moderate-inflation environment than under deflation or low inflation.

Finally — and this is the main new element in this paper — there is growing evidence that economies entering a severe slump with low inflation can all too easily get stuck in an economic and political trap, in which there is a self-perpetuating feedback loop between economic weakness and low inflation. Escaping from this feedback loop appears to require more radical economic policies than are likely to be forthcoming. As a result, a relatively high inflation target in normal times can be regarded as a crucial form of insurance, a way of foreclosing the possibility of very bad outcomes.

This paper begins with a brief review of the standard arguments for a higher inflation target, then deals in turn with each of the further arguments I have just sketched out. I conclude with some speculation about the unwillingness of many central bankers to consider revising the inflation target despite dramatic changes in our information about how modern economies behave.

1. The two zeroes

If you polled the general public about what rate of inflation we should target, the answer would probably be zero — full price stability. Some economists and central bankers would agree: either they view any erosion of the purchasing power of money as illegitimate, in effect a form of expropriation, or they argue that even mild inflation degrades money’s role as a unit of account. There is even a case for persistent deflation: Milton Friedman’s optimal quantity of money paper famously argued that prices should fall at the rate of time preference, so that the private cost of holding cash to add liquidity matches its zero social cost.

In practice, however, the great majority of both economists and central bankers advocate modest positive inflation. Why? Because of the two zeroes.

The first zero is a hard one: nominal interest rates cannot fall below zero (except for trivial deviations involving transaction costs or the role of bills as collateral), because people always have the option of holding currency. This in turn sets a lower bound on the real interest rate, which can’t fall below [zero] minus the expected rate of inflation.

Meanwhile, central banks are trying to stabilize their economies, which means trying to set policy interest rates at the Wicksellian natural rate [Summers' FERIR], the rate consistent with more or less full employment. The problem is that the real natural rate of interest clearly fluctuates over time, rising during investment booms (whether these booms are well-grounded in fundamentals or reflect bubbles), falling when economies face adverse shocks. If expected inflation is low, this raises the possibility that there will be periods in which the central bank cannot cut rates to the natural rate, leading to output below potential and excess unemployment.

A positive expected rate of inflation reduces the size of this problem, because it allows real interest rates to go negative; and the easiest way to ensure that expected inflation is positive is to pursue a monetary policy that keeps inflation stable at a modestly positive rate. [12]

Notice that he mentioned the "Wicksellian natural rate" which I noted as being the same as Summers' FERIR. This theory of interest rates was Knut Wicksell's most influential contribution to Economics, published in 1898, and it comes from the Austrian School which theorized that an economic boom happened when the natural rate of interest was higher than the market (or monetary) rate of interest. [13] The inverse would be that an economic slump, or stagnation, would happen when the natural rate (or FERIR) was lower than the market rate of interest, which Larry Summers shows that it is today.

You might be wondering why I included such a long excerpt from Paul Krugman's paper. I did that on purpose, because I thought It was very good and provided some important insight into central banking. This being a gold blog, some of you probably assume that I think Paul Krugman is always wrong, perhaps even an idiot. But that assumption would be wrong. For example, on the subject of the gold standard and the unrighteousness of hard money (see here), and on whether or not normal inflation is akin to theft (see here), I'm basically in agreement with Paul, more so than with the hard money camp. [14]

Where we differ is in our perspectives on the big picture. Think of it like this: The $IMFS is like a fishbowl, and we are all like goldfish swimming around in that confined environment, wondering why our economy has stagnated and why there's no more room to grow. Krugman, Summers and everyone else are all trying to understand the cause in order to cure the problem within the confines of the fishbowl, while the fishbowl itself is the limiting factor.

It should be no surprise that a fish, immersed in water inside a fishbowl, would not identify the glass boundary as the problem and recommend breaking it in order to grow. Most would not even be aware of the bowl, and even if they were, breaking it would seem like a suicidal means of escape. So imagine that global stagnation is a real problem, but that all 23 economists and virtually everyone else discussing its possible causes and cures are all viewing it from an inside-the-fishbowl perspective, and that what I am offering you in this post is an out-of-the-fishbowl view, even though I'm stuck inside the fishbowl just like everyone else.

What if I told you that the fishbowl is only an illusion? That even though it confines us, we remain inside its boundary not because it really exists, but because we think it exists? And what if I told you that there's a big ocean out there, just waiting for us to break free from our self-imposed confinement? Does this analogy resonate with any of you?

Remember the scene in The Matrix where the little boy is teaching Neo how to bend a spoon like Uri Geller? The boy says, "Do not try and bend the spoon… that's impossible. Instead, only try to realize the truth." "What truth?" asks Neo, and the boy responds, "There is no spoon." Neo puzzles, "There is no spoon?" And the boy explains, "Then you'll see that it is not the spoon that bends, it is only yourself."

I used the Matrix analogy at least once before, back in 2010, in How Can We Possibly Calculate the Future Value of Gold? Here's a quote:

"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."

When the "virtual matrix" blinks off, which in this present analogy is a fishbowl, more than just the value of gold will be affected. $IMFS financial structures that support existing malinvestment while stifling competition will fail, uneconomical practices will face the harsh reality of the open sea, and economical ideas will have the space to grow and flourish. And lest any of you think this is a utopian dream I'm describing, I'll just add that it will be hell on wheels for many fish to adjust to the reality of the ocean.

My View

As I said, I agree with Krugman and Summers on the symptoms of global stagnation. Where I disagree is on the causes and cures. This is what my Freegold lens (my out-of-the-fishbowl perspective courtesy of FOA) reveals—a different cause and cure for today's global economic stagnation.

Okay, let's start with the low inflation problem. Remember that low inflation combined with a low or negative natural interest rate (the FERIR) leaves central banks stuck between a rock and a hard place, the rock being sluggish growth and the hard place being financial bubbles and instability. But with loose monetary policy and explosive growth in the money supply since the 1970s, what could possibly account for more than three decades of low inflation?

I'm talking about consumer price inflation here, which is where the rubber meets the road. Physical plane (the real world and the real economy) price inflation has been surprisingly low relative to growth in the monetary plane (the financial sector and the money supply). Here's how FOA described it:

FOA (10/3/01; 10:21:26MT - usagold.com msg#110)

"For decades, hard money thinkers have been looking for "price inflation" to show up at a level that accurately reflects the dollar's "printing inflation". But it never happened! Yes, we got our little 3, 4, 8 or 9% price inflation rates in nice little predictable cycles. We gasped in horror at these numbers, but these rates never came close to reflecting the total dollar expansion if at that moment it could actually be represented in total worldwide dollar debt. That creation of trillions and trillions of dollar equivalents should have, long ago, been reflected in a dollar goods "price inflation" that reached hyper status. But it didn't.

That "price inflation" never showed up because the world had to support its only money system until something could replace it. We as Americans came to think that our dollar, and its illusion of value, represented our special abilities; perhaps more pointedly our military and economic power. We conceived that this wonderful buying power, free of substantial goods price inflation, was our god given right; and the rest of the world could have this life too, if they could only be as good as us! Oh boy,,,,,, do we have some hard financial learning to do."

In a world with many different fiat currencies, the value of each one is a reflection of its economy. "Where the rubber meets the road" means where the monetary plane meets the physical plane, meaning that a currency is worth what its economy produces that can be bought with that currency. But price and value are not necessarily the same thing in the world of many different currencies.

In order to price something, you need a numéraire. So while the value of a currency is what its economy produces that can be purchased with that currency, the price of a currency is its exchange rate with other currencies from other economies. In a clean float with Freegold, I think that the price and value of each currency will be pretty close to equal, but that's not the case in the $IMFS.

The $IMFS is characterized by two things that work in tandem to not only misprice currencies relative to the physical plane, but to systemically cement the mispricing and make it cumulative over the long term rather than cyclical with periodic corrections. The two things are public- and private-sector capital flows between different currency zones. Capital flows between currency zones are monetary plane movements that cause physical plane imbalances, also known as current account or trade imbalances.

