Guest Post: Where To From Here?

Tyler Durden's picture




 

Originally posted by Gerardo Coco at The Cobden Centre,

We face one of the deepest crises in history. A prognosis for the economic future requires a deepening of the concepts of inflation and deflation. Without understanding their dynamic relationship and their implications is difficult to predict how things might unfold. The economic future depends on the interplay of both these forces. From the point of view of their final effects, inflation and deflation are, respectively, the devaluation and revaluation of the currency unit. The quantity theory of money developed in 1912 by the American economist Irving Fisher asserts that an increase in the money supply, all other things been equal, results in a proportional increase in the price level [1]. If the circulation of money signifies the aggregate amount of its transfers against goods, its increase must result in a price increase of all the goods. The theory must be viewed through the lens of the law of supply and demand: if money is abundant and goods are scarce, their prices increase and currency depreciates. Inflation rises when the monetary aggregate expands faster than goods. Conversely, if money is scarce, prices fall and the opposite, deflation, occurs. In this case the monetary aggregate shrinks faster than goods and as prices decrease money appreciates.

Inflation is a political phenomenon because monetary aggregates are not determined by market forces but are planned by central banks in agreement with governments. It is in fact connected with the monetary expansion to fund their deficits. Inflation raises the demand for goods and decreases the demand for money; it increases aggregate spending and money velocity as the ratio between GDP and the amount of money in circulation which expresses the rapidity with which the monetary unit is spent and respent until it remains in existence.

There is no such things as demand-pull inflation or cost-push inflation. Provided that the quantity of money does not increase, if cost or demand for some goods changes, demand for other goods must necessarily adjust, leaving unchanged the amount of spending and the money aggregate in the economic system. If some people spend more, others have to spend less, thus leaving the purchasing power unaltered. The cause of inflation is nothing but money manipulation.

Inflation is a tax affecting all real incomes. While this is obvious for the fixed ones, it is less so for the variables ones such as business income. Inflation, in fact, overstates profits by making final sale prices to rise as compared to historical sale costs. When the moment arrives that businesses renew their capital assets, the higher price they will pay for them due to inflation will absorb the extra nominal profits. Since taxes are calculated on them, real profits will be insufficient to either replace or increase capital. Hence by decumulating capital, inflation penalizes economic growth and innovation.

As an economic stimulus, inflation sets the stage for deflation. By increasing the nominal taxable economy, it reduces the real one.

Likewise, subsidies and bailouts produce the same inflationary effects because most of them are financed through monetary expansion: a money supply growing faster than the productivity of capital and labor impairs both.

If inflation accelerates and becomes extreme, hyperinflation sets in: the demand for money tends to zero and because everyone hurries to spend it to avoid the loss of purchasing power, its velocity accelerates rapidly. The monetary aggregate and prices tend to infinity and the value of money to zero. Money loses the character of a medium of exchange and the credit-debit system collapses. Because money is the prerequisite of the division of labour, its destruction implies the destruction of the latter. To avoid barter the monetary system must be redesigned. In this catastrophic state of affairs it is small comfort to acknowledge that the overall debt of a nation is repudiated.

Inflation is a precondition of extreme deflation: depression.

Deflation in itself, however, is an economic phenomenon. Economic progress has a natural tendency to lead to falling prices. By increasing production and productivity, prices decrease, signaling that the economy grows faster than the money aggregate, which means that with the same volume of expenditure more things can be bought – i.e. money has a higher purchasing power.

Because depression usually is accompanied by deflation, central banks interpret any incipient downturn in prices as a sign of crisis and try to prevent it with monetary stimulus. But a depression occurs not because the price level falls but because real output, expenditure and all incomes on which aggregate expenditure is based fall. Regardless of the causes and confusing them with the effects, central banks always inflate, opening the door to evil that they claim to cure.

True and false money

There are many definitions of monetary aggregate. Strictly speaking it is the aggregate in the narrow sense which reveals inflation because it includes only the effective means of payment  excluding short term redeemable financial assets. In fact, by definition, something that must be converted into money is not itself money. No one pays necessities with short term securities. Money is only the stock or base money needed to buy goods and services. If the public holds 50 in his pocket and banks 1000 in their reserves, the monetary base equals 1050. It’s called “base” because is the foundation upon which the banking system builds a pyramid of money and credit. Whenever central banks purchase government securities either directly from governments or from banks they increase bank reserves and the monetary base setting the pace for credit expansion.

