In a fiat monetary system, there will always be a balancing act between inflation and deflation since the money must be manipulated by the central banking system. It is however, very rare for a fiat system to suffer from deflation because of the very nature of the monetary system itself and it only occurs when there has been a boom in the business cycle brought about by, once again, central banking manipulation of interest rates.
Of course, in our “collective” memory, the only thing we can associate deflation with is The Great Depression however, that memory when compared to our current deflationary bout is skewed by the differences between the two monetary systems; the one which existed prior to 1934 and then the one that now exist that came about in 1971. It should be obvious, but perhaps not, that a foundational difference in the monetary systems will have profound effects on both inflation and deflation; along with economic movements and behaviors. In a way, the world was turned upside down in the 30s, not because of The Great Depression, but because of the actions taken by our government in concert with the Federal Reserve Banking System.
When FDR debased our currency through the confiscation of gold and the revaluation of the official price of gold some very interesting things had to take place, similarly when Nixon cut the ties of gold completely from the dollar some drastic changes needed to occur. I don't think many understand just what had to take place and what was involved to completely transform the monetary system of this country during these two periods. Basically, everything involved with all the very complex relationships within the economy and the market dynamics of domestic economy and later the foreign economy were eliminated during these transformations. It is therefore, impossible to adequately compare any economic disruption prior to those events to those we are now experiencing. While superficial comparisons can be made, the comparisons end there. There is a completely different dynamic at work under a total fiat monetary system than was at word during The Great Depression or even prior to 1971. Indeed, that difference was witnessed during the latter part of the 1970s and into the 1980s when the economy began to experience something that, according to the Keynesian/Neo-Classical “Text-Book” Economists, was not expected nor did it fit into their econometric models. Stagflation was simply not possible under their economic ideology.
Remember, prior to that time there had never been a period when there was a downturn in economic growth while there was an inflationary monetary event. The key, of course, was that the Dollar was no longer tied, in any way, to the only anchor of stability it had ever been tied to and that was gold. Historic inflationary charts reveal a great deal about the effects, not only of sound money, but also of partial and total fiat money. Interestingly, the ability to inflate without the restraint of gold commodity is extremely evident from that singular point in our economic history: 1971. Since that time there has been a steady incline in the amount of fiat money that has been created and perhaps more interesting is the steady decline in the overall economic and social health of this country.
The degree at which our Dollar's purchasing power has been diminished since 1971 is absolutely astounding; actually it should be alarming to all of us. The purpose of money is to act as a means of exchange and when the purchasing power of a currency is drastically debased there is not only an economic consequence, but also a socio-political consequence to such depreciation. When a drastic depreciation takes place over a few decades there is a corresponding decline in both the political and social economy.
When a currency, which is a means of exchange, loses its purchasing power it eventually loses its meaning as a means of exchange, confidence is lost and as that confidence in the money erodes so too does the confidence in the political structure occur.
I have had people say to me that people are making more money today then they ever have in our history; that is true on the surface and it is perhaps one of the greatest deceptions of our time. It is not however, the number of Dollars or the face value of those Dollars that matter, it is the amount of goods and services that those Dollars can be exchanged for that provides the benefit. It is the Quality, not the Quantity of money that provides a social benefit.
Now, it is important to understand that inflation will eventually destroy the fiat monetary system and deflation will prolong the system's life span. Inflation eats away at the purchase value of fiat money and deflation increases the purchase value of each fiat unit. Thus, as most of us know, inflation has eaten away at approximately 97% of the purchase value of the U.S. Federal Reserve Notes. It has been a type of taxation without any representation whatsoever; that in it would be enough to cause any one of our 18 Century ancestors to rise up in revolution, but we have been effectively duped by a very clever scheme to deprive this nation of our birthright.
Today, this and other countries find themselves in the situation of crisis because that is the belly of the fiat beast; there is a natural inclination toward fiscal abuses, not only on a governmental scale, but on a corporate and individual level as well. Everyone seems to be wondering just how this crisis came about, the answer is extremely easy: the fiat monetary system!
The world has been under the heavy thumb of the central bankers for the last 37 years in particular, prior to that they were restrained by a partial fiat monetary system that would only allow them to play in their cesspool up to their collective ankles. Since 1971 however, they have jumped head-first into the muck and mire of a total fiat system that has allowed them, along with their political comrades, to scrape up the dregs of a monetary system that will ultimately spell disaster, not only for the People of this country, but in the process even the central bankers will suffer as the monetary monster they created and upon which they depend, turns on them with a vengeance and consumes the works of their filthy hands.