The public sector uses fiat currencies—primarily the US dollar—as international monetary system reserves, and the private sector uses fiat currencies—primarily the US dollar—as wealth items, collateral, financial reserves and savings. Private sector capital flows into the dollar and US-based dollar-denominated investments overprice the dollar relative to its physical plane value. This happens with other currencies as well, but the dollar is the one that the foreign public sector, by doing the dirty float, prevents from periodically correcting. The result is the perpetual US trade deficit that hasn't reversed in 40 years.

The perpetual US trade deficit is what reveals that the dollar is overvalued. This is caused by the foreign sector buying dollars as investments, savings and reserves. The foreign sector is divided into two subsectors, the foreign public sector and the foreign private sector. The foreign public sector is the foreign CBs, like the ECB and the PBOC. The foreign private sector is everyone else.

The foreign private sector loves all kinds of US investments, and it buys lots of dollars because of this love affair with Wall Street and the various US markets. This overvalues the dollar and causes the US trade deficit. But the foreign private sector isn't a constant source of dollar support because it acts only from the profit motive. Every once in a while, US markets come down and the foreign private sector flees out of the dollar. That's when the dollar exchange rate declines.

For the past 40+ years, certain foreign CBs have kept their currencies more or less pegged to the dollar. This meant buying dollars whenever the dollar's exchange rate declined. In effect, this acted as a "stop gap measure" for the dollar, and prevented its overvaluation from ever correcting. In effect, this exchange rate pegging with the dollar was the structural support that I write about. The foreign public sector bought dollars not with a profit motive, but for quite opposite reasons which translated into buying dollars whenever the rest of the foreign sector was fleeing from the dollar and its markets. This was structural support.

FOA (03/20/99; 11:34:12MDT - Msg ID:3615)

"Entire countries are economically impaired in an effort to maintain the fictional valuations of "US assets"! … It was the longest "stop gap measure" I have ever known to exist! A tremendous success by any standard, to keep the dollar stable for such a time. Many think it was "good old American know how" that did it. Well, now we will see…"

I apologize for repeating myself, but I think this is important. In essence, the "dirty float" or unofficial pegs to the US dollar were structural support. Not that they were primarily responsible for the overvaluation of the dollar (the foreign private sector was), but they kept it from collapsing and correcting each time the private sector retreated, including in the 2008 financial crisis. To understand how this structural support is responsible for the low inflation rate "problem", at least in dollar terms, please read this quote from FOA, as many times as it takes until it sinks in:

Friend of Another (9/22/98; 18:01:45 Msg ID:96)

"Using an overvalued dollar makes one feel as there is no inflation, even though there has been massive dollar currency inflation over the last twenty years (the real cause of price increases is when the exchange rate is allowed to balance a negative trade deficit)."

Many things, of course, can cause price inflation. Physical plane prices are really just the relative values of different things expressed using a common numéraire, and those relative values change all the time for many different supply and demand-related reasons. But overall inflation is a monetary phenomenon, a change in the price of the numéraire itself, which, as I said above, requires another numéraire. We often think of it as a case of more money versus fewer goods and services resulting in price inflation, but that's not necessarily the case when the global monetary and financial system promotes the hoarding rather than the spending of money acquired as surplus revenue.

Think about a trade surplus country like China, which has now accumulated nearly $4 trillion in foreign currency reserves. We can think of that $4T as surplus revenue that has been accumulated over the past 15 years, but the truth is that it was accumulated merely as a consequence of the dirty float of the Chinese currency. The effect was that it kept the price (the exchange rate) of the dollar elevated when it would have otherwise declined. This kept US imports cheap in dollars when they would have otherwise become more expensive, in other words, it kept US price inflation lower than it would otherwise have been. This effect is the same whether it is the foreign CBs or the foreign private sector hoarding dollars, but together, in tandem, the two sectors have kept the dollar perpetually overvalued for decades.

Another way we tend to think about inflation is as a decrease in production (supply) relative to consumption (demand) that results in an overall shortage of goods and services and therefore an overall rise in prices. But that doesn't necessarily work either. The US is a good example of an economy in which consumption (demand) is greater than production (supply), even as the US is one of the largest producers in the world. This is evident in the US trade deficit. Each month we consume about $40B more goods and services than we produce. The extra supply comes from abroad, where the rest of the world (ROW) in aggregate is producing about $40B more goods and services than it consumes each month. The ROW (in aggregate) is also buying about $40B in dollars for investment purchases, savings or monetary reserves each month.

As long as those two numbers are pretty close to each other, the US capital inflow and the US trade deficit, the dollar's exchange rate will be pretty stable. If the dollar is rising, then either the ROW is buying more dollars (capital inflow is increasing), or else US consumption (demand) is declining relative to US production (supply). Likewise, if the dollar is declining, then either the ROW is buying fewer dollars (capital inflow is decreasing or even reversing), or else US consumption is rising relative to US production. But when we look at these two variables, changes in net consumption happen relatively slowly while capital flows can literally turn on a dime.

Now, imagine that the $40B per month capital inflow suddenly stopped. You can imagine any number of causes, but perhaps a dramatic stock market correction would suffice. It doesn't even need to reverse and become a capital outflow, so you can imagine the money that's "already inside the US" running to the "safety" of Treasuries while money that's not already in dollars finds greener pastures elsewhere. As I've laid it out for you here, it should be clear that the dollar's price (its exchange rate) would plunge toward its physical plane value. The dollar's current price is based on a constant monetary inflow each and every month, not a balance of trade, so if that inflow stops, the price of a dollar drops.

When that happens, even if no prices tags are changed inside or outside of the US, the prices of imports from the ROW will appear to have risen from the perspective of the dollar holder. And if the price tag of a net-import like oil which is priced in dollars isn't changed, then it will appear to have declined from the perspective of the foreign oil producer, so it will have to be raised. I hope you can see the "relativistic" effect on the prices of imports and exports when currency prices (exchange rates) change. While US imports will appear more expensive from inside the US, US exports will appear cheaper from the perspective of the ROW, and this relativistic (relative to your frame of reference) effect is present without changing any local price tags.

I don't want to spend too much time on this point, but what it means is that, in an open system with many different fiat currencies, the two things which I said characterize the $IMFS subjugate, supersede and overpower local inflation drivers. Those two things, once again, are oversized private sector international capital flows and their structural counterpart, public sector capital flows known as the dirty float. As FOA said, "the real cause of price increases is when the exchange rate is allowed to balance a negative trade deficit." In the present case, the cause of price stability in the $IMFS is the dirty float, in which exchange rates are not allowed to balance trade.

In a clean float, you'd have more closely balanced trade, and therefore the local inflation drivers targeted by monetary policy would begin to reassert their influence. Private sector capital flows would still have an effect, but it would correct periodically. And because changes occur more slowly in the physical than in the monetary plane, imbalances driven by private sector financial drifts would not become structural, cumulative and therefore systemically dangerous. Furthermore, and I hope to get into this more later, the predicted transition implies a smaller financial sector, smaller international capital flows, and a shift from financial pyramids and volatility churning into real economic enterprises as the most profitable focus for "hot money".

People, especially economists, tend to think they understand the causes of inflation. What I am proposing to you here is that, inside the $IMFS fishbowl, most of them are wrong, or at least what they understand theoretically is subjugated globally by the $IMFS and the dirty float. Look no farther than the US to see this in action. Here's the official inflation rate in the US for the last 30 years, from 1984-2014:

During that time, the US population grew by 35% and household incomes grew by 100%, meaning they doubled nominally. But that low inflation rate compounds to about 130% total over 30 years, which means household incomes haven't changed in real terms in 30 years, at least by the official inflation rate. But even though our incomes merely doubled in nominal terms, we spent as if they skyrocketed as shown in the 1,200% growth of total US debt to almost $60T:

As a consequence of all of that deficit spending, our cumulative checking accounts (basically the money supply aggregate that should affect consumer prices) grew by 900%, and our monetary base grew by 2,000% while cumulative consumer price inflation was only 130%. If this seems to violate what you thought you understood about the causes of inflation, you are not alone.

