gogle poll 41 to 50

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#41 google poll

http://www.worthyopinions.com/54-downtime-false-prophet-of-false-profits/

Downtime: False Prophet of False Profits
Tuesday, February 10, 2009 (2:48 am)

Sometimes you have to take off the gloves in order to knock the empty air out of someone. In his February 6th column, National Review Online’s Economics Editor, Larry Kudlow, pointed out that stocks were trading high that Friday, in spite of a massive plunge in jobs. As one of the gurus of the old economy, Larry explained this disconnect: “The stock market is telling us the economy’s future is a lot brighter than its past. The stock market looks ahead; the employment report looks behind.”

Whatever hallucinogen Larry’s taking must be only available to those who bathe in Perrier because I’ve never found any drug that can make me as delirious as Larry is over the predictive wisdom of the stock market. National economies all over the world just reported their worst contraction in decades, but Larry thinks the second-coming of the economy is here because the stock market went up on Friday. This is what happens when false prophets run up against the reality that the religion they preached has failed. The false prophets of religion look for different scriptures to adjust their dates. The false prophets of false profit look toward any indicator that provides the news they want to hear.

READING PORK BELLIES

The stock market’s incongruity with the job market is best explained, according to Larry, because “mustard seeds planted awhile back are now pointing toward recovery. The huge energy tax cut is one such mustard seed. The related inflation collapse is another.... With zero inflation, that’s a real increase in worker purchasing power.”

You might as well state, Larry, that the thing that profits geese is that elephants don’t eat them. While Larry trips into euphoria over the silver that still lines a darkening purse, he should perhaps preach his dogma to employees at Woolworths in the U.K. Woolworths just locked the doors on the last of its 807 brick-and-mortar stores, ending a hundred-year retail history. The weak go first, so the loss of those jobs and similar jobs among so many other retailers around the world is a shudder the economy hasn’t even felt yet. Tell those newly unemployed that the good news is their purchasing power has increased due to lack of inflation. I’m sure they’ll run right out and buy a drink with the power of their zero paycheck. I don’t think they’ll be raising cheers to the stock market’s wisdom, however; but expect inflation on the price of Guinness in the U.K. as consumption grows faster than yeast. I’d say, go long on beer stock.

Obviously, denial reigns supreme. Who cares that the stock market is in the same drug-induced euphoria as Larry? Since when has it been the oracle of wisdom? If it had been, it would have bet against this economy before the housing collapse. After all, it looks ahead — remember? In its superior wisdom, the stock market has done nothing but lurch downhill after the banks like Jill after Jack. Nevertheless, Wall Street is a religion for some, and people like Kudlow are still believers in its divine wisdom.

OUR FAITH-BASED MONETARY SYSTEM

Larry was also thrilled because “the Federal Reserve has been pumping in money to offset credit and asset deflation.” Credit and asset deflation is exactly the thing that needs to happen, Larry, to a false economy built on nothing but skyward debt. He’s right, of course, that the Fed has been creating lots of money — it’s self-administered narcotic of choice. In just the last few months, the Fed has mainlined $300 billion into the U.S. money supply, meaning it has injected $300,000,000,000 (it helps to see the zeros) more into banks than it has received from the Treasury in revenue. In fact, this figure doesn’t come close to telling the whole story. The Fed stopped publishing its M3 measure of money supply because it tells a horror story. M3 was a count that included money that is tied up in long-term institutional deposits. Those long-term institutional deposits that are not included in the current money count are the kinds banks use to hold their money. That, of course, is where all new money is being hoarded right now. So, inflation is not being felt because most of the new money is not even included in the count and is not flowing through the system ... yet.

Most money is not currency. It exists on balance sheets and is as vapid as numbers, but the presses do tend do have to catch up later as the money flows to consumers in the form of credit, and some eventually converts to currency. When the Federal Reserve moves money to the balance sheets of its member banks, the U.S. Treasury usually issues bonds for the same amount as the source of that money, which creates a liability against the supply. That balances the equation. Right now, the Fed is just manufacturing money out of thin air. It’s doing this because it wants to create inflationary forces to prevent further deflation of prices in the housing market. Yet, if prices do not deflate on homes, the only way people can buy them will be to continue to take out far more credit than they can afford, meaning credit must stay deregulated so that it can remain ridiculously perilous.

Larry, however, is excited that we’ve had no inflation because the Fed is doing all it can to create new money to avoid deflation; but, if printing money could save a failing economy, Zimbabwe would be a superpower. Currency in Zimbabwe reached such disastrous overprinting last month that one church received a check for 6,000,000,000,000 Zimbabwe dollars and did not even bother to cash it.

Larry points out that there is generally a lag between the increase in money supply and the actual loaning out of that money — a float of six to twelve months. “Through January,” he states, “we’ve had five months of money stimulus [creating money out of thin air]. So stocks may now be telling us that the gloom and doom crowd [like David Haggith] — and its pessimistic economic prognostications that cover all of 2009 and in some cases 2010 — is about to be proven wrong.”

Larry, Larry, Larry. The market does not tell us anything. The market IS us, all of acting in our own various crazy ways, including the doom-and-gloomers like myself. How the false prophets like to tickle our ears with good news. Larry believes that when banks start giving out loans on freer terms, people will start putting that money into circulation, but he misses the obvious: this same lag he speaks of is exactly why we have not yet seen inflation due to all the new money. It’s still choked at the top. So, if the money does go into circulation quickly, inflation will come quickly. There’s another possibility, though, which I think more likely: banks may start offering loans now that they’re floating on air, but few may be interested in buying. How many jobless consumers want to take on more debt? As for retail picking up so those jobs come back, it’s a long time till Christmas, Larry. Loans will mostly be limited to refinancing, not building new homes; so, they won’t have much stimulus effect.

If I were investing in manufacturing right now, it would be in the manufacturing of printing presses — the kind used by the U.S. mint — because those presses have a lot of catching up to do once that money enters circulation. That, or buy yeast because the unemployed may soon be buying a lot of beer at $300 a pint. Money supply right now is growing at about the same rate as yeast anyway, so yeast growth is probably a better indicator of where the present economy is going than Larry’s mustard seeds.

THE HALLELUJAH CHORUS

In his prophetic ecstasy, this false prophet of the old economy backs himself up with one of the now-renowned Wizards of Wall Street: “Meanwhile, Bank of America CEO Ken Lewis told CNBC on Friday that he can get out from under TARP in three years. There will be no nationalization!”

I had to put the exclamation point on there for you, Larry. I can just hear you saying, “Whoopeee!” Is this the same Ken Lewis who a very short time ago bought Merrill Lynch for lunch and then said he never saw the financial problems Merrill really had? Is this the same beggar who ran to the government with his hand out for another $20,000,000,000 to buy himself a pair of glasses? Is it the same Ken Lewis whose share prices fell over 80% from the time he first announced the acquisition or Merrill Lynch?

I guess it is because Larry adds, “Lewis also said his firm’s acquisition of Merrill Lynch will be successfully executed over time.” Well, hallelujah, Larry! I thought that was what Lewis said the first time. I suppose, with yet another ten to twenty billion in free government money printed from air, it might someday become true. You know the pundits of profits are hurting when they call in the rodeo clowns to prove their point.

“It’s no surprise,” Larry says, “that bank stocks were the leaders in Friday’s huge rally.” At last we agree, Larry. With the government printing so much free money to stuff in the bank coffers, it’s no surprise some people want to invest in the racket. But it won’t save the economy.

Larry believes the growth in money supply will be the dark horse that comes through and saves the economy within the next few months. I think Larry must have received his economic education from the University of Zimbabwe. It may well be that money growth will produce the biggest economic surprise of the year, as Larry says, but it won’t be the surprise Larry is hoping for. So, get out your stein.

