Playing with fire

From the New York Times:

Most of Wall Street, and America, is still waiting for an economic recovery. Then there is Goldman Sachs.

Up and down Wall Street, analysts and traders are buzzing that Goldman, which only recently paid back its government bailout money, will report blowout profits from trading on Tuesday.

Analysts predict the bank earned a profit of more than $2 billion in the March-June period, because of its trading prowess across world markets. If they are right, the bank’s rivals will once again be left to wonder exactly how Goldman, long the envy of Wall Street, could have rebounded so drastically only months after the nation’s financial industry was shaken to its foundations.

Oh, come on now. Nobody will be wondering how Goldman did it-- that story broke last week. Turns out Goldman has computer equipment on the floor of the stock exchange, and this equipment, along with its proprietary software, is much faster than everyone else's equipment. What Goldman does is "sniff" the traffic, detect trades that someone is in the process of executing, and jump in ahead of them. According to Daily Kos diarists:

The code, as it has been noted by many, including Goldman-Sachs, allows the firm to execute securities/commodities transactions in microseconds, thus providing their company with an extreme edge over their competitors. The tacit fact is, with proper monitoring of market trades, in general and as facilitated by Goldman's own practices, it's entirely conceivable--albeit significantly questionable from a legal standpoint--that the firm would be enabled to "frontrun" its competition at quite a grand scale, too, since it could see trades occurring in real-time, and then execute its own trades automatically at lightning speed, before the previously-observed trades of others were even concluded.

All along, for the past nine-plus months--and in part due to government-related authorizations (by appointing Goldman-Sachs as the only active player in a new effort known as the "Supplemental Liquidity Program") to enable Goldman to assist the Feds in propping up stock/commodities markets during the noted economic upheavals of same during this period--it has also been widely noted that Goldman had all but cornered the market, literally, in terms of the sheer volume of in-house trading the firm was engaged in during the time, supposedly, on its own behalf; to the point where it had been widely observed and documented that well over half of all program trading occuring on Wall Street (we're talking 20%-30% plus of all stock/commodities trades in this country, for all intents and purposes), during many weeks over the past nine months, was being executed by Goldman-Sachs, too.

Market makers get paid for executing trades. Something like a quarter of a penny per trade, which doesn't sound like much, except that Goldman Sachs could execute millions of trades per minute. It could buy and sell at the same price, and not move the price at all, but meanwhile get its little quarter penny. Anyone who recalls the plot of Office Space will be familiar with how a fraction of a penny here and a fraction of a penny there can add up, and with astonishing speed.

This all came to light because a Goldman employee stole the program code and uploaded it to a server in Germany. In arguing that this employee should be denied bail, Goldman complained that if the code got into the "wrong hands" it could be used to manipulate markets. Right, which Goldman Sachs would never ever do itself-- promise!

And yet, as I understand it, the government has been essentially paying Goldman Sachs to do precisely that-- to support US markets. We had a heck of a bear market rally these past few months. Historically speaking, it was stunning. Wonder how that happened?

It's not much different than Reagan coming up with the President's Working Group on Financial Markets, generally known as the Plunge Protection Team, after the 1987 crash. Except that this time, the government was paying banks to support the markets. Or-- not banks, plural... just one bank. The one we get our Treasury guys from.

The slavish New York Times goes on to say:

In essence, Goldman has managed to do again what it has always done so well: embrace risks that its rivals feared to take and, for the most part, manage those risks better than its rivals dreamed possible.

Helps to have a man in the Treasury, it would seem.

As Jim Kunstler put it in today's post, "This is a company playing with the fire of world history."



[Addendum: See Glenn Greenwald's story on how Goldman Sachs garnered its astounding profits, courtesy the US government.]

Deflation in the midst of hyperinflation

The Austrian economic school defines deflation as a decreasing amount of money, while inflation is an increasing amount of money. But is that in real terms (in terms of how much gold it would buy you), or in nominal terms (dollars, marks, etc)?

What if the amount of money in circulation is falling in real terms (deflation), and prices are also falling in real terms, and yet nominally speaking the money supply and prices are rising astronomically (hyperinflation)?