In my view, where we are today is stuck in a physical plane (real economy) that is subjugated, superseded, overpowered by and therefore subservient to the monetary plane (oversized financial capital flows). We have actually achieved a remarkable level of price stability for most of the world and for a very long time, but at what cost? In my view, there are two big costs, persistent economic stagnation in a relatively stable price environment, and inevitable periodic currency collapse.

Price stability mandates are only a means to an end which is a healthy and sustainable real economy, and yet, almost ironically, today's price stability continues at the cost of global economic stagnation. But this economic rut that we're in is not the only cost. Price inflation has been within acceptable levels for a very long time, aside from the occasional currency collapse or hyperinflation. And that's the second cost: the occasional currency collapses and bouts of hyperinflation.

You see, structural imbalances leave our landscape of many currencies vulnerable to abrupt and devastating corrections. It's like the tectonic plates on which we all live. The immense pressure that builds up around the edges is belied by the stable ground we feel most of the time, but every once in a while those plates correct themselves with disastrous effects.

Even with a higher target inflation rate like Krugman and Summers both recommend, monetary policy would likely have little or no effect as it stands today. In fact, we can see with our own eyes that it has little effect, as central banks have printed trillions in new reserves, practically monetizing consumption directly in some cases, while lowering both short and long term key interest rates to unprecedented lows, and still no effect on inflation.

Some have suggested that, in the case of Europe, the monetization of a broader range of assets, including gold, might be appropriate for monetary policy easing [15]. But all that does is raise demand for the monetized assets, likely raising the price, and in the case of gold causing inflow from other currency zones thereby putting downward pressure on the price of the currency itself. These kinds of purchases do not raise consumption, demand or create new borrowers, but instead they simply transfer existing purchasing power from the economy to prior asset holders. (And in the case of gold, CB purchases beyond a prudent reserve level are just currency manipulations that punish the workers in the economy while actually incentivizing lower consumption as more people will elect to forego current expenditures in order to buy gold: "Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises." - Another).

Even if they could get inflation up, I doubt that it would have the intended effect on the real economy. A certain rate of price inflation may well accompany the kind of economic growth that economists and central planners desire, but I'm not sure causation works in the direction they hope it does. In other words, economic growth may cause inflation, but inflation does not cause real economic growth. Here is a concrete example of what I mean:

By 1933, the annual US inflation rate was below -10%. Prices had fallen 60%, industrial production was down by half, millions were homeless and a quarter of the workforce was unemployed. FDR's inauguration on March 4, 1933 marked the lowest point in the worst depression in history, and it also occurred in the middle of a bank run. By the end of that day, 32 of the 48 states had already closed their banks, and the very next day, the day after his inauguration, FDR declared a four-day national bank holiday while Congress worked out a change in the dollar monetary system.

That monetary change of rules stopped price deflation in its tracks. By May, the monthly rate of inflation hit an annualized rate of 10%, and it even hit 40% annualized in June. [16]

The positive inflation rate, however, did little for the real economy in which unemployment remained in double digits until WWII. Five years after FDR's inauguration, Alvin Hansen would propose his secular stagnation hypothesis, and only gearing up for war in 1941 would finally drag the US economy out of its rut, and unemployment back down to low single digits.

During the post-war years of 1946-1953, with the US economy roaring on its own, cranking out a trade surplus with Europe as evident in the gold inflow which peaked in 1952 (see Fiat 33), we saw some of the highest price inflation rates ever, reaching 20% in 1947 and 10% in 1951. The point, once again, is that even though inflation may well accompany periods of economic growth, it does not follow that higher inflation rates cause higher economic growth.

Money Hoarding

For that matter, neither does low inflation—also known as price stability—cause economic growth. In my view, today's price stability has the same cause as today's low interest rates, which is also the same cause as today's global stagnation. As I've said many times before, correlation does not imply causation, and the treating of symptoms rarely cures the disease.

The "cause" that I am referring to is massive, systemic and global money hoarding. Money, at its essence, is credit. It is the credibility of future production revenue made spendable in the present (see Moneyness 2: Money is Credit). That is how new money comes into being, and then it circulates right along with the rest of the money pool as a medium of exchange in the present.

The hoarding of such credits, however, overvalues the unit of account itself, as the credits that are not hoarded enjoy a present purchasing power that would otherwise be lower if all existing "fungible credibility" circulated, and such credits were only held as short term balances rather than as wealth reserves. Hoarding, by the way, includes re-lending the credits to someone else, which is the primary way money is hoarded.

The re-lending of credits earned as surplus revenue simulates the money creation process without actually creating any new money, again overvaluing the unit itself as the credits enjoy a present purchasing power that would otherwise be lower if new money had actually been created. Re-lending is fine and normal to a degree. That degree is where it is done professionally, with one's own surplus revenue.

Where it becomes hazardous is when it is done systemically and passively by savers who leave it up to someone else to determine the lending standards. All of this money circulates in the same pool, so using credits as the system's reserves and the passive savings of virtually everyone in the world crowds the banks and professional investors within the financial and monetary arena. This crowding pushes the banks and professional investors into riskier and more questionable activities in order to make a living.

The result is low interest rates (because there is too much money competing for a limited pool of credible borrowers), lower lending standards (because passive money is being managed by people who make an up-front percentage and then have no more skin in the game), low inflation (because the process itself systematically overvalues the currency on an ongoing and cumulative basis), and economic stagnation (once debt and malinvestment levels reach a certain point of saturation). That's where we are today, in my view, on a global scale.

Money hoarded as savings or foreign reserves must find a vehicle to be hoarded into. This creates a massively oversized and passively generic demand for debt and equity investment vehicles, which leads to bubbles, malinvestment, debt saturation, across-the-board unprofitability, and ultimately to persistent economic stagnation where uneconomic and unprofitable businesses continue operating at a loss just to service their debt, and in some cases where government stimulus is involved, just to keep people employed. We see this happening everywhere today, even in China.

It is a vicious feedback loop, and it only gets worse as the viability of new products becomes secondary to their corporate presence in the investment markets. One of the main criticisms of the secular stagnation hypothesis, which I mentioned earlier, is that innovation and growth in the IT sector is underappreciated by economists. But just consider how many of the new rising stars in the tech industry are more about the business of selling shares than creating real economic value.

In essence, global savings (because in the $IMFS "savings" is defined as money hoarding) has outstripped profitable investment opportunities. There are more "savings" in the world today than there are truly-economic opportunities to make a profit, therefore the very act of saving for the future today worsens imprudent lending standards, inflates valuation bubbles in overpriced (and therefore unprofitable) industries, and promotes the illusion of new rising stars of productivity like Pets.com and Candy Crush.

In supply and demand terms, there is too much savings relative to investment opportunities that are profitable due to real economic value creation. The return on "savings" (interest in the case of debt and dividends or profits in the case of equity) is low because there is too much supply (savings) relative to demand (profitable opportunities). These are exactly the conditions in which bubbles arise—when "savings" or investment capital are in overabundance.

If you think it's good for the economy or for society in general to loan your surplus revenue to someone else, or to buy a company's stock, or even to stuff it in your mattress for later, guess again. You are part of the problem. If you're willing to give it away and forget about it, that's fine, but if you're hoping to reclaim that purchasing power at some point in the future, you are only adding to the congestion that is bringing the global economy to a standstill.

FOA (3/14/99; 16:17:55MDT - Msg ID:3362)

"Ironically, the very prospect of free world trade, so fought for by the American Administration, is the condition that the IMF/dollar system cannot handle! The debt built up from all of the past, unfree, protectionist old world trade is killing the transition. The policy is to sell free trade and the narrow margins it produces as they shut down entire economies because the low profits cannot service the old debt. Do you follow the logic and the problem? This brilliant, modern free trade system and all of its benefits cannot be implemented using the US dollar as a reserve currency. It shuts off commerce that in turn limits the use of commodities such as oil, metals, food and the like. Many hail the low price inflation in the US as a victory and ignore the intent other nations had in following "free trade". That being to promote a world economy, not just a US economy.