At last, in true form, Larry believes the real stimulus will come from the lack of tax increases, as the stimulus package maintains previous tax decreases. Larry, if those tax decreases could save the economy, they would have done so last year when they came into being. They made no difference at all because they do not change the fact that the economy built on endless debt has failed. Keep dreaming, Larry. I think you’ve fallen asleep, counting golden parachutes.

# 42 of google poll

http://www.ripoffreport.com/Bank-Of-America/Banks/Bank-Of-America-Fraudulant-Ove-A8M8C.htm

Report: Bank Of America

Category: Banks
Bank Of America Fraudulant Overdraft Fees!! RIP OFF Dallas Texas
*Consumer Suggestion:... A duplicate transaction is covered by Reg E

Are you an owner, employee or ex-employee with either negative or positive information about the company or individual, or can you provide “insider information” on this company?
Victim of this person/company?

Are you also a victim of the same company or individual? Want Justice? File a Rip-off Report, help other consumers to be educated and don’t let them get away with it!
Print Email
Bank Of America
Phone:
Fax:
bankofamerica.com
Dallas, Texas
U.S.A.

Submitted: Tuesday, May 26, 2009
Modified: Wednesday, May 27, 2009
Reported By
Houston, Texas

Ripoff Report Verified Safe
I’ve been banking with Bank Of America for 10 years. Since they accepted the bail out money I’ve gone to Bank Of Texas but still use Bank Of America as a spending account and have my merchant services deposits go in there. I keep a typically low balance, about $500 and transfer more money when needed.

Anyway, I woke up to 6 $25 fees but I had not overdrafted. My account fell to $65 and then I transferred another $500. After arguing with the CSR for about an hour we broke down every single transaction and they had to admit they were wrong. What happened was a merchant (over a week ago) authorized my card twice, once for products without shipping and once for products with shipping but the authorization fell off the next day. But they deducted this authorization from my balance and hit me with fees 7 days later when I would have overdrafted had the transaction actually been paid. (I know, it’s complicated, but it’s highly fraudulent).

After they corrected the six over draft fees of $25 each I wake up the next day and find TEN overdraft fees of $35 each! The first set of overdraft fees caused me to overdraft FOUR more times, which is true but why TEN charges? Nobody seems to know! After another hour on the phone this was taken care of.

So I cynically wrote the bank an e-mail asking for $500 worth of credits towards my account for wasting my time. I made the point that if I had overdrafted by mistake I would not be able to deposit the difference and say “I’m sorry” I would have to pay $500 worth of fees!!!

They wrote me back with “We’ve researched this account and found that you overdrafted blah blah blah”. I wrote back with “apparently you didn’t research this account because xxx and yyy”. They wrote back again with “Oh. You’re right. Sorry”.

It just drives me so mad! First, they use a fraudulent fractional reserve system and create money out of thin air! The Federal Reserve is about as Federal as Federal Express and then they have the nerve to assess fraudulant fees on the public!

Let me tell you how money is created. No,it’s not backed by gold, it hasn’t been in DECADES!

The United States Government decides they need $10 million dollars. So they print up some fancy looking treasury bonds. Then they call up the Federal Reserve (who is a private corporation) and they print up some more fancy pieces of paper and give it to the US government. That’s it! 10 million was just created!

Oh but it gets far worse than this. The new created money has to have value and since the only thing regulating the value of money is how much is in circulation 10 million dollars has stolen value from the money you have in savings causing inflation! Now imagine 700 Billion being created out of thin air and given BACK to the bankers! And you wonder why gas is $2/gallon when a barrel of oil is going for $35 (it should be $.75 at the pump!)

It gets worse! The fractional reserve system requires banks to only have 10% of their reserves in holding. This means they can loan out 90% of their reserve. So what happens to the $70 Billion of bail out money? It goes into bank accounts. Not $70 billion has because 7 TRILLION!!! Thus causing MORE inflation!

And if you really want to realize how you’re getting screwed let’s factor in INTEREST! The US government doesn’t just give the bonds to the Federal Reserve but the bonds are promissory notes that the US government will pay back the Federal Reserve with INTEREST! But if the Federal Reserve made the first dollar where does the money to pay back the interest come from? You got it! Print more money and borrow more money from the Federal Reserve! Causing a never ending cycle of inflation!

Inflation is a tax on the people. Look at cars for a minute. In the 80’s a new car cost an average of $7000. Now it’s an average of $20,000. Did things get more expensive? No! The value of the dollar has been chopped down to a third while wages have not even doubled! So you save a million dollars to retire on. When you retire that million dollars will have the buying power of $250,000 if your lucky!

And to top it all off.. they hit us with overdraft fees! We need to hit THEM with overdraft fees for bankrupting this economy and creating money out of thin air!

And if you really want to hear the truth watch two movies on google video.

America: From Freedom To Fascism
The Obama Deception

And speaking of Obama, lets take a look at the stimulus package for a moment. WE’ve already established the Federal Reserve printed 700 billion for the bail out right? OK. Well, we authorized the bail out money to be printed and we (the people) took responsibility for the debt, the interest and inflation. Then Obama writes a 700 billion dollar stimulus package. So what does the Fed do? They loan the US 700 billion dollars at INTEREST! AAAAAHHHHH! They’re not even using Vaseline!

Chris
Houston, Texas
U.S.A.

#43 of google poll

http://www.thetrumpet.com/?q=4582.2844.0.0

Central Banks Turn On the Printing Presses
December 19, 2007 | From theTrumpet.com
When central banks offer “unlimited” below-market credit, somebody is scared; but the cure may be worse than the ailment.

The European Central Bank (ecb) has opened an unlimited credit window to financial institutions for two weeks to help repair damage from the credit crisis, the bank announced Tuesday. Additionally, the ecb said it had made a record $501.5 billion ready to be loaned to banks affected by the crisis.

“Unlimited” is an awful lot of money.

According to Financial Sense columnist Jas Jain, central banks have essentially promised to “rain money” on the financial sector. $501.5 billion, for example, is enough to purchase JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc.—three of America’s biggest financial institutions—lock, stock and barrel, and still have multiple billions in change left over.

According to Stratfor, the ecb’s December 18 “blank check” was intended to send the message “Do not worry—if you need more money to lend, we will lend it to you on the cheap.” Stratfor also said it was an attempt to battle corporate perception that the credit crisis would continue to worsen.

However, the ecb’s blank check sent one other message. Banking authorities are running scared that the economy may be headed for much worse. How much worse? Worse enough that the ecb is willing to do just about anything—including creating “unlimited” money out of thin air—to prevent a deflationary recession.

Modern Western economies, especially the United States, depend on high levels of consumer spending. But over the past few years, the consumer has only been able to increase spending by increasing borrowing—from the financial institutions. However, because the housing market is collapsing, banks are having to raise reserves to cover losses and are no longer as willing to lend.

Thus, central banks are afraid that consumer spending, which accounts for 72 percent of gross domestic product in the U.S., may be about to fall off a cliff and take the economy with it. Hence the cure: Create “unlimited” amounts of money to lend to the financial institutions, so that they will begin lending to each other and to consumers again.

The ecb isn’t alone. On December 12, the U.S. Federal Reserve, in conjunction with the Bank of Canada, the Bank of England, the Swiss National Bank and also the European Central Bank, announced new efforts to inject billions into the banking sector via “blind” loan auctions.

In the Federal Reserve’s case, it will give the auctioned money to un-named banks in an attempt to protect the borrower’s identity. The Federal Reserve is afraid that if it was made public which banks were coming to it for loans, it could damage the reputation of the banks involved.

Such widespread central bank action indicates the credit crisis may be deteriorating. Whether these latest moves temporarily fix the system remains to be seen.

But perhaps the biggest problem with the central bank plan is that the fix may create other unwanted problems.