As far as I can see, that's exactly what happened in Weimar, Germany (emphasis is mine):

But the main force which gave inflation its momentum was the steady decrease in the true value of money in circulation. This has been observed in all past rapid inflations and it is vital to understand it if inflation is to be coped with.... [P]rices began jumping much faster than the government could generate new money. Thus the total circulating currency fell drastically when measured in terms of its true value. One economist stated that, "In proportion to the need, less money circulates in Germany now than before the war. This statement may cause surprise but it is correct. The circulation is now 15-20 times that of pre-war days, whilst prices have risen 40-50 times." In fact, the total currency when calculated in gold value fell from 7428 million marks in January 1920 to a mere 168 million by July 1923.

So, measured in terms of gold, Germany experienced a catastrophic decline in its money supply. This would have been ameliorated by the very high velocity of money. That is, marks were changing hands at a far more rapid pace than during normal times, as everyone attempted to spend their currency before it could depreciate further.

If you consider that key equation MV = PQ, we might call MV the "availability of money." During Germany's hyperinflation, MV surely did not drop as precipitously as M (again, in real terms) because V was high and increasing. Perhaps, during certain periods of the hyperinflation, Germany did not have deflation in the sense that MV was not dropping. (I've argued that MV makes much more sense to look at than M alone.) But the problem is that velocity cannot just go up forever. It cannot remain sky-high when there are no more goods left to be purchased. There are physical constraints on production, and when the available goods are exhausted velocity must drop back again. Somewhere along the line, MV began decreasing in real terms.

If the figures quoted above are correct, the amount of money in real terms fell by over 97%. Velocity would have had to increase to 45 times its pre-hyperinflation values, in order to allow the "availability of money" or MV to remain stable. But you can't have 45 times normal velocity for very long, if ever. They were already at full employment and maximum productive capacity early in the hyperinflation. Once there is nothing else to buy and no one else to hire, there's nothing you can do with your money-- except burn it in your kitchen stove, as in one famous Weimar photograph. MV must fall in real terms.

Which brings us to the real crux of the matter: during hyperinflation, governments print money frantically in an attempt to stave off the real-terms deflation which threatens to crush the economy and put an end to most commerce. Yet, printing money actually exacerbates the deflation (emphasis is mine):

Once people lose confidence in a currency, they try to get rid of it. As Lord Keynes pointed out, this makes circulation speed up enormously, and hence prices rise faster than the government can print new money. Marshall, studying this process, concluded that, "The total value of an inconvertible [fiat] paper currency cannot be increased by increasing its quantity; any increase in quantity which seems likely to be repeated will lower the value of each unit more than in proportion to the increase."

In other words, you can print another trillion marks, which is equivalent to X ounces of gold, but the real value of all currency in circulation will decline by more than X ounces of gold. The paper currency will devalue at a faster rate than the rate you're printing it at. The faster you print, the worse the deflation in gold terms.

And thus, paradoxically, the Germans didn't have enough money, and that situation only grew worse:

Despite the proliferating billions of trillions of marks, the average citizen found it harder and harder to get enough money for necessities. Banks, short of money, could not honor checks. Businessmen were strapped for money to buy materials and meet payrolls. The government faced the same problem. It appeared that there was not too much money around, but rather much too little. The clamor for more money grew on all sides. It seemed that any halt to the printing presses would bring business to a standstill and throw millions of workers out on the street. The government itself would be unable to carry on. Riding a tiger, it dared not dismount. On October 25, 1923, the Reichsbank noted that it had that day printed 120,000 trillion marks. Unfortunately, the day's demand had been for one million trillion.

Once confidence in the currency has been lost and hyperinflation is entrenched, you can't merely stop printing. The resultant deflation would mean the end of the economy. Running faster and falling behind is still better than letting everything come to a screeching halt. And yet the more you print the worse everything gets. What a horrible trap.

It's a trap that can be gotten out of by going to a new currency altogether, one backed by gold or by silver, or one pegged to another hard currency, or (in the German case) by backing it with land. A currency which is equivalent to something of tangible value can retain the people's confidence, which is the only way it can remain real money. The problem with a currency which is collapsing is that it isn't actually money any more-- it is not a store of value, it's not a unit of account, and it's not even a dependable medium of exchange. It's not money-- and the country has to stop using it and put in place something that is money. The old currency is hopeless.

It's a very strange thing to say, but deflation and hyperinflation are actually mutually reinforcing when deflation is seen in gold terms. There's no way to escape that trap, once it begins; the currency must be abandoned.