More aggregate expenditure  follows, making nominal GDP grow. Because new credit corresponds to new debt, credit expansion by inducing more debt lowers the ratio between liquid assets and liabilities in the entire economy. When a deficit of liquidity follows to a credit crunch, debts repayment can only be made by deleveraging balance sheets and asset prices across the board sharply fall. Moreover part of the overall debt is cancelled by insolvencies and the combined effect of prices and debt reduction shrinks the monetary and spending aggregates triggering deflation in the form of recession. On the other hand the overall debt does not decrease because governments do not liquidate it as the private sector does. Quite to the contrary they increase debt to pay the outstanding so as to avoid default. As a matter of fact they must increase their debt to make up for debt deflation in the private sector.

Should in fact the overall debt collapse, there would be an extreme deflation or depression because the money aggregate would contract dramatically. In fact the money equivalent to the defaulted debt would literally vanish. It is for this reason that central banks monetize new debt at a lower interest rates, raising its value. Because lower interests raise also the values of all assets, the entire economy looks healthier. But debt monetization gives only the illusion of wealth. It produces inflation growing faster than GDP with the effect of diluting wealth. Real incomes fall not only because of money debasement but because by raising their nominal value, inflation pushes them into higher tax brackets. In this context only the financial sector thrives because in a context of ever growing uncertainty and unpredictability, instruments for averting risks proliferate.

All the financial bubbles and the mass of derivatives are just the consequence of debt monetization. By keeping interest rates extremely low, monetary expansion finances speculation at low cost, allowing it to shift huge amounts of money and earn risk-free profits by capturing price differentials between different markets, which, is the only way to gain returns and preserve purchasing power when interests are kept low or even negative. Because new money is dissipated through the process it must continually be recreated. Debt monetization result in a never ending process of creation and destruction of money. It discourages productive activities leaving the economic future at the mercy of speculation.

All this destabilizing process is the consequence of the creation of money out of the debt. Debt monetization is the exchange of new money for a promise to pay it in the future. Now, if money is a function of the debt it is impossible that we can settle debt permanently. Legal currencies are false money because they depend on the debt expanding and contracting accordingly. Real money cannot be a liability or a promise to pay unlimited debt of third parties subject to default.

The role of money can be discharged only by an economic good that is always in demand, preserves its value and is immune from the failure of third parties. The money with these characteristics is gold, the only financial asset which is not dependent on anybody’s promises and is not subject to debasement or default. As long as this truth is not fully recognised  no structural reform whatsoever can overcome a crisis which is systemic precisely because it is immanent to an economic and financial system based on debt. Without sound money on the scene of the economic drama, inflation and deflation will continue to play their conflict until the final outcome: the monetary breakdown.

The currency cliff

In a context of false money, fiscal and monetary instruments are not only ineffective, but harmful. The first, trying to reduce the debt by increasing the tax burden results in draining resources when they are most needed. The second by refinancing the debt and boosting the monetary aggregate to prevent its collapse produces inflation. Hence debt cannot be tamed. Only hyperinflation or default can annihilate it. But the first would destroy the money system, the second would trigger a deep depression.

How will this all end? In history, debt monetization has always produced hyperinflation. As long as countries are enjoying credit, fiscal deficits through inflation work. But when they incur new debt to repay the outstanding they reach the point of no return because it becomes clear that they cannot repaid it. Thence hyperinflation has always been the consequence of the inability to service the debt. Investors start to lose confidence in the country and its currency and so citizens. At this point, monetary policy can no longer defend it and a collapse ensues.

In Western countries, despite the exponential debt a runaway inflation has not yet occurred. Monetary policy has only inflated the financial sector, starving the private one, which is showing a bias towards a deflationary depression: here the demand for money increases, the velocity and prices fall but the monetary aggregate holds as long as debt monetization works. According to the quantity theory it is the money actually spent on goods and services that causes inflation. As long as liquidity is parked in the bank reserves or finances speculation it does not flow into the real economy and inflation progresses slowly. If money were suddenly released it would have the same destructive impact of a dam breaking and overthrowing water downstream. Central banks in fact control the quantity of money but not  its velocity, which depends on social forces.

At the present fiscal and monetary policies try to preserve a precarious status quo, balancing inflation and deflation, a state of affairs which allows the debt perpetuation. But this balance can not be maintained for long because sooner or later inflation will be translated from the financial into the real economy via the general currency debasement taking place worldwide. It must not be forgotten that not only are currencies depreciated by debt monetization and fiscal deficits. Governments debase their currencies, destabilizing their trading relationships too by correcting trade deficits to boost exports. Hence a currency downtrend might eventually trigger a systemic collapse, because speculation causes further debasement through currency short-selling .