“Unlimited” easy money was the reason so many unqualified borrowers were able to get loans in the first place. Now that loan delinquencies are skyrocketing and lenders are racking up losses—what is the central banks’ solution? Print up some more easy money and throw it into the fire.

Although creating money out of thin air may postpone a recession, it will not cure the fundamental economic problems causing the recession.

Printing money is comparable to how doctors use radiation therapy to treat cancer. In small doses, radiation will kill cancer cells. But radiation is also a poison. Each time it is used, it causes a whole host of other problems. Depending on the dosage and treatment, it can destroy your immune system and affect your blood. Worst of all, it destroys healthy cells too. Similarly, easy money also destroys the healthy aspects of the economy—aspects like the dollar’s value and its reputation as a store of wealth, not to mention people’s savings. •

#44 of the google poll

Bank Of England wants to print more money

http://www.infiniteunknown.net/2009/02/18/bank-of-england-wants-to-print-more-money/

Britain’s AAA credit rating threatened by scale of bank bail-out Failed HBOS chief will pocket £572k pension
Bank of England wants to print more money
Posted On Feb 18 Economy, Politics Add comments

Quantitative easing = Increasing the money supply (by creating money out of thin air) = Inflation = Stealing

Inflation is a hidden tax:

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
- John Maynard Keynes

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. ... This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”
- Alan Greenspan

“I care not what puppet is placed on the throne of England to rule the Empire, ... The man that controls Britain’s money supply controls the British Empire. And I control the money supply.”
- Baron Nathan Mayer Rothschild

“Give me control of a nation’s money and I care not who makes the laws.”
- Mayer Amschel Rothschild

Watch the pound: Jim Rogers: ‘Sell any sterling you might have; It’s finished’

Bank of England seeks power to inject more money into economy to fight recession

The Bank of England’s Monetary Policy Committee has voted unanimously to seek Goverment permission to increase the amount of money in the economy as interest rate cuts lose their power to fight recession.

The 9-0 vote by the MPC was revealed in the minutes of the meeting held on February 5. The Bank’s Governor Mervyn King will now write to Alistair Darling, the Chancellor, to ask for approval to introduce measures aimed at raising the supply of money in the economy – known as quantitative easing.

The Bank hopes that by increasing the quantity of money in the economy it can encourage banks to increase lending and consumers to start spending.

“The lack of supply credit is the biggest problem facing the UK economy and increasing the supply of central bank money via purchases of government securities should help to loosen these restrictions,” said Andrew Goodwin, Senior Economic Adviser to the Ernst & Young Item Club.

At the meeting, the MPC voted 8-1 to cut the main lending rate by half a point to 1pc, the lowest since the Bank was founded in 1694. David Blanchflower, who has long argued the UK faces a deep recession, wanted a full point cut.

However, other members feared that cutting rates further would stop banks and building societies lending with “potentially adverse consequences for the rest of the economy”.

Lenders keep a spread between their deposits and lending rates to cover costs and to make a return. The minutes said: “Once those deposit rates were at zero ... banks might decide not to pass on cuts ... in order to mitigate the impact on their profitability.”

Ross Walker, UK economist at RBS, said: “The news is the unanimous approval for moving to quantitative easing and seeking the Chancellor’s approval.” He said while not quite ruling out further cuts, the minutes suggested any further action will be more modest.

Vickey Redwood, UK economist at Capital Economics, said: “The minutes of February’s MPC meeting reinforce the message from last week’s Inflation Report that a significant further policy easing is required and that quantitative easing is imminent.”

The MPC said it was likely that it would want to consider a range of asset purchases in due course and George Buckley, chief UK economist at Deutsche Bank, said he expected to measures to be in place by the March meeting.

By Telegraph Staff
Last Updated: 2:28PM GMT 18 Feb 2009

Source: The Telegraph

#45 of google poll

Bailout becomes a buy-in?

http://www.stormfront.org/forum/archive/index.php/t-530572.html

Mensch 2.0
10-11-2008, 01:21 AM
I saw Henry Paulson on TV today attempting to explain the change of course regarding the bailout. Honestly, this guy is nothing like the financial genius I expected. In fact, he doesn’t even appear to have an 8th grade command of the English language. From pundits who “translated” for him, we are now evidently going to buy into failing banks rather than purchase their bad paper. This way the US government will actually own shares (nobody said how much) of these banks so presumably we can watch them, prevent them from their parasitic ways, and eventually make a couple bucks if everything works out.

What???????

Why doesn’t someone tell Paulson that with 850 billion dollars, you don’t need these banks anymore. Let them all fail. Then, with the 850 billion, start your own banks. Start with direct government involvement, making the Fed. Reserve’s funds directly available to first time home buyers at prime---no middle men.

OK, I know why this is not being done. If this was done, all the bank’s shareholders would get zip, nichts, nothing. These are the real people for whom the bailout is designed and the only people who are to benefit. Why is Paulson so stupid that he doesn’t think we can figure this out, even with all his bad diction?

If the US government is going to nationalize our banks, why not really nationalize them with the interests of the American people being the only goal? We certainly have the money. All we have to do is take the blinders off.
Asdic
10-25-2008, 04:06 AM
The problem that caused this collapse on the money market is the fact that governments allow banks the fractional reserve system.They only have to keep 8% of the money from the saving people, the other 92% they can lend out freely. Alot banks even have politicians sitting in their top. So the reason is NOT a lack of control. Of course not. ‘Control’ means checking if they doing something not allowed. Therefore, asking for more control on the banks is the same as asking thieves to check the locks. The US governments should simply let companies that fail to do the job, they are payed for properly, go bankrupt. Then those companies will disappear from the market to make room for new companies that do their job properly. And that would also include the government itself, the biggest money waster of all. So, I agree on this: Why doesn’t someone tell Paulson that with 850 billion dollars, you don’t need these banks anymore. Let them all fail. Then, with the 850 billion, start your own banks. But not with this: Start with direct government involvement, making the Fed. Reserve’s funds directly available to first time home buyers at prime---no middle men. Let the people chose themselves the companies they want to preserve their set-aside money and make it illegal for those to lend it out if not explicitly allowed by its owners. Governments are the only companies that can steal future-earned money from the people, by creating money out of thin-air and hence cause monetary inflation, which is thus a hidden tax. So no, please not more government involvement, at least if the people they rule over have no direct and specific means to undo their decisions, and even if that is the case, keep in mind that massively spending money other labored for, in the end kills labor and causes global collapse. Look at a recent example in history: Zimbabwe, where its president Mugabe confisquated the properties of the ‘rich whites’. But those ‘rich whites’ where the very base of the countries’ economy and the end result is such a disaster that the situation nowadays, merely some years later, looks like a massive bombardement pulverized all economic structures. Mugabe’s government also started to create money out of thin-air, and the resulted hyperinflation spiral is unseen in history. The thing that a chicken produces everyday costs trillions of Zimbabwian dollars. This inflation completely wrecked the economy that once was the most powerful of the whole region. So be cautious when involving things like ‘government’ in anything.
Dylan
03-20-2009, 10:06 AM
The Jews put Woodrow Wilson in as their stooge in 1913 and got their Federal Reserve Act and the Income tax (16 amendment), then withdrew credit in 1929 to create the depression, then killed Kennedy in 1963 after he issued U. S Notes that would have eventually destroyed Federal Reserve Notes. Banks are run by Jews worldwide, the take over of banks by bailout, as Mensch has suggested, is to relieve “goyim” of their stock in banks and consolidate their hold.