Americans ready their torches

As I think everyone can sense, there's a rising tide of anger against the banks and the bankers. We're not much given to protests and demonstrations here in the US, but we're not going to get through this economic disaster without unrest. That's just not historically tenable. Perhaps that's why the media steadfastly ignored the protests in Greece some months back. Greek protesters burned several banks to the ground, but the US media claimed the riots were against the police, who had recently killed a teenaged boy. Those in charge didn't want anybody getting any ideas over here across the pond.

Last autumn, there was a spectacular public protest (via email and telephones) against the banker bailout bill, which authorized giving $700 billion of the American people's money to Wall Street's mega-banks. Reportedly, calls were coming in to Congressional offices at a rate of 50, 100, even 200 to 1 -- against the banks, of course.

Around that time there was a Wall Street protest which featured this sign, rather famous out here on the inter-tubes:



That's been made into T-shirts and stickers, to boot.

More recently, Jim Kunstler -- always the curmudgeon -- was quite funny about the complacency of bankers:

One mistake that the banking elite and their lawyer paladins made the past decade was their show of conspicuous acquisition -- of houses especially -- in easy-to-get-to places where anyone can see them, for instance an angry mob in Fairfield County, Connecticut, or Easthampton, New York. Unlike the beleaguered elites of South Africa (where I visited recently), who live behind layers of fortification, the executives of Citibank, Goldman Sachs, J.P. Morgan, and a long list of hedge funds, will be found cringing in their wine-lockers behind a measly layer of privet hedge when the tattooed minions of Glen Beck come a'calling....

Social phase-change, as in the formations of mobs, is nothing to screw around with. Once the first window is broken, all bets are off for social stability. My guess is that the various bail-out gifts to the bankers are long past having gone too far in the eyes of this increasingly flammable public....

By the time Lloyd Blankfein [CEO of Goldman Sachs] sees the torches flickering through his privet, it will be too late to defend the honor of his cappuccino machine.

And then there was the Rolling Stone piece by Matt Taibbi, titled The Great American Bubble Machine: From Tech Stocks to High Gas Prices, Goldman Sachs Has Engineered Every Major Market Manipulation Since the Great Depression, and They're About to Do It Again.

There's been a raft of stories about Goldman Sachs, involving a former employee who stole proprietary trading software. It's come out that anyone in possession of these programs could manipulate stock markets. Which is also an admission that Goldman Sachs can manipulate stock markets. Gee, who'da thunk it?

Just today, the usually humorless Mike Shedlock wrote a post equating the Federal Reserve with Darth Vader's Empire:

Our hero, Ron "Skywalker" Paul, has managed to gather sufficient support to overthrow the Evil Empire widely known as the Fed.

In a brazen attempt to beat back our hero, the Empire has taken its case directly to Congress, seeking more power to rape and pillage the populace under cloak of secrecy.

The Washington Post picks up the story in Sith Lord Kohn warns Congress on meddling in the Empire's affairs.

The Federal Reserve Evil Empire on Thursday launched a robust defense of its independence and warned that efforts in Congress to put monetary policy under political sway would hurt the economy Empire.

Fed Vice Chairman Sith Master Donald Kohn said opening up some of the U.S. central bank's most sensitive decisions to political scrutiny could result in higher long-term interest rates and hurt the United States' credit rating discrimination against the Sith Lords.

Testifying before a congressional panel, Kohn sought to beat back a proposed bill that would open the U.S. central bank's policy decisions to audits by a federal an Ewok watchdog agency. More than half of the members of the U.S. House of Representatives Ewoks have signed as co-sponsors of the measure.

More importantly, a major Hollywood gangster film has just come out, about bank robber John Dillinger. The New York Times understands the darker significance of the film:

If the administration wants to be reminded of how quickly today’s already sour mood can turn rancid, Michael Mann’s haunting “Public Enemies” could not be a more apt refresher course. The casting alone tells you where the audience’s sympathies will lie: Dillinger is played by America’s reigning male sweetheart, Johnny Depp, while his G-man pursuer, Melvin Purvis, is in the hands of the thorny Christian Bale....

Detective magazine polled movie theater owners during Dillinger’s yearlong spree of 1933-34, and found that in terms of drawing audience applause Public Enemy No. 1 beat out F.D.R. and Charles Lindbergh....

