From Sir Martin
ask-socrates.com
What Kind of Inflation is Coming & Why Goldbugs Are Wrong
QUESTION: Hi Martin,
Thank for the great work smoking out the hidden agenda behind Corona. Amazing corruption from these dirty bastards.
Question...You say the gold bugs are wrong about inflation, but you've said this cycle (2020-2024) will produce inflation. I don't understand the significance of the gold bugs being wrong while you're saying inflation is coming too.
What am I missing?
JT
ANSWER: The goldbugs see the only hyperinflation based upon the Quantity Theory of Money. Increase the quantity of money and assets rise in terms of the currency and hence that is the inflation. They fail to take into consideration reality because they are relying on the same economic theories of Keynes used by the central banks.
Inflation is something that most people perceive as a single-dimensional force with its cause and effect always the same. But inflation is far from such a simplistic explanation of money supply and its relationship to prices. While the studies of Milton Freedman captured the Noble prize for its demonstration of inflation's causes being linked to monetary policy, much has transpired since the formation of Bretton Woods.
The monetarist's view of economic history is, unfortunately, a tainted one built upon a case study of 100 years of data which ended during the 1960s. The very definition of money supply has drastically been altered by the advent of credit cards, electronic transfers and most of all, the floating exchange rate system itself.
A formal gold specie standard was first established in 1821 when Britain adopted it following the introduction of the gold sovereign by the new Royal Mint at Tower Hill in 1816. The Province of Canada in 1854, Newfoundland in 1865, and finally the United States and Germany adopted the gold standard and demonetized silver in 1873. The classical gold standard period was therefore 1873-1914. Gold was money and budgets were mostly balanced until war arrived.
However, contrary to popular belief, people generally did not conduct commerce with gold coins. Local commerce was conducted primarily in banknotes and silver. Certainly, gold coins existed, but people mostly used paper banknotes and bank transfers as they still do today. If we look just before World War I began, i.e.1910, gold coins comprised $591 million out of total currency (base money) of $3,149 million in the United States, or 18.7% of the money supply. Gold coins were used more in international commerce and domestically some people used them to salt money away.
Despite the fact that there was a gold standard, that by no means meant there was no inflation. When the supply of gold was increased due to major new discoveries, the money supply increased often by chance rather than by design which created inflation not intended by the government. The value of the dollar was fixed to gold and as such, it was not subject to wild fluctuations in the international marketplace as it is today under the floating exchange rate system based upon the quantity of gold. As a result, if the supply of gold increased, the money supply increased which would lead to a rise in prices.
The British pound, which was a gold sovereign, was the dominant currency of the world prior to World War I. It was the war that ruined the British economy and shifted the status of the Financial Capital of the World from London to New York. What people did not realize is that the currency of the dominant economy of an Empire, always carriers a premium over its metal content throughout ancient times.
With the dawn of paper money, nothing changed. British pound notes were the standard in the world pre-1917. When the floating exchange rate system in 1971, the dollar was divorced from gold which only served as an international currency post-1934 when Roosevelt confiscated gold from the public for domestic use. The factor that the United States had become the dominant economy post-1945 was why the dollar continued to be the major currency despite the emergence of the floating exchange rate in 1971 post-Bretton Woods. What appeared to be a new variable that was introduced into the equation forever altering our understanding and definition of inflation surfaced. However, this was no different for the currencies of Athen, Macedonia, and the Roman Empire in ancient times - each was imitated and each carried a premium over their metal content.
Perhaps no other period in US economic history would demonstrate this change in inflation than the period between 1980 and 1985. When the Paul Volcker was the head of the Federal Reserve, he raised the Discount Rate to 14% in 1981. Because debt could be used as collateral post-1971, it simply became money that paid interest. We can see that at such high-interest rates, the national debt exploded between 1981 and 1985.
Because of the high-interest rates, despite the increase in the supply of dollars, the demand for the dollar rose so high it created massive deflation for the dollar also rose in value forcing the British pound to fall from $2.40 to $1,03 by 1985. Suddenly, deflation was being created by the high-interest rates which attracted massive capital inflows.
By 1985, the dollar had risen to such heights that they formed the G5 at the Plaza Accord in New York. Here we had the national debt virtually doubled by $1 trillion, money supply rose by 400% and yet we called this period the age of deflation! According to our old definition of inflation being caused by a rise in the supply of money, the period of 1980 to 1985 should have been one of the most inflationary periods of this entire century. How could deflation emerge when economic theory suggests that inflation should have taken place?