Enter the Euro! Understand that the increased use of commodities is a good thing. It's not just for the purpose of making a rising chart pattern so speculators can sell their calls! Commodity usage creates real things and helps the lives of real people. When citizens gain real productive mechanisms, they hold real wealth. Some would have you believe that third world people are enriched by saving US treasury bonds, not true! The only way to increase world trade, with an eye on building new consumers in all countries, is to remove the overhang of "dollar settlement".

The US started the free trade movement but quickly backed away when it was realized that the US currency, backed by debt through the fractional reserve system, would suffer severe inflation in the transition. Government guarantees would require the treasury (and Fed) to print unbelievable amounts of new currency to cover the unserviceable debt that Free Trade would create!"

FOA (03/20/99; 11:34:12MDT - Msg ID:3615)

"It was understood some time ago that the $US would indeed become "debted out" as digital currencies go. It was the logical conclusion to the world reserve money being removed from the gold exchange standard… We arrive at the final result today, with the dollar so expanded that it is failing the "free trade conversion" the world so craves. Entire countries are economically impaired in an effort to maintain the fictional valuations of "US assets"! …

It was the longest "stop gap measure" I have ever known to exist! A tremendous success by any standard, to keep the dollar stable for such a time. Many think it was "good old American know how" that did it. Well, now we will see "who knows how" as the world unwinds all of this dollar debt! …

As it is, this is created through BIS manipulations of foreign exchange (dirty float) and official money flows out of all non reserve currencies … One might have expected that others (as in the markets) would already be deducing the "secret moves" and re-evaluating the value of the dollar accordingly… this is not a "New York day trade", but rather a world money transformation that will affect you "down to the shoes on your feet"… Also, history usually documents that the most earth moving events were obvious, all along, but no one believed them!"

The Cure

The cure for global stagnation, I think, is very simple. In fact, unlike Krugman and Summers, I don't have a prescription. What would be my recommendation is already happening, so I only have a prediction for how and why it will end.

There is a common misconception that the sale of foreign goods and services in exchange for US dollars is what overvalues the dollar—foreign oil priced in dollars being the prime example, but China has also been selling other goods in exchange for dollars for a long time. In other words, it is a misconception that the international use of dollars as a medium of exchange is what keeps the $IMFS going.

This misconception, sometimes called the petrodollar theory, is so common that it is ubiquitous, not just in the conspiratard community, but in the mainstream as well. So I'm going to explain briefly the truth of the matter. You will need to understand this if you'd like to accurately understand how and why it will end.

There are two ways for the foreign sector to buy dollars. One is by trading goods and services for them, and the other is through the foreign currency exchange. So, as a foreigner, you can buy dollars either with goods and services or with another currency. I'm not even necessarily talking about trade directly with the US, because you can buy dollars from other foreigners in both of these ways as well.

The US trades more than $2.2T worth of goods and services with the rest of the world each year. We export $2.2T worth of goods and services, and in exchange for them we also import $2.2T worth of goods and services. Dollars are the medium of exchange for all of them so, as you can imagine, there is a large pool of dollars circulating internationally. Think of it like this: A foreign exporter buys dollars with his goods and services, and then he sells the dollars to a foreign importer (in exchange for the local currency) who then uses the dollars to buy goods and services from the US. This happens each year to the tune of more than $2.2T.

In my scenario, you have $2.2T in dollars being bought with goods and services, and another $2.2T being bought with foreign currency (by the foreign importers who buy goods and services from the US). That would be balanced trade if that was all that was happening, but it's not. At the foreign currency exchange, where dollars are bought with foreign currency (rather than goods and services), there is also another group of dollar buyers competing with the foreign importers.

For simplicity's sake, let's call this second group the foreign investors and central banks. On average for the last several years, this group has bought about $500B each year which it has used for purposes other than buying goods and services. In 2006, this group's dollar buying peaked at an all-time high of about $750B, but for the last six years it has averaged almost exactly $500B per year. Instead of buying goods and services, these dollars were purchased in order to be hoarded, i.e., to buy dollar-denominated financial assets, like US stocks, bonds, Treasuries, real estate and foreign direct investment (FDI) inside the US.

The easiest way to understand the effect I'm trying to explain is to picture this second group bidding against the first group. The first group is foreign importers who buy $2.2T each year to be used to buy US goods and services. The second group is foreign investors and CBs who buy $500B each year to be used to buy US financial investments (aka IOUs). Together, they represent a foreign sector demand for $2.7T in dollars per year, which overvalues the dollar and causes the physical plane imbalance more commonly called the US trade deficit.

As I said above, we (the US) export $2.2T and we import $2.2T worth of goods and services. But we also import an extra $500B worth of goods and services which meets that extra demand for dollars from the second group, the foreign investors and central banks. Those extra imports are our trade deficit, and the important point here is that our trade deficit is caused solely by that extra demand for dollars from the second group, the foreign investors and foreign CBs. It is not caused by the fact that so many goods worldwide can be purchased in dollars that most American importers aren't even aware that other currencies exist.

The fact that many goods and services worldwide—once again oil being the prime example—can be purchased with US dollars does play a supporting role, but it is not the cause of the dollar's overvaluation. And in order to accurately understand how and why the $IMFS, and therefore global stagnation, will end, you need to understand its true cause. Oil being priced in dollars supports the dollar's overvaluation only insofar as the foreign oil producers themselves choose to hoard the dollars they earn as surplus revenue.

Secondarily, it provides the central banks engaged in the dirty float a false pretense for their excessive purchases of US dollars. You'd be surprised at how many people actually believe that China bought trillions of dollars as a rainy-day reserve fund simply because oil, food and many other global necessities are priced in dollars.

The cause of the dollar's overvaluation is the exorbitant hoarding of dollars by foreigners, including both foreign investors (which, yes, includes some of the foreign oil producers, though not to a great extent) and foreign central banks doing the dirty float. And of those two (foreign investors and foreign CBs), it is the CBs that were the cause of the perpetuation which lasted many decades, because they were the ones who bought dollars when everyone else was not.

Eliminate that particular cause, and you don't immediately eliminate the overvaluation, but you do end its perpetuation. And that's where I think we are today.

There have been a number of articles lately, both in the conspiratard media and in the mainstream, like this, this and this, about how the plunging price of oil spells doom for the dollar. $45 oil didn't doom the system in 2009, nor did $26 oil in 2001 or $16 oil in 1998, and $68 oil isn't going to doom it today. Something else is. The oil narrative is predicated on the common misconception that I outlined above, and is therefore wrong. But that doesn't mean the system is not doomed, it only reveals an inaccurate understanding of how and why it will end.

According to the narrative in those articles I linked, the fat lady should have already sung, if not in 2008, then at least in 2012, 2013, or at the beginning of this year at the latest. Yet the dollar is stronger than it has been in four years, the stock market is soaring at all-time highs, our trade deficit is currently above its six-year average at $516B annualized, and official price inflation is holding steady at 1.7%. There must be a better narrative, and there is.

Here's a chart by the French bank BNP Paribas from the Reuters article above. It shows what it calls "petrodollar exports" which it says were negative this year for the first time in 18 years.

Like I said, if this were the whole picture, then the fat lady would have already sung, but it's not and she hasn't… yet. I think this chart is misleading in many ways. "Petrodollar exports" is supposed to mean dollars spent on foreign oil priced in dollars that were then "recycled" back into US financial markets and other dollar-denominated debt. But all it really shows is foreign private sector dollar investment from part of the ROW. Excluded from the chart are Japan, Europe and the foreign CBs.

Look at 2008 in the chart. The blue is Asia excluding Japan, and it's negative in 2008. Yet 2008 was the PBOC's second-largest dollar buying spree ever, with an accumulation of $250B in Treasuries that year. The PBOC surpassed 2008 two years later in 2010 by buying $265B that year, and notice that the entire "petrodollar exports" for 2010 in that chart don't even total $200B. I don't have the data for the chart, but it looks like about $185B for 2010. In 2010, our trade deficit was $499B. $265B was purchased by the PBOC, and about $185B from "petrodollar exports", for a total of $450B. Something must be missing, and it is. Europe's private sector!