Then, the banks, the currency (Federal Reserve Notes), the insurance companies and the government are one with the International Jews. A brilliant move on their part. The Federal Reserve Note is slated for collapse, it will be replaced by the “Amero” a currency of Canada, U.S., and Mexico. Unbridled Mexican immigration is a necessary element of the merger. An absolute monumental coup. This will eliminate the wealth of the remaining “goyim” who have cash saved for emergencies as it will then be worth nothing. Will WN’s realize this in time and move to a barter or reinstate “junk silver” i.e., pre- 1964 silver coin? Or will their devastation be complete.

Dylan
vBulletin® v3.8.3, Copyright ©2000-2009, Jelsoft Enterprises Ltd.

#46 of Google poll

http://bbs.chinadaily.com.cn/viewthread.php?action=printable&tid=631050

Subject: The Great American Spectacle
Author: peterb Time: 2009-3-28 05:05 PM Subject: The Great American Spectacle

The Great American Spectacle
Robert Morley ̈

The Trumpet.com March 24, 2009

We are living through history in the making. Not the good kind of history. More like Nero-fiddling-while-Rome-burned history.

The kind of history we are seeing now is an empire in terminal and rapid decline. As the greatest single nation in history disintegrates, like Rome and hundreds of other empires before it, the public spectacles and orchestrated circuses for the masses keep getting bigger.

Public spectacle number one: Lies, lots of them.

We'll see the recession coming to an end probably this year, predicted Federal Reserve Chairman Ben Bernanke on March 14. The recovery will begin in 2010 and it will pick up steam over time, he said.

President Obama confidently added, “We will rebuild, we will recover, and the United States of America will emerge stronger than before.¡±

But what else are they supposed to say?

That the Fed slashed interest rates to less than 2 percent in 2002, knowing it would create a massive bubble, but doing it anyway to make politicians happy? That the resulting pop and debt deflation is sucking the economy into a black hole? That the Fed's proposed cure, the only one left in its arsenal -- fiat money creation will destroy the life savings of its responsible citizens, the people who tried to invest for their retirements?

Bloated government and unsustainable deficit spending has saddled the nation with gargantuan debts that will never be repaid. Social Security is a busted bank, robbed by politicians who spent the trust fund money. Medicare and Medicaid benefits will be slashed because politicians made unsustainable promises to buy votes. Taxes will probably be doubled¡athen tripled when foreign creditors cut America off. America soon won't be able to provide the level of services that Americans have come to look upon as constitutional rights.
Is that what you say?

That we are on our way to becoming a nation of beggars?

You won¡ ̄t hear these words come out of any public officials¡anot because they are not true, but because the truth would cause panic among a populace that has been wooed to sleep by the sweet lullabies of politicians.

Public spectacle number two: Outrage, and lots of it.

President Obama is outraged. Ben Bernanke is outraged. Treasury Secretary Timothy Geithner and Senate Committee on Banking, Housing and Urban Affairs Chairman Chris Dodd are both outraged. Congress is outraged. Journalists are outraged. The Baltimore Sun reports: A Financial Outrage The Washington Post: Outrage Over AIG. The Financial Times: Summers Outrage at AIG Bonuses.

A recent Gallup poll found that almost 60 percent of Americans said they were personally "outraged". America is outraged.

Yes, politicians have stirred up a hornet's nest of rage. But what is all the rage about?

Most recently, it is the fact that AIG is paying $165 million in bonuses to its employees -- after accepting taxpayer money to stay afloat because some of those employees got greedy and irresponsible.

A little outrage goes a long way in distracting from the lies, and from the bigger issues.

That $165 million is only 0.09 percent of the $180 billion in taxpayer money that politicians forked over. And AIG was contractually obligated to pay it. The government knew about the bonuses when it gave AIG its first bailout; it could have legally stopped them then. It had the chance again after the second bailout. And the third, and the fourth. Now, all of a sudden, comes outrage! And don¡ ̄t forget the multibillion-dollar bonuses over at Goldman Sachs, Morgan Stanley, Citigroup, Bank of America and other companies that have taken taxpayer money to stay afloat.

Flying beneath all the rage were three bombshell news items that should have ignited outrage, but were lost in the big media commotion over an amount of money equivalent to a rounding error in the recent pork-laden, self-interest spending fest also referred to as the federal budget.

Amid the hubbub, AIG conveniently disclosed where all the taxpayer money it had received disappeared to. Surprise, surprise: AIG turned out to be a front for funneling more taxpayer money into the big Wall Street and foreign banks in what essentially amounts to a second stealth backdoor bailout: $12.9 billion to Goldman Sachs, $11.9 billion and $4.9 billion to France's SocGen and BNP Paribas respectively, $11.????? Deutsche Bank, and $8.5 billion to Britain's Barclays. And so on. Why are U.S. taxpayers bailing out foreign banks?

Also lost in the tumult was the fact that the national debt hit a record $11 trillion last week. It only took 51⁄2 months for politicians to add $1 trillion to the debt -- the fastest jump in U.S. history. It took all of America's history until 1982 to run up the first trillion in debt. The next two trillions only took four years each. President Bush then added the most debt by a single president in the history of the nation: $4.9 trillion. If President Obama's projections are correct, he will run up as much debt in four years as President Bush did in eight.

The current federal budget projects that the debt will soar to $16.2 trillion -- 100 percent of gross domestic product -- by 2012. But it will probably be even higher, because as Bernanke indicated, the government is projecting the economy will be out of recession by next year.

The debt numbers are getting so huge that China recently demanded that America guarantee it will not renege on its debts. On Saturday, President Obama was forced to issue the statement: "Not just the Chinese government, but every investor, can have absolute confidence in the soundness of investments in the United States."

But perhaps the biggest news that got lost in the AIG-bailout noise was the fact that the Federal Reserve announced that it was beginning to monetize the debt. This is huge, gigantic, almost-impossible-to-overstate news.

The Fed announced it would begin literally creating money out of thin air to purchase U.S. treasuries¡a$300 billion worth. It is an admission that things are so bad that the federal government might not be able to find enough foreign lenders to give it money. Therefore the Federal Reserve will just create it.

"It is a step in the dark", says Ian Shepherdson of High Frequency Economics. "We simply do not know how this will play out because there is no prior experience to use as a road map."

Shepherdson is wrong. There are hundreds of precedents. History is littered with the wrecks of fiat paper money experiments. In 1716, the rogue John Law created the Banque Generale to buy up the debt of France. Four years later, the bank paper was worthless. John Law¡ ̄s money-creating experiment became known as the Mississippi Bubble. But the livre is not alone. The Argentine peso, Russian ruble, French assignat and frank, German mark, U.S. continental and Zimbabwean dollar are just some of the more famous failed currencies.

"Bernanke has sent a giant sell signal to the rest of the world to sell their treasuries to the Fed," confirms Peter Schiff, one of a handful of economists who predicted America's current crisis. "This is going to be a currency crisis. That's what is coming."

When France went bankrupt following John Law's fiat money experiment, Law commented: "Last year I was the richest individual who ever lived, today I have nothing not even enough to keep alive."

The only difference this time is that the Fed is creating fiat digital money as well as paper money.

Public spectacle number three: National naivety, and lots of it.

With catastrophe plainly staring it in the face, America plunges head first into the shallow waters. It¡ ̄s as if the powers-that-be actually believe that borrowing and spendin can get America out of a problem caused by too much borrowing and spending. It is as if they believe that creating money out of thin air can actually make people richer. And to top it off, it is as if they actually believe that no one else can see the public spectacle that America has become.

Unfortunately, the exhibitions and circuses are only beginning, because that¡ ̄s what empires become when they are going down and politicians don¡ ̄t want people to know it.
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Last updated 25/03/2009

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THE GREAT INFLATION
Part 1 The Nature of Money
by James J. Puplava
September 23, 2004

What is money? Money means different things to different people. On Main Street it may mean the dollar bills in a wallet or the cash balance in a checking account. On Wall Street it represents the electronic digits in the interbank settlement system. To others money represents credit, the ability to buy a home with a mortgage, access cash through a credit line, or the ability to purchase goods with a credit card. Ask different people what money represents and you will get a wide variety of answers.