The answer to this riddle is quite simple. The value of the dollar rose by some 40% during this period offsetting any inflationary pressures that would have otherwise been set free. As the dollar increased in value on world foreign exchange markets, currencies like the British pound crashed falling from $2.40 to $1.03. The yen, Dmark and even the mighty Swiss franc wilted under the pressure of the rising dollar. Therefore, the pressure within the system which would have otherwise been transferred into rising prices resulted in the rise in the value of the dollar instead. People could not understand how the debt and money supply would explode yet the value of the currency rose and deflation expanded. All the concepts of inflation under the Quantity Theory of Money were proven dead wrong - so the majority just put it out of their mind.
It took the new floating exchange rate era to reveal inflation, but even then it was just ignored. Inflation was truly exposed in its raw form from ancient times. It was largely 3 dimensional. Inflation can arise from labor demands, raw material shortages, and overall changes in both the SUPPLY, the value of the CURRENCY, and the DEMAND of consumers. Nevertheless, inflation fails to conform to anyone single definition of cause preferring to remain a multi-headed dragon capable of lunging forward with any single head or a combination attack of two or more simultaneously.
WAGE-PRICE SPIRALThe 1960s was a period known as the Wage-Price spiral. It was a period during which a legitimate scarcity in skilled labor resulted in escalating wages. That period produced the highest gains in the American standard of living, which, to this day, have not been exceeded. This period of the 1960s was called the Wage-Price spiral because wages moved higher first forcing prices to follow in a lagging relationship. As wages drove the cost of production higher, those costs eventually passed through the system causing consumer prices to rise. It was perhaps this first cycle in wage increases that set the tone for what was to come later during the 1970s.
PRICE-WAGE SPIRALThe 1970s was a period that became known as the Price-Wage spiral. Spearheaded by oil price increases by OPEC and shortages in agricultural commodities due to drought, prices in most sectors began to increase first leaving labor in a lagging battle to maintain parity. As a result, labor fought for CPI increases during the 1970s in an effort to keep up with rapidly rising price inflation, which in turn prompted the Federal Reserve to over-react. The sharply rising prices due to OPEC and natural events in weather could not be overcome through artificial intervention. Nevertheless, the Fed raised the discount rate to 17% in its battle with the Price-Wage spiral setting the stage for phase three.
AGE OF DEFLATIONThe over-reaction of the Federal Reserve to the inflationary cycle of the 1970s created a nightmare that would forever change the course of American life. The excessively high interest rates caused interest expenditures of the government to also rise substantially. During the Reagan administration, the national debt doubled despite the fact that revenue and spending were actually balanced. The doubling of the national debt by $1 trillion was caused not by Reaganomics, but by the fact that interest rates rose so high that the interest expenditures during Reagan's term amounted to $1 trillion alone. This massive expansion in the national debt sucked capital from the private sector causing a deflationary impact for the economy while the government sector expenses exploded.
THE AGE OF CURRENCY INFLATIONFollowing the Plaza Accord of September 1985 and the birth of the first G5 (Group of 5 nations), a new dawn of currency inflation was born. European fears that the US debt expansion had been so massive as to threaten default, caused vast capital flows shifts internationally. The Eurodollar deposited dropped by 50% between 1980 and 1985 as Europeans scrambled to move their dollar deposits to domestic US dollar deposits. The more bearish the Europeans became of the fate of the dollar, the greater the shift of deposits from Europe to the United States. The net effect of this massive capital injection into the US economy drove the money supply up significantly as well as the value of the dollar thus forcing deflation in US dollar-denominated assets domestically.
This massive rise in the dollar made US exports very uncompetitive and forced American labor costs to record highs from an international perspective. The G5 attempted to intervene by forcing the value of the dollar down on world markets. This trend had a negative impact on foreign investors within the United States which ultimately led to the 1987 Crash.
Japanese investors were enticed by the significantly lower dollar to buy US assets, namely real estate. With the dollar down by 40%, the Japanese perspective of US real estate was something like a one-day fire sale. Real estate prices began to soar due to substantial foreign buyers based solely on currency. The inflationary spiral that emerged had been prompted not by shortages in labor or raw materials, but by a sharp and sudden decline in the value of the US dollar.
The same trend emerged in Britain following the sharp decline in the value of the pound to $1.03 in 1985. Scores of American investors swamped the real estate markets of London driving prices through all-time record highs with the typical over-reaction by the Bank of England who plunged the nation into a deep recession with excessively high interest rates.
Inflation, therefore, is far from our dimensional definition of money supply and prices. Inflation has several faces and has struck in different forms from one decade to the next. This is why the simplistic definition used by central banks and even the goldbugs simply fails to understand the true trend. |
