Equity futures are higher after yesterday’s pre-close tumble. The dollar, lower all night, has jumped into the higher category this morning as the Yen continues to fall in value – it would seem that the intervention into the Yen is working for now, although I note that currency intervention is almost always undone in the end. Bonds are lower, oil is lower again, and so are most other commodities including gold, silver, and most food commodities. It would seem that the multiple “Fed” officials publically downplaying QE for now is working to dampen the hot money flow… again, for now.
I keep receiving questions about inflation and deflation regarding the actions of the “Fed” and how much control they actually possess to affect inflation. There are those who think that the “Fed” cannot induce inflation that is sustainable, and there are those who believe that we’re experiencing “stagflation” – that is a stagnant economy coupled with rising prices. Here’s what I think…
The inflation/ deflation debate is very muddled and confused because most people don’t understand what is “money.” In fact, we don’t really have money in the United States, we pass around loans from the private banks – these are called “notes,” just look at the top of any bill in your wallet. A loan, such as the notes in your wallet, come into being as someone’s liability, they are debt and they carry interest payable to the private banks who create them. But a funny thing happened to this terrific (if you’re a central banker) debt money system – debt saturation occurred where there were no longer anymore qualified patsies to assume even more debts… the people were saturated, local governments were saturated, and now our national level government is saturated – the whole world is saturated with more debt than income can service. Thus their required never-ending growth ended.
What’s a central banker, whose bonuses are in trouble, to do? Lower interest rates, remove fractional lending limits, and then lower them again and again. But then the whole world becomes saturated even at zero. So then, with only one tool left, the central banks simply begin printing under the guise of “Quantitative Easing.”
Up until QE began, overall the debt saturation of CREDIT money was creating powerful deflationary forces. But QE is a process that adds money that is not credit into the system… thus temporarily holding the deflation at bay. Yes, Bernanke is correct that a motivated enough central banker can always create inflation – in this case it took unbelievable quantities of printing to do it, and not just QE either, the issue is confused with the use and creation of other types of leverage, especially the use of derivatives that function as if they are “money” allowing the creators to assume positions greater than the actual money they possess.
Let’s say that a business has inventory and they sell their inventory only to cash customers. One day they decide that they might spur more sales if they extend credit to customers, and so allow customers to take their inventory on credit. Guess what, that business just created credit dollars! They are not a bank, but their act of lending out inventory for later payment is just one form of credit creation.
Derivatives allow people and corporations to assume positions against both tangible and non-tangible things – they work to expand and to amplify the underlying thing that is being derived. In effect, derivatives work like another form of money so that now we must consider Real Money (of which there is little), Credit Money (of which there is a ton and we are all saturated), and Derivative Money (of which there are ten tons, which is largely unregulated and untracked being created by anyone and everyone).
So, to get a true handle on inflation and deflation, we must be able to know how much total money is in the system – real money + credit money + derivative money. This is not knowable under today’s system because we let derivative money get completely out of control. And then it is vastly complicated because our borders with regard to the flow of all three is open and other agents around the globe also create derivative and credit money and it mixes and flows.
Both credit and derivatives are TEMPORARY instruments! Real money is not temporary!
It is credit money and derivative money that set the foundation for DEFLATION... but not until saturation occurs! Prior to credit and derivative money saturation, the addition of credit and/ or derivatives is inflationary.
Let’s look back in time. During the “roaring twenties” we were on a supposed gold standard, but the “Fed” had been created and thus credit money was flying fast and loose, created by the private banks who had stolen the money creation powers from the people. Stocks were massively purchased on “Margin” which is either a form of credit, or a form of derivative, take your pick – but the net result was that debt saturation was reached. At that time there was a mix of real money, credit money, and margin. Prior to saturation there was temporary inflation, which after saturation was followed by deflation – and the “Fed” at the time was not willing to do what was necessary to keep inflation going.
Since that time, real money was methodically replaced with credit money. When credit saturation began to reoccur, derivatives came on the scene and kept the overall expansion of the three types of money going. Prices rose and inflation was very prevalent over the past few decades, picking up more and more steam. Then bubbles began to form – a big one in technology stocks burst in the year 2000. Okay, lower interest rates to let more credit money in, and loosen up the laws to let more and more derivative money in. “Growth” occurred pushing home prices and stocks into a bubble until the FASB finally demanded that the banks mark their “assets” to a current market price. And just like that, those bubbles burst.
Then the banks used their money creation powers to blackmail the public and the FASB to get mark-to-fantasy accounting reinstated and to get all regulators off their backs. Total capture had then occurred, but saturation was not, and is not cured as the banks have subverted the rule of law which demands that insolvent companies go through the bankruptcy process. They have not, and thus the over credit saturation condition remains.
In comes a concerted Bernanke who is bent on creating enough QE (which is real money by the way – and is permanent, unlike credit money) and he prints and prints to unbelievable quantities, most of which is used to replace BONDS which is his attempt to buy down interest rates to keep the debt saturated condition and insolvency from showing.