Notice, also, that those two years, 2008 and 2010, contained big dips in the dollar's price. In 2008, the dollar hit its all-time low of 71.5, and in 2010, it plunged from 88 in June down to 76 in October, a 14% plunge reminiscent of 1978 (see "Q2 1978" in Dirty Float). Remember I said that CBs doing the dirty buy dollars when everyone else is running away? Well it appears that the PBOC did just that, and it's not in that petrodollar chart.

Here's another chart, this one by Frank Knopers of Marketupdate.nl. It doesn't entirely complete the picture, but it fills in a good portion of what's missing:

This chart is only Treasuries, and you'll notice it's quite large precisely where the "petrodollar exports" one was small, and small where the petrodollar one was large. In this chart, Asia is red, and you'll notice how it dominates in 2008-2011 while in the last chart, where Asia was blue, it was but a minor concern. Also look at 2006, and how it's actually the lowest point in the past decade in this chart while it was the highest point in the last one.

We're looking at an incomplete picture in both of these charts, and also if we take them together the picture is still incomplete. That's because the total capital flow includes sectors, markets and actors that are not accounted for on either one of these charts. But if we understand how the balance of payments works, then we know that the physical plane trade deficit is the sum total of the monetary plane (capital) flows, of which these two charts merely give us a partial view.

Now imagine that the monetary plane "capital inflow" into the US suddenly stopped, turned on a dime, panicked, or whatever… it just vanished—poof. It would look something like this:

Notice that the numbers no longer balance. Suddenly the US is trying to import $2.7T in goods and services while only exporting $2.2T in goods and services. This puts an extra $500B in dollars per year into the foreign sector for which there is no longer a demand. As I said above, the demand caused the flow in the first place and, because the foreign public and private sectors worked in tandem, perpetuated it for decades. But, remember I also said that changes in net consumption happen slowly while capital flows can literally turn on a dime. The inertial differential between the two planes is critical in this instance.

One way or another, however, those numbers will balance in short order. Perhaps the red numbers could drop from $2.7T to $2.2T, or the black numbers could increase to $2.7T. Think about what would have to happen in short order, in real terms, for either of those scenarios to work. To foresee how these two numbers will reconcile, you must think in real, physical plane terms. You must think about those numbers representing a real volume of goods and services flowing in either direction, and the inertia of the demand to keep that real volume unchanged.

What you'll find, if you play out this thought experiment honestly, is that the weakest link in the whole system, the one that will lose its grip and make those numbers meet, is where the rubber meets the road—the prices that connect the dollar to the physical plane of goods and services. First the price of a dollar (its exchange rate) will slip, because there is suddenly a $2.7T supply meeting a $2.2T demand. This will have two initial effects. 1. It will send more dollars back to the US bidding up the price of US goods and services (real price inflation). 2. It will make those US imports appear relatively more expensive from the frame of reference of the dollar holder (relativistic price inflation).

Normally, this would mean a quick devaluation of the dollar, say for simplicity of calculation, by 50% or something. If that happened, you'd see those numbers rising quickly, but with the black numbers rising faster than the red until they meet at $4.4T (a 50% devaluation of the dollar). In real terms, US exports would have remained the same, but US imports would have shrunk from what would have been $5.4T after the devaluation to only $4.4T, an 18.5% reduction in imports in real terms, and a 100% reduction in net consumption by the US as a whole.

The sudden elimination of net consumption by the US as a whole is what FOA called "crashing our lifestyle," but he added in the very next sentence: "Something our currency management policy will confront with dollar printing to avert." A simple devaluation of the dollar would not only eliminate our trade deficit immediately, but in the case of the dollar because it is the global standard for savings and reserves totaling more than $60T, it would deliver a global haircut in real terms to the value of those savings and reserves. Nominally they would still be the same, but their real value would have been halved.

That, alone, would probably be enough to start a cascading avalanche of panic out of dollar holdings that would take the dollar much lower than the initial devaluation. But what FOA wrote—"Something our currency management policy will confront with dollar printing to avert"—is even more true today than when he wrote it and will, in my view, precede and amplify the avalanche, making the US dollar look more like the Zimbabwe dollar than the krona, peso or ruble in the end.

The reason I say it is more true today than when he wrote it is that, when he wrote it, the US private sector was the primary net consumer. But ever since the 2008 financial crisis, the US private sector is no longer a net consumer. We have, in essence, already "crashed our lifestyle." Yet the US as a whole, which in sectoral terms means the US private sector plus the US public sector (the USG), hasn't crashed its lifestyle at all.

Beginning in 2009, the net consumption of the US public sector, the US federal government, with net consumption defined as spending in excess of income, has been equal to or greater than the net consumption of the US public and private sectors combined. Stated simply, the USG's budget deficit has been equal to or greater than the US trade deficit for the last six years.

What this means, if you play out my thought experiment honestly, is that "the sudden elimination of net consumption" will be borne entirely, or at least almost entirely, by the one entity that can unilaterally, not unlike Mugabe, "confront with dollar printing to avert" (or at least attempt to avoid) bearing the brunt of that crash of lifestyle. That singular entity is the USG, and that's the basis for my view of how the US dollar will come to look more like the Zimbabwe dollar in the end.

FOA (3/17/2000; 9:16:57MT - usagold.com msg#13)

"We are only just now arriving at a time period that will bring about "The Currency Wars". Everything prior to this was only a preparation period to build an alternative currency. The years spent traveling this road were done to prepare the world for an escape medium when the dollar finally began its "price" hyper-inflation stage.

Few investors can "grasp" that in reality, our dollar has already been hyper inflated , but without the higher price effects. Years of deficit spending, over borrowing, debt expansion have created an illusion that the dollar was immune to price inflation. This illusion is evident in our massive trade deficit as it carries on with no negative effects on dollar exchange rates. Clearly other investors, outside the Central Banks were helping in the dollar support process without knowing they were buying into a dying currency system.

The only thing that kept this process from showing up in the prices of everyday goods was the support other Central Banks showed for our currency through exchange intervention. As I pointed out in my other writings, this support was convoluted at best and done over 15 to 20 years. Still, it's been done with a purpose all this time. That purpose was to maintain the dollar for world economic trade, without which we would all sink into depression…

The first signs that official dollar support is winding down is seen in real world pricing and official policy. The most obvious "first" price sensitive arena to reflect a "real coming inflation" is not gold as so many think, it's the stock markets. Their long term bull run, mostly starting around the early 80s completely reflected this official sanction of world dollar expansion without price inflation. It's only in the last year that we can see where equity markets are telegraphing a transition into dollar expansion "without world support". Better said, major price inflation is coming on a level equal to hyper status. Many stock markets have headed straight up in reflection of this."

Trail Guide (03/22/00; 07:53:28MDT - Msg ID:27266)

"The whole system is spiraling out of control now. We just call it the end of a currencies "timeline" and leave it at that. Most everyone else will eventually call it the beginning of dollar hyperinflation."

FOA (9/23/2000; 9:26:10MD - usagold.com msg#39)

"Again; it's the dollar that's caught in a vice because its exchange value is rising while its native buying power is somewhat the same. In order to balance the dollar's strength, native goods prices should be falling. By staying the same, its effects on our exchange rate process makes the local price of US goods ever more noncompetitive to sell to world markets…

Left on its own, such a process would expose the dollar structure to the bankrupt / hyper inflated position it has been in for many years. The US trade deficit would grow until the flow of dollars destroys our dollar reserve system. From where I swim in the ocean (in deep water), this is exactly the unending process we have embarked on. This time it will not reverse…

Truly, the ECB is not interested in "crashing" the system, rather let's "transition" the system into a more fair order. If intervention is needed, it's needed to keep the American economy from failing too fast from the coming hyperinflation of its currency. If the ECB is worried about the "exchange rate" being too far out of whack, it's a worry about its effect in generating a dollar system meltdown from deficit trade. Not a total failure of the Euro as so many report. When the time comes, and it will; the dollar will begin its fall away from its own past policy failure. Until that time, for the benefit of oil producers and many others, let's move as far down this Euro/gold trail as possible. Without a breakdown."