In today’s complex financial world the concept of money gets lost in translation in the day-to-day affairs of commerce and living. Somewhere along the road of history as complex societies evolved mankind shifted from direct to indirect exchange in order to expand and conduct trade. The basic problem with direct exchange (barter) is that it lacked “indivisibility” and “coincidence” of wants.[1] Under direct exchange you could only conduct trade if both parties to a trade desired the other’s goods. Because commerce needed a system of payment that transcended direct exchange, money was invented as a medium of exchange. As societies evolved and the division of labor became more complex, the diverse needs and wants of the economic system became more refined. The invention of money allowed a market to develop for the trading of goods and services that was able to meet the needs of developing societies.

Gradually money developed into a medium of exchange used in trade. The invention of money allowed society to expand and extend beyond the limits of an individual household to that of a nation and indeed the whole world. Money solved the two basic problems created by barter, which were “indivisibility” and the “coincidence of wants.” Money became a unique commodity used to transact trade and commerce between diverse cultures and nations. A secondary function of money was that it also facilitated credit transactions which were simply the exchange of present goods for future goods.

What we learn about money is that it was a commodity in its own right, with its own unique properties. As Rothbard states, “Money is not an abstract unit of account, divorceable from a concrete good: it is not a useless token only good for exchanging: it is not a ‘claim on society’: it is not a guarantee of a fixed price level. It is simply a commodity. It differs from other commodities in being demanded mainly as a medium of exchange. But aside from this, it is a commodity—and like all commodities, it has an existing stock, it faces demands by people to buy and hold it, etc. Like all commodities, it’s ‘price’—in terms of other goods--- is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it.” [2] [Emphasis added]

The best explanation of the origin and role of money is given by the Austrian school of economics. For we have no definitive or historical event as to its origin. No king issued an edict that created money nor is there some inventor who is credited with its invention. The Austrian economists Carl Menger and Ludwig von Mises have given us the best explanation as to the origin and development of money. According to Menger, money’s origination was spontaneous. No king, government, or person created it. The origin and development of money came into being through barter. Eventually, as trade developed, one particular commodity became more desirable to own than another. Items such as wheat may be more desirable than a ceramic vase, and a metal that was durable might be more desirable than a bushel of grain.

Before there was money, there was credit. Credit preceded the coining of money. Historical documents dating back to the Sumerian civilization, circa 3000 B.C., reveal that the ancient world had developed a formalized system of credit based on two major commodities, grain and silver. Before there were coins, metal loans were based on weight. Archaeologists have uncovered pieces of metal that were used in trade in Troy, Minoan and Mycenaean civilizations, Babylonia, Assyria, Egypt and Persia. Before money loans came into existence loans of grain and silver served to facilitate trade. Silver was used in town economies, while grain was used in the country. For nearly 2,500 years throughout Sumerian and Babylonian history, the rate of interest on grain and silver loans remained constant. The customary rate of interest on a barley loan was 33 1/3% and for a loan of silver it was 20%. [3]

SUMMARY OF MESOPOTAMIAN INTEREST RATES / 3000 - 400 B.C.
Dates B.C. / Normal Rates % / Legal Maxima %

See the chart at <<http://www.financialsense.com/series4/part1.html>>

Source: Homer, Sidney & Sylla, Richard, A History of Interest Rates, 3rd Edition,
Revised, Rutgers University Press, New Brunswick, 1996, p31.

Although interest rates would occasionally vary, the legal maxima embodied in the Code of Hammurabi, established 33 1/3% per annum on loans of grain and 20% on loans of silver. These rates lasted for more than 2,500 years.[4]

THE BIRTH OF MONEY

Eventually, the demand for a certain type of good outstripped the demand for other commodities. In matters of trade certain type of commodities were in high demand and became universally accepted in trade between buyers and sellers. As explained above, loans of silver and base metals were already used as a means of facilitating credit. Eventually precious metals emerged as the commodity of choice. At this point money came into existence as a commodity used as a medium of exchange.

The official birth of coined money was around the first millennium B.C. It is believed to have originated in Lydia in the seventh century B.C. King Croesus of Lydia (560-546 B.C.) has been credited with coining gold and silver ingots. Eventually, the innovation of stamped metal coins spread to the Greek world. Because the Greeks developed an urban economic system based on commerce a money commodity became necessary to facilitate trade. From this point forward, the use of precious metals as money used to conduct commerce was institutionalized between the developed societies of that day and has been used ever since. In matters of commerce, silver was used for smaller exchanges, while gold was used for larger transactions.

The reason that silver and gold began to be used as money was based on their unique characteristics. The use of money required several properties. It had to be divisible. It had to have utilitarian value separate from the whims of any king, emperor, or government. It had to be durable. It couldn’t perish or be consumed. It also had to be relatively scarce to maintain its value. Finally, it had to be made of material that was ductile and malleable. Both silver and gold held these properties, which is why they began to be used as money. Ludwig von Mises tells us, “For hundreds, even thousands, of years the choice of mankind has wavered undecided between gold and silver. The chief cause of this remarkable phenomenon is to be found in the natural qualities of the two metals. Being physically and chemically very similar, they are almost equally serviceable for the satisfaction of human wants.”[5]

Universal Standards of Value

Because of the necessities of trade, standardized weights and measures had to be developed. Here again Ludwig von Mises’ clarifies through his theories on money that the reason why individuals began to value money was because they expected money to hold its value. This meant purchasing power. People would only surrender goods or provide services in the present only if that money unit could be expected to purchase the same goods and services in the future. Money functioned as a medium of exchange only if it maintained its purchasing power. A standard weight and measure had to be maintained or else money ceased to function as a medium of exchange.

Eventually, standardized weights and measures were developed for the coins of each country. The shape and size of the coin made no difference. What mattered was its content. Various coins of different nations were valued on the basis of their silver and gold content. The coins that maintained their silver and gold content became the coins of preference used in commerce. Any nation that expected to grow and expand its economy needed to maintain the standard of its money.

THE DEBASEMENT OF MONEY

As the use of money became widely used in commerce, standards of value were established trade and commerce flourished. As long as honest weights and measures were used, trade between nations and between peoples went on unencumbered. However, eventually kings, emperors and their governments began to debase their money. In order to finance a war, build monuments or palaces, or fund welfare programs, rulers required larger amounts of money. Wars were costly and could not always be funded through taxes. The money required to pay soldiers, buy armaments, and finance a campaign often required additional methods of financing. If the government couldn’t raise the money through additional taxes on its people, governments learned the art of debasing their currency. In the ancient world before the invention of printing presses, emperors and kings resorted to nefarious ways to fool their own people. The common measure used to debase their own currency was through coin clipping and mixing inferior base metals into gold and silver coins. The government would simply chip away a part of a silver or gold coin and appropriate the shavings for itself. The shavings would then be melted down and made into new coins, which would increase the supply of money without having to mine more of it.

Another measure used was reissuing new coins that had lower amounts of silver and gold content. Lesser valued base metals such as copper would be mixed in with the silver and gold. Governments would also issue smaller size coins and declare they had the same value as the larger coins. Clipping, shaving, mixing base metals in coins became the standard method used by governments to inflate the money supply. No matter the method used to debase the currency, governments tried to fool the people hoping that nobody would notice. Eventually the populace caught on. The additional supply of money eventually drove up the price of goods. The price of everything went up as a result of additional demand brought on by an artificial increase in the supply of money.