[O]rdinary law-abiding Americans even wrote letters to newspapers and politicians defending Dillinger’s assault on banks. “Dillinger did not rob poor people,” wrote one correspondent to The Indianapolis Star. “He robbed those who became rich by robbing the poor.”

Gorn writes that the current economic crisis helped him understand better why Americans could root for a homicidal bank robber: “As our own day’s story of stupid policies and lax regulations, of greedy moneymen, free-market hucksters, white-collar thieves, and self-serving politicians unfolds, and as banks foreclose on millions of families’ homes, workers lose their jobs, and life savings disappear, it becomes clear why Dillinger’s wild ride so fascinated America during the 1930s.” An outlaw could channel a people’s “sense of rage at the system that had failed them.”

And here I might make one final point: the unemployment rate is much higher for teenagers and those in their early 20's than for other age groups. In fact, the age group which is doing best in the job market are those over 55. This means we have a great many aimless, impoverished young people with a lot of time and anger on their hands. Not a good mix. And if they dutifully went to school and did as they were told and jumped through every hoop, believing this would net them a comfortable salary, they're that much more pissed off when the promised good job doesn't manifest.

During the Great Depression, many protests went unreported in major newspapers, for fear of "contagion." This time around, everything will be reported via the internet. Should be interesting times.

Dire

I missed posting the past few days due to excessive pessimism. Let's just say that the whole "Oh my God, do we have enough soap?" and "Damn, I never bought those lentils!" mentality is back again, with a vengeance. Another thing I have not yet done is buy, say, the next 3 years worth of clothing for my kids. That's a shopping trip that cannot be put off too much longer. Far more important than that are the generator and the hand pump for the well. Suddenly, I need more time!!

There has been what I'd call a "coincidence of rumors" surrounding the end of the third quarter (Sept 30) and the month of October. Jim Sinclair is being very specific and is counting down the days until the world loses faith in the dollar (120 days to go, he says). There are rumors of bank holidays in September. There is the "embassies" rumor, reported by popular newsletter writers Harry Schultz and Bob Chapman, who say that the State Department has instructed US embassies overseas to accumulate enough local currency to last them a year (presumably because the dollar may crash at any time). Meanwhile, China has begun selling goods not in the international reserve currency, the dollar, but rather in its own currency, the yuan (who needs the dollar?). Middle Eastern nations say that their previous plans for a common currency have changed; this new currency will not be pegged to the dollar, as previously intended.

Meanwhile, the technical analyst on this week's Financial Sense Online radio broadcast said that the charts look so bad, it appears to him that the target values (meaning the bottom or minimum values) for the major stock markets of the world (Dow Jones, S&P, Tokyo Nikkei, London FTSE, etc) would be... well, essentially zero. Apparently we are approaching a catastrophic fall in stocks. So if you own a 401k, I guess you are better off in short-term Treasuries even though they're going to tank, also.

I mean really, the only thing a person can do is buy gold and silver. There really is nothing else, at least not until after the next cataclysmic drop in stock markets.

What was that? Your retirement plan doesn't allow you to buy gold and silver? Heh... exactly. There are few scams more successful than 401k plans for stealing the wealth of the middle class and sending it right on over to Wall Street.

Meanwhile California is in such a mess, they ran out of cash and they're now issuing what amounts to their own currency. Which, by the way, starts to verge on secession. I know, I know, the legislature there is faced with some awful choices -- like wanting to spend $92 billion, but being short by $26 billion (or perhaps $34 billion if the California Teachers Association takes the state to court and wins). But I read the stories about this negotiation and that negotiation, and the Speaker walking out, and the governator threatening vetoes, and I think-- Have these people forgotten what a riot looks like? Have they heard of mobs and torches?

Meanwhile, the number of people receiving unemployment benefits hit a new record, with 9.4 million people now receiving benefits. And we're just now learning that back in April, the number of people receiving food stamps hit an all-time high of almost 34 million.

The pressing question is: Where are new jobs going to come from? I really can't see any substantial job growth until the currency situation is so bad that we cannot afford Chinese shoes, Mexican food, or Guatamalan pants. Which means things are going to have to get so bad that we will have trouble feeding people. Unfortunately, I think it'll have to get that bad before our domestic production would be truly rejuvenated.

Meanwhile I've been reading about Weimar Germany.