Trail Guide (10/07/00; 21:53:36MT - usagold.com msg#: 38526)

"I expect to see the Euro Zone taking off with some price inflation and a declining trade surplus heading toward deficit. All the while the US goes hyper with mountains of dollars coming home. And I don't mean coming home for investment. I mean coming home to exercise delivery against real US produced goods. I expect that before this is over, we (US) might be forced to use our gold card to help devalue the dollar. That would involve a forced restructuring of the gold markets so as to make gold rise. A few political heads would roll if this takes place. Believe it!"

Trail Guide (10/21/00; 08:50:07MT - usagold.com msg#: 39569)

"Once the ball starts rolling, it's good bye dollar overvaluation,,,,, and hello US hyper inflation. Especially if we want to keep our DOW and financial structure away from bookkeeping failure. Roaring prices for goods, yes, but bookkeeping failure, no! This is how a real inflation plays out!"

Trail Guide (10/24/00; 10:58:56MT - usagold.com msg#: 39784)

"Our currency will be lowered to non reserve status no matter what route we take. Just as in many other historic examples and present examples around the world, nation states always choose hyperinflation when no other way out is offered. No nation on earth has ever cascaded themselves into deflation once they are off the gold money system."

FOA (12/02/00; 11:40:02MD - usagold.com msg#49)

"Thoughts spoken with a background of coming hyperinflation—

It's almost impossible to compare our (FOA & Another) outcome of all this to other opinions because we have built our actions and testimony upon the one-way flow of this timeline transition.

We say "one way and one way only" and waver not! Own physical gold and position one's other interests with regards to a changing reserve currency dynamic.

Most every commentary written that is somewhat at odds with us, uses a foundation of a continued sound dollar financial structure as its base. Be it; deflation alone and/or deflation with some return to a gold exchange standard OR a total failure of other world bodies to reach for other acceptable alternative structures. Some say a little inflation will arrive and lift all boats within a "more of the same" dollar world. Indeed, their boats include a paper gold system and its ongoing use by the gold producing industry. All of these concepts are yesterday's outcomes and will be washed away in this great storm…

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."

Trail Guide (05/12/01; 09:57:47MT - usagold.com msg#: 53470)

"I know that far too many think the system is healthy enough to go on forever maintaining their lifestyle. It won't. Currency systems come and go with time and our dollar is being phased out. Eventually, as the next reserve system unfolds, our US inflation rate will spike into hyper status. Not because the dollar or our economy is suddenly nonfunctional, but because all the past "inflation tax deficits" that we built up over decades will come due. Then, not only the price of using our fiat system will be exposed,,,,, the price of all the political bailouts and American lifestyle enhancements will come due also. It will require a hugh devaluation of the dollar to cover this debt. It will appear to us as a sudden, hyperinflation, imposed on us by an unfair, European government,,,, out to get us."

FOA (06/12/01; 11:23:21MT - usagold.com msg#77)

"As the dollar tumbles on exchange markets, so too will our cost rise to produce anything (massive hyper price inflation). Rendering a net / net non gain in world trade advantage."

Trail Guide (06/12/01; 19:26:58MT - usagold.com msg#: 55977)

"Do you know how many national currencies in the world today experience an average of over 20% inflation rates? Do you know how many of those nations also experience almost hyper rates? More than a few, my friend. The point is that even in super inflation dynamics, modern people still use the fiat. Even as the governments lop off zeros weekly. Sure everyone has gold and hard dollars,,,,, but they don't spend them as much as they do their currency notes.

My point is that we will all be doing just as in Mexico; spending pesos while holding dollars and gold. Only in America we will be saving gold, putting aside Euros and spending inflating dollars. When the dollar goes completely hyper, we will resort to Euros, not gold or silver. The times have changed, my friend, you are fighting a war that will not begin. The world will use only one hard metal as wealth, gold! Because as Randy puts it: "we don't need a redundant wealth asset to hold in reserve". Silver is a good commodity but has no future in either the Euro System asset structure or my private wealth. Gold is the place to be and the events to follow will show this to be true."

FOA (07/27/01; 15:20:44MT - usagold.com msg#85)

"Make no mistake, we are not calling for price inflation to end the dollar's reserve reign! We are calling for "inflationary policy" to dethrone it while said hyperinflation follows…

The very changes needed in our money universe, today, would kill dollar demand by devaluing all dollar assets in super higher gold prices. The debts and the dollars would remain; only 90% of their current illusion of value would vanish. Hyperinflation in prices of all wealth objects will be the workout result of this process. As such, opposing dollar political motive will force the US to give the markets what is needed; both gold and gold prices beyond imagination."

FOA (11/2/01; 12:35:27MT - usagold.com msg#128)

"The evolution of Political will is now driving the dollar into an end time hyper inflation from where we will not return. That is our call. Bet your wealth on the other theorist's call if you want more of their last 30 years of hard money success."

This hyperinflationary picture I paint (and if you'd like to read more about it, I'd recommend these three posts as a good place to start) may seem extreme and inconceivable, but I don't think it is. Nor do I think it is all that bad. As there are usually two sides to everything, there's a good side to dollar hyperinflation as well! ;D

Yes, it will destroy probably close to $100T in savings and monetary reserves worldwide (not counting all the fancy derivatives), but it will also destroy the debt those savings and reserves are built upon. And in so doing, it will destroy the virtual fishbowl that today confines the global economy, holding it in a state of secular stagnation. Yes, this is the cure, and like I said, I don't have a prescription for making it happen because what would be my recommendation is already happening.

As to whether or not it will happen, my view is unequivocally that it is absolutely and positively inevitable. As for when, my view that it could happen at any moment is more than just a feeling and a realization that it's decades overdue. It is, in fact, informed by two simple but important things.

First, all of the US markets are "already badly overpriced", while the foreign markets "are less so". So says Jeremy Grantham in his latest "Bubble Watch Update" newsletter. Grantham's firm has more than $112B in assets under management, and he has built his reputation on correctly identifying bubbles as they were happening. [17] Yet all signs are that the foreign private sector is still piling into the dollar short bus as if it's the only ride in town. The miraculous dollar and its many markets are doing quite well, even as a correction like we haven't seen in at least six years appears to be on the horizon. That would be one of those times when, over the last several decades at least, the foreign public sector stepped in and bought precisely what everyone else was running away from… the dollar. But will it happen this time?

I don't think so, and that's the second thing. All signs are that the dirty float is finished. The ECB has made it quite clear that it will not be interfering with exchange rates anymore, and so have many other central banks. Even in the face of epic weakness, Russia's central bank has, over the past three months, repeatedly reaffirmed its new policy of a "free floating" ruble, here, here, here, here and even here back on Sept. 2nd.

Since publishing Dirty Float on August 3rd, I have also seen free floating exchange rate articles pertaining to Canada, Myanmar, Brazil and Hong Kong. Clean float, as a concept, almost seems to be trending! ;D

The PBOC has reportedly stepped back from its daily interventions in the [currency] market, and well it should stop. Exchange rate manipulation is anathema to its 28 bilateral currency swap agreements, three of which (Sri Lanka, Qatar and Canada) are new since Dirty Float was published. Also new since then are RMB trading centers in Paris, Luxembourg, Toronto and Doha, Qatar. China's currency is finally ready to float, and what do you know, its Treasury holdings are the same today as they were in 2011. The dirty float is dead. Long live the clean float.

Then again, there's still the chance that the drying-up of the subterranean stream (the flow of physical gold through London) will precede the monetary plane's inevitable time bomb, so who knows which one will happen first. A couple of recent statements on this front were Jeremy East's comment at the LBMA conference last June: "We are seeing gold flows circumventing the London market when, historically, gold would typically find its way to London and then out again. So we are seeing a bypass of the London market…" And this comment from a gold refiner via FT.com just last month: "I have to fly gold from Zurich to London, because there just is not enough gold on offer in London. You never used to have to do that."

