To pick up a brilliant point made by Peter Schiff in the video to the previous post below (but not understood by those on the brain-dead panel):
Inflation is simply debasement of the currency, or increases in the money supply. Inflation is occurring, just not where you expect it. It’s occurring in govt pork and govt employee numbers and in govt contractors making big bucks off govt spending.
Banks are lending massive amounts of new money – to governments around the world. They are the only entities the banks can find who will pay them back (even if it has to be in worthless paper currency – ha ha ha!).
Therefore, the “de”-flation that we should have seen occur to “cure” the credit bubble has been deferred – by way of an increase in brain-dead govt employees!
This is unlikely to “cover” for the loss in private sector activity because govt spending is generally unsustainable and therefore has a lower “velocity of money” than genuine private sector investment. However, these ridiculous “heroin stimulus packages” do cover up (temporarily and only to some degree) the deflation we should have had, coming out of the “credit boom” years.
Because of the massive distortions and misallocations caused by (1) the classic ABCT credit-fuelled Ponzi-boom and (2) now the ridiculous unsustainable govt spending, crowding out the private sector’s access to cheap capital for real sustainable projects that the public actually wants, we are now going to get (at the end of the day) much higher unemployment.
Higher unemployment is baked into the cake because of the massive stimulus spending. Take any specific “stimulus” measure, be it “Cash for Clunkers” in the US or the “First Home Buyer’s Grant” or incentives for home insulation or solar panels. Now, simply ask yourself:
What happens when the “stimulus spending” stops?
Most of the “stimulus spending” simply brings forward future consumption patterns - it re-allocates inter-temporal spending patterns, but doesn’t actually increase the total consumption over time.
I explained all of this in much more detail several months ago here. I see the balance of the forces being slight deflation rather than hyperinflation, but the dynamics are the same. I see possible inflation (possible hyperinflation) in 2012-2015, but that’s a long way off – and I mightn’t even be alive then (here’s hoping!).
Only Austrians such as the brilliant Peter Schiff understand that you can have very high inflation and very high unemployment because of preceding bad investments and unsustainable economic activity, leading to an economic dead-end rather than to ongoing economic activity.
When you build on Ponzi-quicksands, you fall into Ponzi-quicksands.
Let me add an addendum to my Trade of the Decade:
Silver, the longtime poor cousin to gold, is $et to $oar!
The shorting of silver by the bullion banks is insane and unprecedented.
Admittedly, the Makian Distribution predicts massive volatility in commodity prices with increased leverage/debt, and that’s exactly what we’ve had in the silver market over the last 50 years.
But something tells me silver is due to switch across to the right hand side of the bifurcating normal distribution very, very soon.
I would love to see a short squeeze in the silver market. It would be like watching fireworks on New Year’s Eve.
As you begin to appreciate the gravity of the situation Charles lays out in a most eerie fashion what the most likely scenario awaits us and builds a strong case for why he believes the dollar will collapse. At this point most readers not familiar with economics or America’s history of debt may begin to panic and pass out from fear, as Charles’ arguments are extremely convincing. From a long term perspective there is very little to argue about, our fiat pyramid of debt has to and will eventually collapse – the only question is of timing. This question is crucial to properly answer as it will spell out the direction of the next several years. While Charles attempts to answer the question with an open mind, his views can be best described as inflationist and he firmly believes that the forces in charge of our destiny will turn to the only tool available to them - currency depreciation. Once again, in the long run this may be true, but for the time being America finds itself in a unique situation where our dollar is still the reserve currency and is still trusted around the world. Certain technical reasons also suggest that the dollar may strengthen in the coming months not so much due to any internal policy, but the systemic failures in other parts of the world. Still, as Charles poignantly argues our status as the reserve currency is on borrowed time and can change with a blink of an eye. For this reason the book’s last section presents advice valuable for every American regardless of what one’s prognostication may be.