Ultimately the combined action of low interest rates and currency depreciation would drive investors away either from financial securities or currencies on behalf of tangible assets, notably commodities, whose prices would escalate. Demand for money would fall and so velocity and aggregate expenditure. At this point the market value of the debt securities would fall, bringing the interest rate to astronomical levels. The value of the whole debt would collapse while the price increases of critical commodities would hit the entire economy, pushing up the consumer prices dramatically.

All this process is not linear but oscillatory: massive flows of money would alternatively inflate and deflate financial and real sectors, causing vibrations in the economy that superimpose, eventually reaching a magnitude sufficient to bring down the whole economic structure. It is impossible to predict whether defaults would occur through hyperinflation or depression and where they would start first. Probably the first countries to be affected would be the ones with the weakest currency and the most fragile political setting. The outcome will also depend on the geopolitical situation. The prospect of the extension of a war would certainly make for hyperinflation. Floating currencies would disappear as suddenly as they appeared a little more the forty years ago. It is very hard to imagine the social cataclysm that it would ensue.

Managing deflation

If all the disruptive effects of inflation were understood it would be prevented. The fact is that its effects are confused with real economic growth while inflation is pure and simple currency debasement via increasing currency supply destroying money gradually and systematically. Inflation cannot be controlled. Once the currency loses value it is lost forever. Deflation, by contrast, can be controlled – avoiding its deepening into depression. The latter is like a purge whereby the economic organism expels the poisons accumulated previously with inflation. A gradual deflation induces the recovery because it realigns values with the economic reality, reducing the inflated money stock at level that makes the debt sustainable and repayable. The currency appreciation which ensues is just the antidote to depression itself. In fact, when the quantity of money tends to be measured in terms of absolute purchasing power, it corresponds to more money and therefore to more liquidity.

Note, here, the difference between the true and the false money: defaults make money disappear, while gold, the real money, never does: once in circulation it will remain – it cannot be eliminated by default. The criticism that gold causes depression is unfounded; on the contrary avoids it.

Inflation and its effects can be contended by managing deflation, and this is a political task.

First, to avoid a systemic collapse reciprocal debts have to be either renegotiated or condoned. It must be recognized that their current dimension makes it impossible to repay them, opening the way to uncontrolled defaults.

Second, government spending must be reduced as well as taxes. At the same time, all banks’ bad debts recorded in the accounts as sound credits should be written down. Without this adjustment banks will never be able to operate normally, resuming their credit activity and financing the economy, neither will they be able to attract new capital. The recognition of their losses is the prerequisite for their financial reconstruction. In order to be able to provide new credit banks must first receive it. No investor is willing to lend them funds with the fear of covering losses disguised as gains.

All this restructuring would last a few years and would give a positive signal to markets that facing true values can restore the lost confidence in the economy. Currencies would appreciate again and money would start to flow again without inflating. However, problems would not be solved and crisis would recur with a debt based money. Hence a process of readjustment must contemplate the return of the real money, gold. Since 2010 central banks have become net importers of gold. Why keep it in their coffers? It has to be used immediately to recapitalize banks, and remonetized straight after.

Unfortunately governments and banks will go for more inflation. It is well known that both usually make not only the wrong choices but the exact opposite of the right choices. As history teaches, besides money the freedom of citizens can also be the victim.

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Fri, 12/07/2012 - 18:21 | 3044119 fonzannoon
fonzannoon's picture

Calm down. Once we emilinate the debt ceiling we can start to get the debt under control. Yup. That's how it works.

Fri, 12/07/2012 - 18:28 | 3044134 AldousHuxley
AldousHuxley's picture

as long as fed buys USTreasuries, debt ceiling doesn't matter as congress will just print and borrow.

 

 

 

Fri, 12/07/2012 - 20:58 | 3044520 AldousHuxley
AldousHuxley's picture

what's there to follow.

the power buck stops in congress. including power to appoint dovish fed chairman.

Sat, 12/08/2012 - 01:03 | 3045015 EscapingProgress
EscapingProgress's picture

I predict strong economic headwinds caused by enormous financial shit blizzards.

http://www.youtube.com/watch?v=S-5_Nw0tFXE

"You feel that ... the way the shit clings to the air?"

Sat, 12/08/2012 - 01:31 | 3045041 economics9698
economics9698's picture

September 2013.

Sat, 12/08/2012 - 07:42 | 3045172 Supernova Born
Supernova Born's picture

Food inflation internally destabilizes a nuclear power, then a second or more. Then a nuke or 50 go off and a shit ton of people die.

Then, ???

Baseless fiat would never have lasted this long without the fear of nuclear catastrophe.

The nuclear catastrophe will come anyway.