My recommendation is to be prepared now, because that's the best way to avoid stress and regrets, which, IMO, are two things that are well worth avoiding. Either way it ends, I can't imagine how it could take too much longer.

FOA (2/28/2000; 10:18:13MT - usagold.com msg#8)

"Central banks gorged themselves with worthless dollar reserves and prevented a hyperinflation of the dollar in the process. They did this, because they knew that gold had the ability to completely replace any and all loss of dollar reserve value once a new system was in operation."

FOA (03/02/00; 20:15:21MT - usagold.com msg#9)

"Soon, bullion will return to doing what it did centuries ago. Representing the value of the world's assets and productive wealth. Only, with the world having far more in the way of modern things than ever before in its history, "Freegold" trading as a "reserve asset" will be valued as never before."

Trail Guide (03/04/00; 17:50:29MDT - Msg ID:26375)

"At first dollar hyper inflation will not be reflected in a rising price of gold on the current dollar paper gold market. It will be reflected in a corresponding lack of real gold relative to outstanding contracts! A physical gold shortage will happen "first", as the contract price system slowly defaults in an ever lower price. Next the paper markets will totally fail from non availability. That means a super low (discounted) bid price for contract gold. That's the same price the stock market players currently value your gold shares with.

Once the dollar gold contract system fails (and this will be happening during a full blown "hidden" price inflation), a physical gold market will develop,,,, whether officially (Euroland) or black market style.

The point is that during this dollar inflation, physical gold will be in almost no supply and its price will be 10X the paper price. No body, and I mean NO BODY is going to be cashing out of gold shares or any form of paper gold and doing an even swap! Every gold mine that operates using the dollar gold market to sell into,,,, does its financing with and is hedged leveraged with dollar based Bullion Banks ,,,,,, is going to see their stock ride the paper gold market to its end."

FOA (4/19/01; 17:50:29MT - usagold.com msg#65)

"The dollar is toast because most of the world doesn't like the management policy. They didn't like it in 71, but tolerated it because gold was supposed to keep flowing in repatriation payments. And if they didn't like it back then, they god awful hate it now!

We like to think that the dollar is what it is because we are so good. (smile) But, the truth is that for over a two decade period +, none of our economic policy, our trade financing policy, our defense policy or our internal lifestyle policy has pleased anyone outside these borders. We managed the dollar for us (U.S.) and the rest could just follow along.

Our fiat currency has survived all these years because others have supported our dollar flow in a way that kept it from crashing its exchange rate. We talk and think like we are winning the tug-of-war when, in fact, they just aren't pulling too hard. Waiting for their own system to form up."

Looking Forward

As I wrote earlier, my predicted transition implies a smaller financial sector, smaller international capital flows, and a shift from financial pyramids and volatility churning into real economic enterprises as the most profitable focus for "hot money". I know that many of my readers find this "glimpsing the hereafter" stuff challenging. I mean, everyone's into stocks and bonds today, right? So won't they run back into the warm embrace of paper IOUs right away?

Well, remember the Roaring 20s when everybody including the shoeshine boy was in the markets? After that crash, the average saver did not want to touch the stuff for four or five decades, and that was without hyperinflation wiping out his or her "savings" to 0.01% of their previous purchasing power. This time, I think it will be quite obvious that the only things "left standing" will be "real things".

Even among real things, the degree of purchasing power retention in real terms will vary greatly. This should lead to the usual mentality of risk reduction and channel future savings to a different focal point than today. And it's not just about the focal point which is for truly surplus (i.e., not needed anytime soon) revenue, but all forms of real wealth that enhance one's standard of living through their presence and use will gain widespread appreciation. Like nice, heirloom-quality household goods and furniture, instead of the cheap crap we buy today with the virtually-unlimited credit from an overvalued currency.

Ensuring that you own your home free and clear by retirement is another thing we should see post $IMFS, because it reduces risk. And no, I'm not talking about anything like the housing market speculation of today. All this "glimpsing the hereafter" stuff is based on common sense flowing from the elimination of money hoarding which will have proven so disastrous through the reset. This is what FOA explained so brilliantly, how our very human nature leads our behavior, especially through change.

One other thing I mentioned earlier that I want to expand upon in this final section is that any central bank purchases of gold, or any foreign currency for that matter, beyond a level that is prudent for normal international banking liquidity needs and emergencies (a level which I might add that all major CBs already have in reserve), are just currency manipulations that punish the workers in their own economy by reducing the purchasing power of their wages and transferring that purchasing power to someone else. Such transfers do not increase aggregate demand (i.e., purchasing power), they only transfer it from one person to another.

You may have seen the term "GOMO" used recently, which means Gold Open Market Operations or a CB buying or selling gold on the open market. While this idea has been associated with Freegold, I will tell you now that I don't agree that it is part of Freegold, a good idea, or even that we should expect to see it tried by the incompetent. Don't count on GOMO, because it's not what you are probably thinking it is.

I see a lot of people falling into the trap of thinking that "physical gold purchases can only be good no matter who's doing it", because they are thinking of their own holdings and projecting that personal feeling onto a CB that represents an entire economy made up of both debtors and savers. If you thought it was hard to think like a giant, it's even harder to think like a CB. A giant can underconsume and save just like us, but if a CB tries to do the same thing, it's not really saving. It is merely preventing the exchange rate from balancing trade via the relative prices of goods and services, and thereby mispricing its currency and unnecessarily punishing its own labor force.

Look at China. Over the past 15 years the PBOC has accumulated $4T in foreign currency reserves. To do that, it printed $4T-worth of yuan base money. Such printing should have been massively inflationary in China, but it wasn't. Look at China's inflation rate over the past 15 years:

Pretty mild for having printed $4T in new base money, right? The PBOC didn't stimulate demand in its economy with all that printing, instead it suppressed it locally and transferred it to someone else… to us in the US! :D That's all the PBOC did by manipulating its currency. It punished its own workers in its own economy by lowering the purchasing power of their wages below where it would have been otherwise, and it transferred that purchasing power to us.

Now, if a CB buys gold instead, it will be punishing the workers in its own economy in the same way, by lowering the purchasing power of their wages below where it would have been if it hadn't bought gold, and it will be transferring that purchasing power to… you guessed it… anyone who has gold! Sounds good, right? Well don't count on it, because it doesn't increase aggregate demand or consumption, it only transfers it. Gold is not a form of monetary policy, even if someone at the ECB inappropriately mentioned it along with debt and other market assets.

Gold falls under reserves, and not monetary policy, by the ECB's own definitions. It's on every single ECB weekly statement:

Items not related to monetary policy operations (includes gold, foreign currencies and foreign debt)

Items related to monetary policy operations (includes things like lending facilities, refinancing facilities, deposit facilities, LTROs, securities market programs, etc…, many different things, but not gold)

Monetary policy will be the same in Freegold as it is today… raising and lowering interest rates or other ways of easing and tightening, and buying debt if rates get too low. The difference is that they'll only do it within their own currency zone, because the dirty float will be over.

The ECB's own statements make it clear, every week: Monetary policy, by definition, is stuff you do at home; Reserves—gold and foreign currency/foreign debt—and operations pertaining to reserves, are not part of monetary policy. They are exchange rate manipulations, and the ECB has made it clear that they aren't doing the dirty anymore. Monetary policy won't change. If you hate this system because of CB monetary policy, then you'll probably hate the next one as well.

What will change is that exchange rates will no longer be manipulated, therefore foreign currency, foreign debt and gold will just sit there, unchanged, on the CB balance sheets. Simple as that. The CBs will still mess with interest rates, reserve requirements and buy debt and other stuff within their own currency zones, because that's what has at least a little effect on aggregate demand.