Charles is partial to value, a concept easy to grasp when you realize just how worthless the dollar can become. Therefore common sense approaches involving gold, silver and oil are presented. Charles makes a deliberate effort to provide options for any would be investor regardless of experience and if you are under the impression that you must build a ten ton safe and start hoarding gold ingots then you are mistaken, it is easier than you could ever imagine. Several sections are also devoted to address other popular investment strategies like equities and treasuries and why you should think twice before you invest in these increasingly risky asset pools. A rather amusing analogy between America’s credit strength and a shady uncle constantly looking to borrow should be reprinted and distributed all over the Internet.
The Dollar Meltdown is a unique and valuable book, offering the complexities of economics in order to explain where we are and how we got here while presenting investment strategies for those people interested in taking control of their financial feature. If you prefer eating glass over reading economic text or think Wall St. is a prerequisite before making investments, then this book is a must read for you and your family.
“Trader Mark” poses this interesting question: Is America a Ponzi scheme that works?
To quote from the article:
America is a uniquely attractive place to live: a lifestyle superpower. But it cannot afford to be complacent, for three reasons.
First, other places, such as Australia, Canada and parts of Western Europe, have started to compete for footloose talent.
Second, rising powers such as India and China are hanging on to more of their home-grown brains. There is even a sizeable reverse brain drain, as people of Indian or Chinese origin return to their homes. But neither India nor China attracts many completely foreign migrants who wish to “become” Indian or Chinese.
Third, since September 11th 2001 the American immigration process has become more security-conscious, which is to say, slower and more humiliating. Even applicants with jobs lined up can wait years for their papers. Many grow discouraged and either stay at home or try their luck somewhere less fortress-like.
The stakes are high. Immigration keeps America young, strong and growing. “The populations of Europe, Russia and Japan are declining, and those of China and India are levelling off. The United States alone among great powers will be increasing its share of world population over time,” predicts Michael Lind of the New America Foundation, a think-tank.
By 2050, there could be 500m Americans; by 2100, a billion. (I am not sure how Earth would support 500M or 1 billion Americans consider 300M use 25% of all it’s resources!) That means America could remain the pre-eminent nation for longer than many people expect.
My take on this article: The question is not whether a Ponzi scheme can work (all Ponzi schemes that get off the ground work to some degree). The essential questions are (1) can a Ponzi scheme work indefinitely (answer: no, no Ponzi scheme has ever worked indefinitely) and (2) has the U.S. Ponzi scheme just irreversibly burst (answer: yes, immigration levels are falling dramatically if you count illegals and, incredibly, net repatriations of money to Mexican relatives have in many cases reversed - poor Mexican relatives are now in many cases giving money back to newly homeless Mexican families living in the US!).
Once a Ponzi scheme bursts, you cannot ever put it back together because the suckers have dried up and are unwilling to finance the earlier entrants. The latter entrants always have to subsidise the earlier entrants. Once there are no more “latters” the whole thing blows up.
The U.S. is simply running out of “latters”. It’s over, in my view.
The new Ponzi schemes will continue in places like Cambodia, Vietnam and (perhaps) Australia and New Zealand. Until environmental and population problems mean the “latters” again have to go elsewhere.
But the U.S. in my view has just run out of suckers. The price for entry into the scheme is too high and the rewards too low. Everyone sees the Ponzi scheme is a fraud and once that’s exposed it’s all over for any Ponzi scheme. The illusion is shattered – and once the love’s lost, there ain’t no goin’ back.
We already know it’s going to be hyperinflation or deflationary depression.
The Makian Distribution predicts this: unprecedented public and private debt means unprecedented volatility. The one absolute certainty is that you will no longer get steady 4% returns year-by-year in any asset class. You will either double your money in a year or be wiped out completely. Government bonds will have insanely low (even negative) yields – and then suddenly be worthless within weeks.
Now, David Calderwood imagines the deflationary scenario as vividly as anyone has this year. As a deflationist, I’m visualising something very similar to happen, short of Bennie Boy dropping toilet paper fiat from helicopters – which ironically is unlikely given he speculated he’d do it if he had to. Once an academic speculates on something so stupid in an academic paper, he’s highly unlikely to follow through in reality.