What everyone needs to understand about currency collapse is that, counter-intuitively, even though the government will be printing money like nobody's business, there will actually be a lack of money because any given dollar will be nigh worthless. It's a lack of money in real terms, in terms of how much gold it would buy you. Without sufficient money, farmers will not deliver grains. Merchants will not sell their inventories. Truckers will not deliver goods. They know they cannot be paid what their goods are worth, and that all anyone will have to offer is swiftly depreciating paper, and not nearly enough of it to make it worth their while.

Imagine you go to the grocery store and it's empty. You have a toddler who needs shoes but there are no shoes. Your electricity keeps going out, the natural gas for your furnace is on and off, people are being fired because businesses have great difficulty in paying them given the rapidly plunging value of the currency.

I mean really, what could be worse, for a nation the size of the United States?

Argentina's tale is no better. For whatever reason it seems that their crime rate went through the roof when their currency failed (and then failed again).

If you have any extra money at all, even $5 a week, use it to buy something you know will keep, and that you will need in the future. An extra bar of soap and a bottle of cheap shampoo, if nothing else. There is no reason at all to feel silly about "stockpiling" such items, because the fact is, your money isn't going to make any interest or any profit at the bank. The best things to buy are the things you will need. Canned food in the basement keeps much longer than the expiration date implies, so that's also a good investment. Other than real goods, the only option is to buy gold and silver.

And by the way, it's no mystery how you buy silver. Google coin shops in your area, go in, and tell them you have X dollars to spend and that you're interested in junk silver or government-issued 1-ounce coins. Junk silver is not junk; it's slang that means pre-1965 US quarters, dimes, half dollars, and silver dollars. Government bullion coins are things like US silver eagles and Canadian silver maple leafs. Keep the receipt, because you'll need to pay taxes on the increase in value after you sell it, so you'll need to show the price you bought it at.

From the above Weimar link:

By mid-1923 workers were being paid as often as three times a day. Their wives would meet them, take the money and rush to the shops to exchange it for goods. However, by this time, more and more often, shops were empty. Storekeepers could not obtain goods or could not do business fast enough to protect their cash receipts. Farmers refused to bring produce into the city in return for worthless paper. Food riots broke out. Parties of workers marched into the countryside to dig up vegetables and to loot the farms. Businesses started to close down and unemployment suddenly soared. The economy was collapsing.

Meanwhile, middle-class people who depended on any sort of fixed income found themselves destitute. They sold furniture, clothing, jewelry and works of art to buy food. Little shops became crowded with such merchandise. Hospitals, literary and art societies, charitable and religious institutions closed down as their funds disappeared.

The question is: Do you think the current US government is smarter than the German government of 1920? Why would they be, given the coddling and bonuses they've always known at Goldman Sachs?

Many months ago a friend asked me if I thought this would be as bad as the 1930's. I said yes, at least that bad, but almost certainly worse. Take the Great Depression and the Weimar currency collapse and put them together, and you're starting to get close, but you're still not there. Our manufacturing base has been gutted, and cheap oil is coming very swiftly to an end. I try to tell myself that it's not the collapse of the Roman Empire... it's just the 1340's, is all.

It's the V that gets you

I'm going to do a horrible thing to my 3 or 4 readers, and focus on an equation in this post. (Gaaah!!!) Here it is:

(amount of Money) x (Velocity of money) = (Prices of stuff) x (Quantity of stuff sold)

Otherwise known to econ students as MV = PQ. You can also think of it as MV = GDP, or MV = total economic activity aside from bartering. [V, or the velocity of money, means how often a dollar changes hands in a given year. Higher values mean there's more spending.]

Now, I never took an econ class in my life, and I never saw this equation until a few months ago. But it seems I'm not the only one who's been neglecting this equation. Many people in the "hard money" or Austrian camp tend to get obsessed with M, the money supply, rather than with MV. They tend to define things based solely on M, e.g.:

Inflation is best described as a net expansion of money supply and credit. Deflation is logically the opposite, a net contraction of money supply and credit. (Mish)

Inflation is an increase in the money supply. (Ron Paul)

Inflation and deflation are purely monetary phenomena.... Inflation is the very specific case of a rise in general price levels driven by an increasing money supply. If the money in an economy grows at a faster rate than the pool of goods and services on which to spend it, general prices are bid higher as a result. Only money creates inflation. (The Market Oracle)

This last blurb tacitly makes reference to the MV = PQ equation, but it pretends V is not there! If M is increasing, while Q (the total amount of goods and services) is not, then, the author concludes, in order for the equation to balance, P (prices) must increase.