An important concept to understand as it relates to money unlike other commodities is that an artificial increase in its supply confers no social benefit. The price of money—like any other commodity—is by eternal laws of supply and demand. Like any other commodity an increase in its supply lowers it price. Conversely an increase in demand raises its price. As Rothbard reminds us, ”What makes us rich is an abundance of goods, and what limits that abundance is a scarcity of resources: namely land, labor, and capital. Multiplying coin will not whisk these resources into being. We may feel rich for the moment, but clearly all we are doing is diluting the money supply... Thus we see that while an increase in the money supply, like an increase in the supply of any good, lowers its price, the change does not—unlike other goods—confer a social benefit. Whereas new consumer or capital goods add to standards of living, new money only raises prices—i.e. dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value...its utility lies in its exchange value, or “purchasing power.”[6]

What is even more important is that when money is depreciated, it leads to the moral and economic decay of a country. In the final days of the Roman Empire, its currency was depreciated repeatedly by successive emperors. “During the first century A.D. the metal content of Roman coins was reduced by 25%, and during the second century A.D. it was reduced substantially more. Silver coins were reduced to the status of token coins. In the third century A.D. monetary inflation on a grand scale accompanied a succession of revolutions and civil wars... The chaotic years, fifty years before Diocletian, 284-305 A.D. were, in the opinion of Tenney Frank, the period when Rome fell. There was anarchy and looting. Provincials lost faith in Rome. Industry and trade disintegrated, and even the Latin speech decayed.[7] As a reminder of this truth I have on my desk at home a collection of Roman coins from the 3rd and 4th centuries. The coins feature the portraits of the last twenty Roman emperors. The coins are all bronze.

Debasement and Inflation: Modern Methods

Money Substitutes
For thousands of years of recorded history silver and gold served as money. Eventually, as commerce and trade expanded, money substitutes began to replace silver and gold. In order to facilitate large transactions, it became too cumbersome to carry and transport large gold deposits. Gold warehouses were created. Owners of gold deposited their gold at a warehouse (later banks) and received a warehouse receipt for their gold. The warehouse receipt entitled the owner of that receipt to demand payment of his gold at any time. The warehouse or bank in this case made its money by charging a storage fee. Eventually, as commerce and trade expanded, warehouse receipts representing stored gold came into use more frequently. The transfer of warehouse receipts replaced the transfer of gold.

These warehouse receipts eventually evolved as money substitutes and the modern era of banking was born. Eventually, paper money backed by gold and silver served as money in transacting commerce on a larger scale. Silver and gold coins still functioned and were used as money in day-to-day transactions by the common man, but in matters of commercial trade letters of credit, claims on bank deposits became commonplace. Instead of the transfer of paper receipts, the transfer of title or a book claim on the bank took their place. The owner of the claim had an ownership right in the stored gold at the bank. Thus the modern era of paper money and banking came into existence. As long as depositors had faith in the bank or currency of a country and a standard of value was maintained, the system functioned and prospered.

Standards of value erode over time.
What gold warehouse owners and eventually banks found out is that the gold—or in today’s era, paper deposits—tend to remain at the bank or warehouse for long periods of time. Since gold deposits remained stationary, the bankers could loan out their depositors’ gold for a profit. This in effect invalidated the gold warehouse receipts because not all of the gold remained on deposit. If all of the owners of the gold showed up at once and demanded their gold the bank or warehouse would be in default. This is what happens when there is a bank run today. When the owners of money demand withdrawal, the bank no longer has the gold [prior to our going off the gold standard] or paper money to satisfy all depositors’ claims. As of June 2004, bank reserve requirements are only 10% on transaction deposits in the U.S. Reserve requirements on time deposits and savings accounts are zero.

Fractional Reserve Banking System
By adopting a fractional reserve banking system, the money supply—and thus the standard of value of that money—can be expanded tenfold by every dollar on deposit. For example, in the case of a new $100 deposit, a bank can loan out $90 of that deposit, keeping $10 (10% reserve requirement) as a reserve. The bank receiving that $90 deposit can also make an additional loan of $81 keeping 10% of the deposit or $9 in reserve. This process can continue expanding the initial deposit of $100 into a maximum of $1,000 of new money. The process becomes more complex since reserve requirements are applied only to transaction accounts such as checking, which is a component of M1. Savings accounts and time deposits, which are components of M2 and M3, representing broader measures of money, have zero reserve requirements. Since time deposits and savings accounts have no reserve requirements, they can expand indefinitely. Banks can also expand the money supply by drawing down their reserves and replacing their reserves through money market loans at the prevailing cost of money (the federal funds rate).

Source: www.economagic.com

By its very nature, a fractional reserve banking system is inherently an inflationary institution. Banks as shown in the example above can expand the money supply by creating money out of” thin air.” They enjoy a unique privilege under our present economic system not available to you and me. As individuals the only way we can expand our bank accounts is through savings.

Debt Monetization
In addition to banks increasing the money supply by expanding loans made through deposits, the government can also expand and depreciate the money supply through debt monetization. When a government needs money, they have three ways of obtaining it. 1) they can get the money by raising taxes, 2) they can issue debt, or 3) they can issue debt that is monetized by its central bank. In its simplest form, debt monetization is simply the government issuing bonds, which are bought by the central bank. The central bank buys the bonds by creating money “out of thin air.” The Fed did not earn or save to get the money used to purchase the government’s bonds. They simply created it out of nothing. This is commonly referred to as printing money. It is an anachronism left over before the era of computers and digital money. Today when the Fed purchases the governments bonds, an electronic entry is made to the government’s bank account for the amount of money to purchase the governments bonds. Issuing bonds does not increase the money supply as long as existing savings are used to purchase the bonds. It is only when new money is created through fiat means that the money supply increases followed by a concomitant increase in inflation.

THE ROOT OF INFLATION

As mentioned above, the government has three ways of obtaining money. Unfortunately increasing taxes is not a popular choice. Taxation is unpopular with the people. The last two presidents to raise taxes in the U. S. were George Bush senior and Bill Clinton. Bush Senior lost his reelection bid over the tax issue and Clinton lost Democratic control over Congress. Because taxes are unpopular with the people, governments resort to an indirect means of taxation. It is what we know as inflation. If the government can find a means of expropriating resources without the direct knowledge of its subjects, they will do so. In effect what the government resorts to is a form of counterfeiting. By creating money “out of thin air,” the government is creating its own money that wasn’t appropriated directly through taxation. Counterfeiting is simply another name for inflation.

As I mentioned earlier, inflation creates no social benefit for society. It is simply a means of redistributing wealth from producers to nonproducers. Inflation creates no new wealth. No new goods or capital stock are created by it. Wealth is simply transferred to those who benefit first from the creation of the new money. This is usually the bankers and the financial system through fractional reserve banking or the government through debt monetization. It takes time for inflation to work its way through the financial system and the economy. Those who receive the new money first profit the most from it. By the time the expansion of money works its way through the system in the way of higher prices, the people are the last to know. The inflation profiteers have long since made their profits. Society as a whole must now bear the cost of that inflation through higher prices.

However, in order to keep playing the game and expropriate the people’s money, the inflation profiteers must keep the people fooled. That is why all government and central bank actions are shrouded with an air of mystery or secrecy. FOMC meetings are enshrined with a religious reverence. The meetings are conducted under the air of priestly secrecy. In his book “Secrets of the Temple,” author William Greider says it well by stating, “Like the temple, the Fed did not answer to the people, it spoke for them. Its decrees were cast in a mysterious language people could not understand, but its voice, they knew, was powerful and important...The Public’s confusion over money and its ignorance of money politics were heightened by the scientific pretensions of economics. Average citizens simply could not understand the language, and most economists made no effort to translate for them.” [8]

To maintain the inflation game, it is important to keep people confused. In his book “When Money Dies: the Nightmare of the Weimar Collapse,” author Adam Fergusson explained why the Weimar inflation was possible. He wrote, “The most notable thing about the puzzlement of the financial world, not the least the writers of the Frankfurter Zeitung, was complete failure to consider the continuing flood of new banknotes as one of the reasons for the mark’s behavior (depreciation). Its latest fall was reckoned disastrous for the finances both of the Reich and of the regional governments: all efforts to restore order in the federal budget had been rendered void. It meant the further impoverishment of the classes on fixed incomes, state officials included, and (as another newspaper feared) further recruits for the radical circles of the Right from the ‘social déclassés.’“[9]

WHAT CAUSES INFLATION?