The only question I have for David Calderwood is the same one I have for Steve Keen: WHEN?
Murphy sees destruction of the currency and a new Amero emerging from the wreckage.
MISH, the Rothschilds, Steve Keen (and I) vote deflation.
Someone’s gonna be wrong.
Fortunately gold and silver are the answer in either case.
is the most difficult and insidious addiction to break, because it involves lengthening a shortened time horizon.
Once shortened, it’s impossible to go back.
Austrian economist Frank Shostak predicts further “paralysis” ahead and thinks all the stimulus spending will just make things worse. And he backs up his predictions with a detailed, superb analysis of savings and money flows.
Great in-depth analysis of the current economic environment for anyone interested in the Austrian School.
I prefer to keep in mind the Five Golden Rules of the “Ponzi-economy”:
(1) The more stimulus spending by govt (funded from coercive taxes), the more malinvestments.
(2) The lower the actual reserve ratios for banks, the more likely a liquidity crisis is imminent when the ratio has to increase.
(3) The more govts and banks try to maintain unrealistic asset prices NOW, the more stagnation in the economy.
(4) High CURRENT asset prices mean lower FUTURE profits for investors and therefore lower CURRENT borrowing, investment and economic opportunity. Conversely, low CURRENT asset prices mean higher FUTURE profits for investors and therefore higher CURRENT borrowing, investment and economic opportunity.
Therefore, govts that delay foreclosures, bail out banks, “save” employment in certain hand-picked industries are simply incubating zombies.
(5) There is no solution at the end of a major economic bubble other than letting deflation occur and some banks go bust. The “false” “bubble activities” should never have existed. Keeping them alive only delays and exacerbates the inevitable corrections that must occur anyway.
Ludwig von Mises’ Theory of Money and Credit was published in 1912.
Nearly a century on, the Swiss Bank Mafioso rediscover Austrian Business Cycle Theory.
An interesting piece pouring scorn on the “recycling” fetishists.
I don’t know whether this is the best application of Austrian analysis to a problem for the following reasons:
1. As Michael Rowbotham points out, the current monetary system pushes us towards debt-based overconsumption. Gold would reverse this process and reward savings to a much greater degree. So the real concern is that the whole monetary system is pushing us towards unsustainable overconsumption – something both Mises and Rothbard would have seen had they been alive. Their PRINCIPAL concern was the monetary system skewing incentives and creating malinvestments. This is what Austrians should be worrying about. Not trashing recycling.
2. Perhaps I’m a soft Austrian, but there are externalities which are not “endogenised” in the price system currently. The full long-term polluting effects of oil production, of cyanide-based and mercury-based gold production, of coal mining… all of these have externalities in the form of pollution of river systems and the air which are not captured by the price system because no one owns these rights. So I do believe we may not be appropriately pricing inputs for the long-term, which means that recycling may make more sense than this “Austrian” believes.
It’s funny that in the old days when there was more stable money, there was actually more recycling. I still remember glass bottles of milk being picked up in country towns in Australia each day for recycling. I still remember aluminium cans being collected for their recycling value. I still remember “stuff” being re-used all over the house by my grandmother. What’s changed? The cost of these “throw away” items relative to our income has gone down, but the cost of housing relative to our income has gone up. Massively. So we worry about our mortgages and our jobs – but not about our savings or the milk bottles.
Return to gold and yet another problem would be addressed – that of pointless debt-based over-consumption. The cost of housing relative to our income would go down. The cost of “throw away” items relative our income would go up. And so we’d throw away less.
Steve Keen calls a second GFC due to private debt levels that have “now reached levels that are simply unprecedented in human history.”
Ha Ha Ha!
That’s like throwing toilet paper at a receding tide, expecting the tide to stop receding.
And it’s curious that Japan is still fighting M3 deflation if the govt is in total control of M1. Further evidence that Gary North is wrong?