This is not a fair conclusion. If V falls, it may counteract the increasing amount of money. Conversely, "Only money creates inflation" is not correct, because if V increases then inflation may result even with a constant money supply. The question is not "what is happening to M?" but rather, "what is happening to MV?"

Mr. Bernanke doesn't seem to recognize this, either:

By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

I guess eventually, over the long haul, he may be right. But the assertion that printing money "always" generates higher spending (PQ) once again ignores V altogether. We've seen this with the tax credit stimulus that was supposed to boost the economy... it didn't work very well, because people didn't spend that money. They paid down debts or stuck it under the mattress. To take an extreme example: if V = 0, then MV= 0, no matter how fast M is increasing.

Consider Weimar Germany, where velocity of money drove inflation moreso than the total money supply did.

By the end of the war, the amount of money in circulation had increased four-fold. In view of this, the extent of inflation was less than one might have expected. The consumer price index had risen 140% by December 1918....

Some rather simplistic folks would argue that a four-fold increase in the amount of money should have resulted in a four-fold increase in prices. Such folks should recall that the equation is MV = PQ, and not M = PQ. M went up by a factor of 4, but because people do not spend much money during wars, V went down. Thus, prices were not as strongly affected as one might expect, if one is looking solely at money supply. But then the war ended:

[I]nflation resumed after the peace until by February 1920 the price level was five times as high as it had been at the armistice. Yet during this same time the amount of currency in circulation had only doubled. Prices were in fact rising much faster than the rate at which money was being printed.

Yes, because the war was over now, and people were spending again. Velocity surged, and with it, prices.

Currency collapses -- often referred to by the inapt term hyperinflation (as if it's just an extension of regular inflation, which it is not) -- primarily seem to be caused by a catastrophic swing in velocity, from very low velocity (hoarding of money) to extremely high velocity (desperate panic buying of anything of tangible value). Jim Sinclair says history proves that currency devaluations or failures arise from very bad, deflationary economies. During the bad times, people don't spend. They hoard cash.

During this pre-collapse period, governments commonly print money to pay bills, as the Fed has begun doing. They also try to goose the economy by printing money and handing it 'round, hoping to get the party started again. This doesn't work very well, because when your economy is faltering and unemployment is rising, it's hard to get people to spend any extra cash they may have been given.

But the day comes when the psychology changes. Here again I would cite Jim Sinclair, who has repeatedly said that a currency collapse is a psychological event. The madness of crowds swings the other way, from panicked hoarding to panicked buying. (In Weimar the shift was more dramatic due to massive speculation in financial markets, which rapidly turned against their currency; but this is still a psychological event.) The change happens at some very unpredictable point, at the moment when confidence in the currency is lost. Suddenly people would rather own anything but the currency. During this phase, if you go to the store and all they've got to sell is 8 toasters, then you buy 8 toasters. That's the psychology that destroys currencies.

In terms of our equation, during the period before "hyperinflation" you have an increasing M but a falling V, so you do not see major price inflation. The currency begins to fail in earnest when V turns around and begins to shoot upward. All of a sudden MV is skyrocketing, but on the other side of the equation, Q cannot skyrocket because it is subject to physical constraints. There is only so much factory space, only so many engineers, and so on, so Q must remain relatively stable. This means that P must increase in line with MV. Prices go up rapidly, which is to say, the currency rapidly loses value.

The printing of new money, and thus the larger value of M, has a multiplying effect and makes any increase in velocity worse. It also plays a role in causing loss of confidence in the first place. But it's not like there is some value of M beyond which the currency begins failing. That failure occurs when the velocity changes.

In short, it's the V that gets you.

Not one or the other, but both

One of my favorite financial writers, Jim Willie, recently wrote:

One of the primary objectives of the banking elite in firm control of the USGovt and USCongress is to confuse the public and investment community on the entire topic of inflation, what it is, how it is measured, and its risks. The same goes for deflation. All debate as to whether the Untied States will suffer from inflation or deflation is a horrible misdirected distraction that manifests the confusion. The US will suffer both higher monetary inflation and worse economic deterioration, not one or the other, but BOTH, and with steadily increasing intensity.