Ask any person today what causes inflation and they will tell you that it is rising prices. Like many issues on money, the inflation issue is clouded and confused. That is because the inflationists want it that way. By focusing attention on rising prices, it takes the attention away from the cause, which is excess money creation. Instead, all of the attention is focused on the symptoms of the disease rather than the root of it.

There are only three ways that prices can rise. The most important influences are as follows:

1.The supply of money and credit
2.Supply of goods and services
3.Demand for goods and services

Prices can increase by:

1.Increasing the supply of money
2.A decrease in the supply of goods and services
3.An increase in demand, i.e. population increase

Conversely, prices can decrease by the same three measures when:

1.The supply of money declines
2.The supply of goods and services increases
3.Demand decreases

These are the only three ways that prices can increase or decline.

There is very little understanding of where inflation comes from or where it originates. Most individuals define inflation as rising prices. They speak about symptoms rather than cause. If inflation is simply rising prices, then what causes it? You’ll find that inflation is attributed to many sources—none of which are accurate. The common misperceptions by policymakers and the public is that inflation has three principal causes:

1.Cost-push inflation as a result of arbitrary demands of labor unions.
2.Profit-push inflation resulting from the greed of businesses raising prices.
3.Crisis-driven inflation resulting from acts of God or weather.

The general belief that inflation is the result of something other than its true cause makes it hard to understand and resolve. Most people believe that inflation is conspiratorial such as OPEC raising crude oil prices, businessmen wanting to make higher profits, or unions looking to enhance worker benefits and pay. Somehow inflation has become an evil caused by greedy individuals and businesses. To most people inflation has become a causeless phenomenon inexplicable and born of ill will.

LET’S GET THIS STRAIGHT

Definition

There is irrefutable evidence that government is the source of all inflation. An undue increase in the quantity of money is what stands behind a rise in prices. The source of all money or credit is government. Thinking of inflation only in terms of rising prices is similar to looking at the symptoms of a disease rather than the disease itself. A more exact definition of inflation would be an increase in the quantity of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level, an increase in the quantity of money caused by government.

You will notice that this definition doesn’t say anything about cost-push, profit-push, or crisis-push inflation. It simply states that the supply of money expands leading to higher prices. It is the expansion of money and not rising prices that leads to inflation. This also points to the real cause behind inflation as government intervention in the economy and financial system by expanding the supply of money and credit in the system.

Formula

When the government increases the supply of money and credit in the economy, it increases demand for goods leading to higher prices. Higher demand or lower supply is the only conceivable cause of higher prices. It can be demonstrated by the formula below: [Price Level = Demand/Supply]

P = Dc/Sc

To expand and elaborate on this formula, we must add a time factor, which is how long and how fast the holders of money decide to make it available. Lord John Maynard Keynes referred to this as “liquidity preference,” or how much and how long the holders of money liked to keep it on hand. The reverse of this is called the velocity of money, which measures the volume of purchases relative to the supply of money. Money velocity is the hardest to understand because it is dictated by psychological factors. The volume of spending within an economic system is not only determined by the supply of money, but also by the demand for money. The greater the demand for money, the greater is the preference to hold it. (Keynes’ liquidity preference) The smaller demand there is for money, the less preference there is by holders of money to want to hold or store it. Simply put, the greater the demand for money, the lower the velocity and the smaller the demand to hold money, the greater the velocity.

When individuals decide not to hold money and instead have a preference to spend it, the velocity of money increases. Likewise, when there are desires to hold money instead of spend it, the velocity of money decreases.

Therefore, to our quantity theory of money, we must add velocity to the equation. The new formula for price levels can then be stated as follows:

The new equation shows that the general level of prices moves in direct proportion to the quantity of money and its velocity. Price levels move in inverse proportion to the aggregate supply of real values. If money velocity is held constant, then price levels will depend on the quantity of money. It is only when people begin to distrust money and feel that the security of their money is being threatened that money velocity increases. When the value of money is insecure, the demand for it falls. There is less of a desire to hold it because its value is depreciating. People dispose of their money and find a replacement for it in tangible goods that are real. The desire to own commodities or real goods increases because these goods represent a better source for meeting future cash needs.

During the latter stages of inflation, money velocity increases because people no longer have faith in their currency. As shown in the chart below, the depreciation of the Reichmark increased as the supply of money expanded as did money velocity. Money velocity is a direct reflection of the degree of confidence that people have in their currency. A sharp increase in velocity normally takes places during the final stages of an inflationary crisis.

More will be written about this subject in later installments of this Perspective series. Suffice to say that when the money supply begins to rise money velocity lags. Stated another way, quantity leads and velocity follows. During the early stage of an inflationary cycle, price increases are muted by a reduction in money velocity. This is because the holders of money are willing to hold on to their money unaware that supply is increasing. Initially, interest rates fall due to the extra supply of money, which induces forced savings. The drop in money velocity during the initial stages of inflation represents unrealized depreciation of the currency. Later on as prices work their way through the financial system and economy, both money quantity and velocity begin to increase simultaneously. It is only during the final stages of inflation as shown in the chart above that velocity rises faster than the quantity of money. Therefore, during the early stages of an inflationary cycle, it is important to focus on the quantity of money. It provides us with a clue as to what follows afterward. For this reason we return to the quantity theory of money for a greater understanding.

This theory states that the general level of consumer prices equals the aggregate demand for goods divided by the aggregate supply of consumer goods. Therefore, the resulting rise in consumer prices is a function of a numerator (demand) divided by a denominator (supply). If there is a resulting change in price, it is the result of either a rise or fall in demand or a rise or fall in supply.

Government Variables

When the government or actions by the Fed increase the quantity of money in the economy, the demand for consumer goods is increased through the supply of new money being spent and re-spent within the economy. Since there is greater demand than supply, the price of most goods will go up. In the U.S. the rise in prices has not been commensurate with the supply of money and credit in the system because of imported goods. The trade deficit is a function of increased demand being satisfied by increasing imports. If the U.S. economy was self sustaining, self sufficient and able to meet all consumer demand, prices would have risen more substantially. Goods inflation has been somewhat tame only because excess demand in the U.S. has been satisfied through imported goods. Without the ability to import goods, prices would have been driven dramatically higher.

However, goods inflation eventually surfaces because a country with an expanding trade deficit eventually experiences a declining currency which raises the costs of imported goods. The graphs below of the money supply, budget deficit, trade deficit, and declining dollar are interrelated.

Source: Federal Reserve Bank of St. Louis, StockChart.com

They are all attributable to an expansion of money and credit in the economy and financial system. Inflation and higher interest rates are often associated with government deficits. If these deficits are financed by selling bonds to the public or to institutions, there is no increase in the quantity of money. The existing supply of money stock is simply diverted from private to public consumption. Government budget deficits become inflationary when they are financed through new and additional money. This occurs when the Federal Reserve purchases government debt. In effect this is known as monetization. The full inflationary impact of the U.S.’ growing budget deficit has been mitigated by the purchase of government securities by foreign central banks and foreign financial institutions. The Fed hasn’t had to resort to debt monetization because of direct foreign intervention in the currency markets.