Now, in a maddening dash toward the fiat abyss, the central bankers are embarking on a predictable path which will lead to ultimate destruction of the fiat monetary system, the only system they have, the only system they place their faith into and depend upon. Today, although hidden from our view, there is an absolute unprecedented depreciation of our Dollar taking place and few realize the fact that the “precious” fiat Federal Reserve Note, along with just about every other fiat note around the world, is being destroyed.
To give an example of just how skewed our economy is under a fiat system we should look at savings. Normally, under a sound monetary system a decrease in the savings rate will translate into a rise in interest rates, regulating credit accordingly, but not so under a fiat monetary system. Savings have been very low in this country, debt has been high and rates are artificially pressured downward by the FED. Everything in the man-made fiat monetary system is completely contrived and contrary to sound economics; it shows in more ways than we can imagine.
Now, Mises, in his wisdom, stated:
“There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”
Now, that one statement holds a vast amount of information that is very pertinent for us today, for it maps out the only two routes available to the Federal Reserve and this government. Either the Federal Reserve will allow for the economic exhaustion to run its course, abandoning its easy-money-easy-credit fiat policies, or the currency will be destroyed by hyperinflation. The problem of course is that they fear deflation because it will lay their plans before the world, exposing their inner-workings and fraud for all to see; the other alternative they feel they can control, but the awakening will be rude and cold. They live under a grand illusion and perhaps they are as deluded as the majority of politicians and the people themselves, but they will simply not be able to avoid a reality that is about to destroy their system.
At the moment, the bond markets are draining capital away from the economy, but that will not remain the case for much longer. The FED is churning out liquidity in record amounts, primarily in the form of direct infusions instead of the routine fractional reserve system. The massive debt, both public and private, is proving to be more and more difficult to pay off and as interest rates continue to fall, the actual value of that debt increases. The new fiat world order is saturated with malinvestments, stagnate debt and dwindling profits. All the while, the Bond Market sucks productive capital away from sector after sector, creating its own set of problems for the FED analyticals.
We simply don't grasp just how distorted our economic world really is; it is difficult to understand just what had to take place in the natural order of things when our economy was completely divorced from gold money. Not only did that distort the economic order, but the resulting monetary policies, along with the regulatory policies of the government itself, have created an economic environment that is surreal and fantastical in its mechanics. There has, through market manipulation and fraudulent monetary contortions, been a massive asset mispricing, not only here in the U.S., but around the world.
On top of all that, there is a looming monstrosity lurking on the books of the Bank of International Settlements, you know the Central Bank of Central Banks, and that monstrosity is a vast quagmire of debt derivatives that will soon begin to function as an enormous black-hole. Since there is little knowledge or transparency about these “debt” assets, no requirements of disclosure about what they are and where they are associated, then there is no possible way to prepare for an eventuality of derivative toxicity streaming into the world's economic circulatory system. One thing is certain, the Federal Reserve, along with our Treasury, is no longer just the lender of last resort, it appears that they have been forced, by their own past actions, to become the buyer of last resort also. They have the “printing presses” full of paper and ink, ready for what comes their way.
One of the problems, of course, is that under a fiat monetary system there will always be an excess of fiat paper then there is a demand for it. That sounds strange, how can there be an excess of money in an economy? The nature of fiat is to run in excess of demand because it must rely upon quantity since it cannot rely upon quality. The economy we see today is exorbitantly inflated by the fiat system, so much so that few people understand the illusion that the quantity of money creates. That is one reason that so few people can wrap their heads around a return to gold money, they look at today's economy and are magically hypnotized by the face amount of dollars involved and say there is not enough gold to do the job. However, every dollar of economy value is only valued around 3 Cents or less, it does make a huge difference. Even so, the monetary mechanism of gold money does not act the same as fiat money, nor does it require a constant supply to be effective since each unit operates as a means of exchange throughout the economy and is rarely stagnate.