In Fiat 33, Dirty Float and now Global Stagnation, I have traced the evolution of the global exchange rate regime, from the fixed exchange rates of Bretton Woods, to the "exchange rate anarchy" of the 1970s, to the dirty float of 1979-2013, and now to the clean float that will take us well into the future. At the beginning of Fiat 33 back in June, I made a statement which bothered some of you:

I know that some of you are skeptical about what I am saying. You're probably thinking that Freegold relies somehow on gold and whether or not it is embraced by the masses. But here's another thing that will probably surprise you in the end. Gold has little to do with "Freegold the monetary system"!

I knew that what I had in mind would take several posts to explain. I knew that what I was writing at the beginning would be confusing and maybe even a little controversial, but I hoped that it would eventually make sense after I finally got out what I had in mind. So now my question to you is whether or not the beginning of Fiat 33 finally makes sense to you. I hope it does. I'll end with the part I'm referring to, so please let me know if it now makes sense, or if I've still got more work to do. ;D

From Fiat 33:

I know I haven't written a post in a while, but my plan right now is to write a series of posts, this being the first, that will hopefully paint a nice big picture for you of what Freegold is all about. I've had the idea for a while now to write a post about what, precisely, constitutes the overvaluation of the dollar today, as that relates directly to the deflation versus currency collapse/hyperinflation debate.

In order to see how the dollar can collapse against the physical plane of real goods and services, you must understand how and why it is overvalued today, not just in the monetary plane with its monumental overhang of "financial savings", but also in the very real physical plane of production and trade. In the end, you might be surprised to discover how the dollar would still collapse in value even if we could hypothetically erase, block or sterilize the massive overhang of dollars and "financial wealth" that has accumulated in the monetary plane from rushing out into the physical plane.

As it turned out, this topic was much bigger in scope than I could possibly tackle in one post. In fact, I believe it encompasses virtually everything required for understanding what Freegold is truly about. And again, in the end, I think you may be surprised to discover how simple it really is, but it's going to take me a little while to get there.

I don't know how long or how many posts it will take me to explain what I have in mind. I'm not working off an outline. But here's a bit of a spoiler for those of you who are impatient, don't like to read, or don't care about understanding it deeply and would rather just have an abstract that can be easily dismissed so you can get back to tradable technical analysis.

Freegold is all about gradual, natural and automatic adjustment mechanisms in the modern world of fiat currencies. An adjustment mechanism is quite simply anything that periodically corrects physical plane imbalances. In economics, the term adjustment mechanism is often used to describe the flow of gold between different countries back when gold was used as base money in those countries. But this is not at all what Freegold is about, so I am using the term in a much broader context that applies at any scale, from the global scale on down to the individual.

Whenever you buy a gold coin, or even a coffee at Starbucks for that matter, that's a simple example of an adjustment mechanism at the individual level. Monetary plane balances (like "financial wealth", the "idea of long term debt being held as a money asset", or even cash in your wallet) represent physical plane imbalances. Whenever monetary balances are reduced, real world imbalances are reduced. Likewise, when monetary balances are accumulated, physical plane imbalances increase. It's a simple concept and a simple view.

The flow of money within a common currency zone, like the United States for example, is the most basic and automatic adjustment mechanism. Other adjustment mechanisms include changes in wages and in the prices of various goods and services in general and in different locales, and the movement of people and capital from one location to another.

Wherever multiple currencies interact, like on planet Earth for example, changes in the exchange rate between them are the primary adjustment mechanism. Fixing, pegging or otherwise manipulating the exchange rate of different currencies does, in fact, preclude other adjustment mechanisms and causes imbalances to accumulate, often to the point that abrupt adjustment becomes unavoidable, economically disruptive and financially destructive, in other words, painful.

Currency collapse and hyperinflation are natural but not gradual adjustment mechanisms. Floating exchange rates are a more gradual adjustment mechanism between different currency zones.

These adjustment mechanisms have always been with us, so the real change in Freegold is the "gradual, natural and automatic" part. Gradual (or ongoing) is self-explanatory, but what I mean by "natural and automatic" is that these ongoing adjustments will be allowed to happen or made by choice, not forced or induced by a central bank, because such ongoing adjustments will be in the self-interest of anyone in a position to choose, on any scale.

I know that some of you are skeptical about what I am saying. You're probably thinking that Freegold relies somehow on gold and whether or not it is embraced by the masses. But here's another thing that will probably surprise you in the end. Gold has little to do with "Freegold the monetary system"! Gold is not a key part of the monetary adjustment mechanisms in Freegold. The price and physical movements of gold won't even matter to the monetary system. Any movements of gold in price, ownership or location will be irrelevant to the monetary system of the future.

Freegold is the true unshackling of gold from the monetary system. In Freegold, a properly functioning monetary system requires nothing of gold. In Freegold, the international monetary system won't require gold to change price or location in order for it (the new IMFS) to function. That's why it's called Freegold. Gold is finally and truly set free from its shackles to the monetary system.

Make sense yet? ;D

Sincerely,
FOFOA



[1] Larry Summers appeared on a panel with Ben Bernanke, Stan Fischer and Ken Rogoff at the 14th Annual IMF Economic Forum on Friday, November 8, 2013. The panel, Policy Responses to Crises, included a discussion of optimal policy responses to mitigate the adverse effects of crises. http://youtu.be/KYpVzBbQIX0?t=2m11s
[2] Why stagnation might prove to be the new normal By Lawrence Summers, Financial Times, Dec 15 2013
[3] Secular Stagnation – Fad or Fact? The Economist, Aug 16th 2014
[4] Is The Economy Suffering From Secular Stagnation? NPR, Sept. 9 2014
[5] Secular Stagnation:
Facts, Causes and Cures A VoxEU.org eBook by the Centre for Economic Policy Research (CEPR), Chapter 2, "Secular stagnation: A review of the issues" by Barry Eichengreen
[6] Ibid., Chapter 4, "Four observations on secular stagnation" by Paul Krugman
[7] U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound by Larry Summers, Business Economics 2014
[8] Ibid. [5], Chapter 1, "Reflections on the 'New Secular Stagnation Hypothesis'" by Larry Summers
[9] Hysteresis and the European Unemployment problem Blanchard and Summers (1986)
[10] Ibid. [5], Introduction, Figures 1, 2 & 3, Source: World Bank online database
[11] Former Fed Chief Greenspan Worried About Future of Monetary Policy The Wall Street Journal, Oct. 29 2014
[12] Inflation targets reconsidered Paper presented by Paul Krugman on May 27, 2014 at the ECB Forum on Central Banking: Monetary policy in a changing financial landscape
[13] http://en.wikipedia.org/wiki/Knut_Wicksell#Theoretical_contributions
[14] Gold is like distilled, pure physical wealth, and in that sense it is "monetary wealth" in that it is kind of like the ambassador representing the physical plane while residing in the monetary plane and acting as its most liquid physical reserve asset. Other than that, any entanglement between money (economic credit) and gold (pure physical wealth) is unrighteous at best, and deadly at worst. True wealth is hard, but true money is "easy" by definition. Hard money is practically an oxymoron if you really consider the money concept. Therefore if normal inflation is theft, then so is the value you lose when you buy a brand new car and drive it off the lot. Misusing something as a wealth reserve is user error, not malfunction.
[15] http://www.ecb.europa.eu/press/key/date/2014/html/sp141117.de.html Google translated from German: "The Board of Governors has unanimously advocated, where appropriate, to take further unconventional measures to counteract a lengthy period to lower inflation. Theoretically, this also includes the purchase of government bonds or other assets such as gold, shares, Exchange Traded Funds (ETF) etc.." Yves Mersch, Nov. 17 2014
[16] Source: Puncturing Deflation Myths, Part 1- Inflation During The Great Depression by Daniel R. Amerman, CFA. Feb. 12, 2009
[17] Jeremy Grantham: http://en.wikipedia.org/wiki/Jeremy_Grantham#Views_on_market_bubbles_and_the_2007-2008_credit_crisis Quote source: http://www.businessinsider.com/grantham-guesses-stocks-work-20-30-higher-2013-11