But all that money being added doesn’t go just to pay down debt – oh no, our debts (credit money) are still growing, especially at the Federal level. It takes the load off the bankers and allows them to throw hot money around all over the place. They buy up all the strategic businesses they can – they own the media, the military industrial complex, the stock and commodity exchanges, they own and invest via High Frequency Trading Machines and thus basically fix the price of anything and everything.
Again, the world’s central bankers are all now doing the same, and thus knowing the overall money in the system is not just difficult, I would contend that it is impossible.
The issue of inflation/ deflation is also now confused with very bad data. Price data simply does not match up with reality, and the disconnect is getting larger over time. This is due, I believe, to the fact that the overall quantity of the three types of “money” is growing on an exponential slope, and thus efforts to mask the true effects on price also must get more severe.
So, for me there are very powerful deflationary forces underlying credit money and derivative money, but the “Fed” is replacing that money with real money via QE and various other methods both known, and I believe unknown.
I believe that without being able to correctly measure the true quantity of money that it is impossible to maintain equilibrium on the part of the “Fed.” They are blindly guessing and there are time lag effects that complicate the balancing act they are attempting. I therefore think that we see waves of deflation and inflation as they induce oscillations back and forth, but that the overall trajectory is inflation – that is their desire.
Inflation = impossible math. It simply is not possible to have a stable environment with never ending rising prices. For that to occur, the quantity of all monies must rise and rise and rise until the quantity of money is so great that it simply holds no value. The growth is not linear, it is exponential and we are on a rapidly rising slope of exponential money growth. That means that it is not stagflation, for the REAL economy is not stagnant, it is dying on the debt saturated vine. And while there are waves of deflation, the overall trajectory is inflationary. The end game is that our money is worthless and must be replaced.
Once we can wrap our minds around the inevitable, then maybe we can look at trying to create a better way forward for the next time. To accomplish that, we must understand what “money” is; we must understand that what backs money is not nearly as important as WHO controls its production; we must understand that “money” is a human construct – there is no natural automatic correcting device, that is bunk, but there are limits to growth that nature will impose.
Competition in money is not a good thing, nor is it a panacea – we have real world examples throughout history and it simply doesn’t work either. It enriches those WHO create their currency, but the competition inevitably breaks down into a money creation race to the bottom – as is occurring now world-wide.
Yes, it is possible for man to create a stable money system! In my opinion, it must be a common currency – and it should be backed by the only thing that truly matters – the productive efforts of humans and a legitimate rule of law. We must be able to correctly monitor the total quantity of money, and we must use that knowledge to target exactly ZERO percent overall price inflation – the only mathematically sustainable target there is over time. This does NOT mean that all credit money must go away – fractional reserve banking is NOT the cause of the world’s problems! Letting fractional reserve banking run amok is the problem – and thus there has to be a separation of special interests and politics. There is absolutely NO REASON for a nation to have a national debt – not when the money system works to the benefit of the people at large, instead of just a few specially self-privileged individuals. It is possible to have free markets and yet keep the quantity of money under control. Competition can and does work, but like any man-made game there must be rules and the rules of the game must be enforced.
We’ll discuss today’s economic data, including the Case-Shiller Home Price Index and Consumer Confidence inside of today’s daily thread.
Meanwhile, events in Japan continue to worsen. Plutonium has been found outside of the plant. The media, corporations, and politicians in Japan, however, are downplaying the risks still. They are also manipulating the information presented in the media – for example, articles on the working condition of those trying to salvage the reactors has been shaved down to nearly nothing (Case of Disappearing Articles). A dead man was found face up in a parking lot 5 miles away from the reactor and was so radiated that his remains could not be handled – yet, it was “likely the tsunami that killed him.” Riiiggghhhht – because water always makes people glow in the dark.
They are still making like maybe the reactors have been breached and maybe they haven’t… Riiiigggghhhht, like all that radiation is just spontaneously created. “Just imagine if there were holes,” LOL, it would be outright funny if the incompetence wasn’t so serious. Oh, and maybe it wasn’t so great pouring water all over everything as now the radiation is going everywhere the water goes – duh.
Tokyo power should be removed from the premises and replaced with outside experts who have the freedom to make decisions on behalf of humanity, not on behalf of a piece of paper called a corporation. A knowledgeable outside person should be appointed to act as a public spokesperson in order to keep the public informed.
The U.S. absolutely needs to be reviewing and bring our own reactors up to date – but all of this starts with the separation of special interests and government. There simply can be no meaningful regulation when special interests are allowed to finance campaigns and to appoint insiders into political and other government positions. The ROOT of all these problems is the same! Once you allow private individuals to control the production of your money, then they use that money to subvert the rule of law and any checks and balances that may have existed. The rule of law cannot and will not be reinstated until we change out WHO it is that controls the production of money.