That is, our currency will be losing value, and our economy will be slowing to a standstill. In other words, decline and devaluation (see my earlier post).

Now, here is the confusing thing. Normally, if sales are declining and the economy is slowing down, companies would slash prices. Similarly, because home sales are down, home prices are also down. You have to have lower prices in order to get goods to move in a bad economy.

On the other hand, the dollar is losing value and we should be seeing higher prices because it takes more crappy dollars to buy the same stuff.

To some extent, these two bad trends are canceling each other out. This is one of the problems with only looking at prices. We have two really bad things going on-- total economic slowdown, plus a currency that is losing value like a balloon with a slow leak. But you can't see it in price data because they cancel out. Depending on the measure, prices may look a tad higher or a tad lower in a given month, but we're not seeing anything dramatic.

That does not mean nothing is going on. One barometer of the real value of a dollar is how many dollars it takes to buy an ounce of gold. This is why central banks, commercial banks, and governments in the West fight like hell to keep the price of gold down. Higher gold prices impugn their currencies.

As for economic deterioration, consider the trucks and rail cars piling up in various locations around the country. Or the list of now-bankrupt companies, including Crabtree & Evelyn, Eddie Bauer, Bennigan's, Chrysler, GM, Value City, Sharper Image, Six Flags, Mervyn's, Linens 'n Things, KB Toys, Saab, Nortel Networks, and Circuit City. Consider the empty commerical real estate-- something like 10% of all downtown London office space is now vacant, and there are few strip malls in the US without at least one empty space.

The worst statistic of all, indicative of an economic decline on a par with the Great Depression, is the June unemployment rate, as calculated by economist John Williams of Shadow Government Statistics. He puts the true unemployment rate at

20.6%.

One in five American workers cannot find work. That is one heck of a slowdown. Possibly if we still had a manufacturing base, or if we were not net importers of food, or if exported more than we import, or if we weren't so poor we have to buy shoddy Chinese tchatchke from Wal-Mart, then we might have hopes of a recovery in the not-too-distant future. But that's just wishful thinking.

The worse things get, economically, the less willing other nations will be to loan us money. We've already begun printing money to pay the bills (essentially, counterfeiting our own currency). Once you go a certain distance down that road, there's no turning back, and it only leads to one place: currency collapse. In the usual parlance, that's hyperinflation in the midst of a catastrophic deflation, much as Jim Sinclair has predicted.

Not one or the other, but both.

As goes the USSR...

A very witty Russian-American named Dmitry Orlov gave a presentation some years back in which he argued that the USSR was better prepared for its collapse than the US is for its own demise. Collapse, as Orlov sees it, is the inevitable denouement of any Empire -- "no exceptions."

Although his message is grim, Orlov is both funny and empathetic, although to an average American his assessment of "the greatest nation on Earth" may seem harsh. (This reminds me of a David Sedaris line from when he visited Europe, which went something like: "It began to dawn on me that other countries had slogans, too, and none of them was "We're Number Two!")

Anyway, if you like Orlov's take on things, try his book Reinventing Collapse, essentially a much-expanded version of the above presentation. I guarantee you some laughs.

He's also got a blog, and he's posted another more recent presentation titled Definancialisation, Deglobalisation, Relocalization. Take a gander... I thought it was a great talk.

Decline and devaluation

If you read any economic news at all, you've run across the "inflation vs. deflation" debate ad nauseum. It's got to be one of the most frustrating discussions in history, because the meaning of the words inflation and deflation changes from one person to the next. Most of the debate winds up centering on what exactly inflation is -- rising prices? Increasing money supply? Increasing money velocity? And things only deteriorate from there, because nobody knows what "money" is or how best to measure the money supply-- including, by the way, the Federal Reserve. Take it from Alan Greenspan, in 1999:

We do know that inflation is a monetary phenomenon but we don’t know exactly what money is. It is not any of the M’s people use – M1, M2, M3, MZM. They’re only proxies people use when they talk about inflation. We have great difficulty identifying something we can call true money.

Similarly, deflation seems to mean (depending on the commentator) falling prices, decreasing money supply, or decreasing velocity. Falling production, diminishing trade, and rising unemployment are also (sometimes) taken as signs of deflation, I suppose because they imply a decrease in money velocity.