Foreign Variables

As shown in the chart on the right, foreign intervention in the currency markets through direct purchases of U.S. Treasuries has prevented the full inflationary impact of government deficits from materializing. This enables the U.S. government to export its inflation. Japan and China’s central banks purchased $300 billion in U.S. Treasuries last year.

This year that figure could go much higher. Japan’s Ministry of Finance has set aside $575 billion for dollar purchases, while China has allocated $150 billion. The two central banks combined have the ability of buying up to $725 billion in Treasury debt. This could produce a sharp reduction in the outstanding stock of federal government debt in circulation leading to lower interest rates. Intervention of this magnitude could give us a bond rally at a time when everyone is expecting higher interest rates. Indeed this is what has happened this year.

In a Nutshell
The point to understand is that the full inflationary impact of excess money and credit in the U.S. has been partially mitigated by foreign intervention. The U.S. consumer increases consumption as a result of taking on more debt. This increase in demand-side consumption is made possible through cheap and abundant credit (inflationary). Since the U.S. economy is unable to meet all of consumer demand, excess demand is made up through foreign imports. This also lessens the impact of inflation since foreign goods help meet excess demand, keeping a lid on prices. Foreign goods can also be manufactured at a lower price.

When new money and credit are created, they enter the system through various avenues. The money and credit can actually be spent on domestic goods and services, foreign goods and services or financial assets leading to higher asset prices. Goods inflation and asset inflation are really two different sides of the same coin.

THE NEW CENTURY INFLATION IN FINANCIAL MARKETS

Unlike the inflationary 70’s when money and credit went into the real economy, since the early 80’s and accelerating into the 90’s, this new century money has been increasingly channeled into financial assets, creating asset inflation. This was visible first in the equity bubble of the late 90’s. New money created by the Fed to fight off a collapsing stock market bubble, recession, and a major terrorist attack led to additional bubbles in the bond market, mortgage and housing market, and finally in excess consumption. Rising bond, stock and real estate prices are simply another form of inflation that has been created through excess credit and money added to our financial system. All of these related financial bubbles are what is keeping the U.S. economy going. The fact that P/E multiples on the major indexes are now at 48 on the NASDAQ, 20 on the S&P 500, and 18 on the Dow Industrials is another manifestation of inflation. Just as increased demand raises the price of goods, excess demand for securities raises their price. In this case, the price of bonds goes up, lowering their yield and the price of stocks goes up, leading to higher market multiples.

The U.S. economy has morphed from a manufacturing economy to a service economy and finally to a financial economy consisting of multiple asset bubbles. It has been one reason why job growth in this latest recovery has been so anemic. Money and credit are no longer going into the real economy in the form of new investment in plant and equipment which would create new jobs. Instead credit and money creation is fed into the financial markets leading to multiple asset bubbles in the stock and bond markets and real estate.

There’s Only One Way Out

Given this new aspect of America’s economic life and the fact that the Fed and the government have no inclination to live within their means or curtail rampant money creation, new asset bubbles are going to be inevitable. While one asset bubble may deflate as was the case in the NASDAQ and tech stocks from 2000-2002, other asset bubbles in bonds, mortgages, and real estate took their place. The only thing that can force a government to balance its budget or prevent a central bank from issuing endless money is to limit the power to create money. That is possible only when the money unit of a country is backed by gold and silver. With gold and silver backing the monetary unit, the government is totally dependent on the taxpayer for every dime it spends. Tax rates would be far higher in order to support the government’s voracious appetite for spending. Its citizens might not be as willing to accept tax rates that border on slavery.

Inflation is nothing more than an extension of taxes through other means. Inflation, then, is a hidden tax. Deficits and taxes are really the twin pillars of the welfare state. It gives the appearance that government benefits are free, making government out to be a benevolent Santa Claus.

What We Can Expect

Printing Presses in Overdrive
Since governments are addicted to spending money and central banks exist only to create new money and credit, additional asset bubbles are inevitable. Since the U.S. economy is now a financially-driven economy, we can expect more money and credit to find its way into other asset classes. In a financial economy such as the U.S. where a disproportionate share of capital is invested in the capital markets, additional credit leads to speculative bubbles. Greenspan/Bernanke & Co. have argued that the Fed has unlimited ability to create unlimited amounts of new money (helicopter money) and intervene endlessly in the financial markets to support asset prices of stocks, bonds, or real estate. Therefore as long as this ability isn’t curtailed through constitutional means or through gold and silver backing, the Fed can create sufficient quantities of money to bail out any financial entity be it a bank, hedge fund, or government enterprise such as Fannie and Freddie.

Currency Depreciation
What we’ve seen so far is financial asset inflation in the form of rising stock and bond prices. More recently this asset inflation has spilled over into the housing markets. Looking at the rise in commodity prices and the cost of goods and services, it appears that money and credit are feeding into hard goods. Judging the policy decisions of Asian, European, and especially the U.S. central bank to expand the supply of money and credit, further currency depreciation is inevitable globally.

Asset Bubbles in Natural Resources
What I believe that we will see later this year is that the price of gold and silver will begin to appreciate against most major currencies and not just the U.S. dollar. Therefore if one views the current rate of monetary debasement, I believe the next asset bubbles will take place in the natural resource sector. Commodities—and especially the precious metals—are only in the beginning stages of a new bull market. The charts of the CRB Index, energy and precious metals are tell-tale signs of the coming boom in natural resources. We are close to the second phase of the boom when institutions recognize that they have been fooled.

WHAT IS TO COME

It is my belief that we are now embarked on a journey that will take us into a hyperinflationary depression. There may be brief deflationary spurts that punctuate this journey along the way, but an examination of history leads me to conclude hyperinflation is much more likely than deflation. Unlike the U.S. economy during the 1930s or Japan in the 1990s, the U.S. economy is no longer self sufficient in capital, manufacturing, and energy. And unlike the 1930s, our currency is no longer backed by gold. The U.S. is now the world’s largest debtor nation versus the world’s largest creditor nation as we were in the 30’s. We are no longer self sufficient in energy as we were during the last depression. We import 60 percent of our energy needs, a percentage that is growing each decade. We must also compete with other nations for the world’s last remaining barrels of oil as we enter into the twilight of the oil age. During the 30’s the U.S. created the Texas Railroad Commission to regulate oil and prop up prices because of the abundance of oil in this country. In contrast to the 1930s, U.S. oil and natural gas production decline each year. This forces the U.S. to import more of its energy needs, energy we pay for with dollars. When the world no longer accepts those dollars as payment, the full impact of inflation will hit home.

I would like to end with a quote from Jens O. Parsson’s book “Dying of Money.” It perhaps explains best where we are today and where we are headed.

“Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of al traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.”[10] © 2004 James J. Puplava

ENDNOTES
[1] Rothbard, Murray N., What Has Government Done to Our Money?, Ludwig von Mises Institute, 1990, p.16-17.
[2] Ibid., p. 20.
[3] Homer, Sidney & Sylla, Richard, A History of Interest Rates, 3rd edition, Revised, Rutgers University Press, 1996, p.25-31.
[4] Ibid p.29-31.
[5] von Mises, Ludwig, The Theory of Money and Credit, Liberty Classics, 1980, p.45.
[6] Rothbard, Murray N., What Has Government Done to Our Money?, Ludwig von Mises Institute, 1990, p.33.
[7] Homer, Sidney & Sylla, Richard, A History of Interest Rates, 3rd edition, Revised, Rutgers University Press, 1996, p. 49.
[8] Greider, William, Secrets of the Temple: How the Federal Reserve Runs the Country, p.53-56.
[9] Fergusson, Adam, When Money Dies: the Nightmare of the Weimar Collapse, Kimber, 1975, p.86-87.
[10] Parsson, Jens O., Dying of Money: Lessons of the Great German & American Inflations, Wellspring Press, 1974, p.71.

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