Under a fiat system inflation is the normal stage of operations; it must be inflated to maintain the illusion of its effectiveness. When there is a contraction, or even a simple stall within the creation and expansion of fiat money there is a direct effect on the economy superstructure, as we are currently witnessing in this and other countries. While there are those who believe the underlying debt is a restraint upon the creation of money, the truth is that it only restrains a certain type of fiat money creation. We have been told, not only by Bernanke, but by other central banking heads that they have an unlimited ability to create as much money as they feel they need to effect economic stimulation. What they don't say is that an unlimited supply of fiat money has very definite consequences. They rarely admit that such an unlimited ability increasingly makes the purchase value of the currency worth less and less.
Another reason why the fiat monetary system must rely upon a continual increase in supply is that there must be some way for the central planners to compensate for the continual decrease in the purchase power of each monetary unit through inflation. Strange isn't it? They debase the money through the increase of the money supply, but they have to increase the money supply to combat the effects of increasing the money supply and on and on and on and on they go down their yellow brick road as though they know where they are going. Their dilemma, of course, is that there is no way for them to play catch-up with the loss of purchasing power of the currency, not matter how much money they create the currency will always lose more value quicker than they can “print” it out.
The cows come home when the public begin to loose all confidence in the currency. This is particularly true when interest rates, which have been kept at artificially low levels, begin to bend to market pressures and the FED can no longer keep them down. What triggers the wide-spread lack of confidence in the currency is when the people realize that they money is increasingly worthless even when interest rates are beginning to rise, which would normally indicate a stronger value within the currency, but during a highly inflationary environment, the opposite happens. At that point the people begin to spend their increasingly worthless dollars as soon as they get them in their hands. The wild demand for money stops even though there seemingly an unlimited supply of money available. People and markets suddenly realize that all the money in the world cannot substitute for purchasing power of money. It is a strange occurrence and it happens the same way every time. It is almost an overnight epiphany that occurs.
You see, hyperinflation is not only a monetary event, but it is far more of a psychological event. During boom periods of economic fiat expansion, there a demand for money, the problem comes when a deflationary period enters the economic fiat landscape. At that point, as we have seen, the central bankers push the “presses” into overdrive, full steam ahead to avoid facing the consequences of correction associated with a fiat bust. It is during this period that the danger of hyperinflation evolves because the supply of money is rapidly increasing but the demand for that money is decreasing. Eventually, everyone begins to understand that no amount of fiat money can replace the loss of value associated with the money. At that point everyone suddenly gets a mind, they suddenly come to a realization about just how much of a fraud they have been victimized by over the years and they are no longer willing to play the game.
This great psychological event, as I said, always happens suddenly, so fast in fact that the government must respond by revaluing each monetary unit, seeking to exchange old fiat money with lower denominations with new fiat money complete with ever-increasing numbers of zeros on its face. The system, along with the central bank and government, is effectively destroyed. It is all crippled, stripped of its power to enforce not only legal tender laws, but all laws. The government is effectively neutralized by a hyperinflationary event and the fiat monetary system is dealt a final death blow from which it simply cannot recover because it cannot regain the confidence of either the people or the market.
A deflationary depression can be devastating to a country with massive layoffs, bankruptcies, defaults and business closures, but the money is never destroyed through deflation, that is not the case with hyperinflation. Deflationary will prolong the fiat monetary system, almost cleaning the system of excesses but hyperinflation will absolutely destroy everything that is even remotely associated with the currency. A deflationary depression will simply allow the Federal Reserve to continue its fiat shenanigans; hyperinflation will destroy the Federal Reserve, the fractional reserve banking system and the political machine that supports its criminal activity.
We have already been told, time and again, that the Federal Reserve will not allow a long deep deflationary event to occur; the other side of that coin is that their options will include, as we are now seeing, a drastic inflationary push of fiat economic instruments. Remember, our Dollar has already been debased by 97% or more, it will not take much to tip the scale of inflation where the people's psychology is triggered and they cease any demand for the massive amounts of fiat money coming into the system.
Let us consider a few things. We have a bankrupt government, David Walker said that it has been technically bankrupt for several years now.
So, what must a bankrupt government do to get funds?
It will be running at least a Trillion Dollar Deficit, correct?
It will not cut spending, but increase spending, correct?
It will not be able to increase taxes, at least not to a scale that would make a difference, correct?
It is increasingly doubtful that the government will find lenders to borrow much more to operate, correct?
It will no longer be able to borrow from the American People because they no longer have a savings rate of any notable content, correct?
So, where will all the money come from? It has to come from somewhere and there are no other options left to this government or the Federal Reserve but to directly inject fiat money into the system. No other options left to it, none whatsoever!Tweet
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