Putting aside the tussle over definitions, what inflation means to the average person is a fall in the value of the currency. Your average Jane doesn't care if it came from money printing or China dumping dollars or economic recovery (i.e. increasing velocity); she just knows she can't buy as much at the grocery store because the dollars in her wallet are losing value. I'm swearing off the use of the term "inflation," which is now so fraught that it can derail a conversation as fast as you can speak the word. The better term is currency devaluation. This covers multiple economic scenarios, as well as devaluations by government decree.

Similarly, deflation might be replaced by the simple term decline. Maybe sales and prices are down because credit has dried up, or because money is not changing hands because people are afraid to spend, or because unemployment is skyrocketing, or because international trade has slowed to a trickle. People claim we need to understand the real cause of deflation, and they'll argue about (for instance) whether it was an insufficient money supply that caused the Great Depression, or insufficient velocity. I'm frankly sick of this particular debate. However it happened, you fix deflation by printing money and spending it on production and on nothing but production. If you're on a gold standard, you get extra money by redefining the exchange rate between your currency and gold, as FDR did.

Because people insist on using the terms inflation and deflation, it's very difficult for the human mind, which likes dichotomies, not to see these as opposites. The prefixes imply that they're opposites, and besides, that's just how homo sapiens think. Certain schools of thought, such as the strict Austrians, define them as opposites.

And yet, the United States is currently experiencing both, as the dollar erodes relative to other currencies, gold, and crude oil, even while unemployment soars and industrial output tanks. We are experiencing both economic decline and currency devaluation, simultaneously. There is nothing opposite about these trends. In fact, it's easy to see why they would go hand in hand, because who wants the currency of a nation that's an economic and fiscal basket-case?

Quoting from How Deflation Creates Hyperinflation [i.e. Currency Collapse]:

As an example of deflation leading to hyperinflation, consider the case of the Weimar Republic. In 1920, Germany experienced a deflationary collapse, with the average citizen finding it harder and harder to get enough money for necessities. Banks, short of money, could not honor checks, and businesses were strapped for cash to buy materials and meet payroll. Fearing a collapse that would throw millions of workers out on the street, the German government desperately printed money in an attempt to re-inflate the economy. During this period, despite the government's money printing, the mark actually gained in value against foreign currencies, so that prices of imported goods fell by some 50%.

Eventually, as a result of the money supply's rapid expansion, the nation's massive foreign debt, and the shrinking economy, German citizens lost all confidence in their currency, and the Weimar Republic experienced one of the worst cases of hyperinflation in modern economic history. Billions of hoarded marks came out of hiding and entered the marketplace. The [table] below tells the rest of the story.

The table, which you can see by following the link, details the rise of the price of an ounce of gold from 170 Marks in January 1919 to 87,000,000,000,000 Marks in November 1923. Obviously the price of gold did not change; the Mark lost virtually all its value.

Hitler renewed the devastated German economy by printing new Marks but insisting that they be tied to equivalent amounts of real production and real labor [see previous post]. The German people did not love Hitler in the mid-30's because he hated Jews; they loved him because he had restored their quality of life. (There is a lesson in this: any horrific monster can come to power if he can fix the economy.) Ellen Brown cites another example of printing one's own money in order to fund real production, in this case on the impoverished and indebted island of Guernsey circa 1815:

The end result of the Guernsey Experiment was spectacular – new roads, sea defenses and public buildings were established, fostering widespread trade and prosperity. Full employment was achieved, no deficits resulted and prices were stable, all without a penny paid in interest. What started as a trial led to a string of construction projects, which still stand and function to this day. Money was used in its purest form: as a convenient mechanism for oiling the wheels of commerce and development.

As much as I have learned from "hard money" advocates who abhor money printing of any kind, it does seem that there are examples where money was printed out of thin air and this engendered spectacular recoveries. Western elites don't want this idea getting out, because they like to control currencies themselves. They don't want states, counties, or cities getting any funny ideas about wresting control from the private mega-banks who issue our money. After all, the private mega-banks rely on everyone paying them interest on loans which they created out of thin air. That is, the private banks rely on legalized robbery for survival.

When new money is printed intelligently, and used to encourage only real wealth (that is, labor and production), it can be a society's salvation. The question is: Who figures this out first? The People, or another Hitler?