Sat, 12/08/2012 - 08:10 | 3045244 Radical Marijuana
Radical Marijuana's picture

Yes, Supernova Born, that is my view too:

Baseless fiat would never have lasted this long without the fear of nuclear catastrophe.

This article about "Where to from here?" was quite a GOOD ARTICLE:

All this process is not linear but oscillatory: ...

The prospect of the extension of a war ...

It is very hard to imagine the social cataclysm that it would ensue ...

The conclusion of this article appears to me to be that those who gained the power to make money out of nothing, as debts, by corrupting the government, and thereby forcing everyone else to accept that runaway fraud, will CONTINUE TO RUNAWAY: "Unfortunately governments and banks will go for more inflation."

For all practical purposes, the banks control the governments, although theoretically, it is the other way around, and from some perspectives it appears that We the People, and our governments control the banks, and indeed, own the vast majority of the shares in the banks, the actual operations of the system are due to the history of lies backed by violence, with the best organized gangs of criminals able to form a shadow government, of puppet masters, that pull the strings of the puppet politicians, who are the best professional liars, to continue to fool enough of the people, within the context of the puppet shows put on by the mass media, which are in debt to the banks, in similar ways to which the governments are in debt to the banks.

The inherent structure of the basic system is fraud, backed by force, through the processes whereby the biggest gangsters, the banksters, were able to take control over the money supply, and gained the power to legally counterfeit the money that all others were forced to use, since all other alternatives were systematically destroyed during those processes. That system of huge lies, backed by lots of violence, is oscillating wilder and wilder, and shaking itself apart. However, those who made and maintained the system have no other ends or means than to continue to enable themselves to make more and more money out of nothing, as debts, as the thing that benefits them, and therefore, as the thing that they regard as the solution to the problems created by that system. The ways that that privatized fiat money-as-debt system are operated automatically drives social polarization, where a smaller and smaller minority, closer to the source of the money supply, constantly benefit to greater degrees from that fundamental financial fraud, while those further away from the source of that fiat money suffer worse and worse.

However, the solution can not be return to commodity based money, like a gold standard. That is way too old-fashioned and silly to the point of being stupid. A gold standard relatively works because it is closed to the laws of nature, i.e., the conservation of matter. However, the conservation of matter is itself a special case of the conservation of energy.

THE PRIMARY POINT IS MATTER IS A FORM OF ENERGY. (Your handle, Supernova Born, indicates to me that you appreciate that.) A better monetary system should be based on a better understanding of the laws of nature, which laws now go far, far beyond the old-fashioned ideas about the conservation of matter, into ideas about the conservation of energy, through systems.

While that is theoretically not too difficult, it is practically impossible, because following that kind of innate radical truth, it becomes clear that the entire established system is based on frauds backed by force, and that developed to become a global electronic fiat money fraud, backed by weapons of mass destruction. That whole system has looped around and around itself, getting tangled into a bigger and bigger knot.  Bit by bit, stage by stage, the best organized gangs of criminals were able to make and maintain governments where the most important public powers are effectively privatized, and used to benefit tiny elites, while screwing everyone else worse and worse. Instead of the money being a public utility, the money supply has ended up being the supreme privilege enjoyed by the most wealthy and powerful people, who are thereby able to totally dominate the political processes, to keep their systems going.

Thus, more and more money made out of nothing as debts is the thing that they have been doing, and will continue to do. As you correctly stated, Supernova Born, the only thing that has made it possible for that system to grow to its current globalized astronomically amplified size is that it IS backed by weapons of mass destruction, and therefore, when its wilder and wilder oscillations finally shakes itself apart, then there will be genocidal wars, and democidal martial law, which will NOT make things get any better ... But nevertheless, there does not appear to be any way to avoid eventually going through those social storms.

Indeed, the ONLY theoretical solutions must still be based upon systematic energy laws. That means that the money supply that was and is backed by murder will continue to be. The problems we face are the runaway triumph of militarism creating a monetary system which is fraud backed by force, amplified many orders of magnitude by progress in science and technology, BUT, the basic social and political sciences are all still based on the past triumph of the biggest bullies, the banksters, becoming triumphant, and brainwashing, and enforcing, everyone else to believe, or accept due to lack of any alternatives, the runaway systems that the banksters have built.

Therefore, nice little logical articles like this one do a great job, up to the point where they fantasize about the old-fashioned solutions to the runaway postmodernizing problems. The inescapable realities are that the debt controls depend on the death controls. There will never be any surviving future for human beings where those expressions of systematic energy transformations are no longer the case.  What exists is a combined money/murder system, and that system has become global electronic fiat money frauds, backed by the force of weapons of mass destruction.

Since the vast majority of people do not want to understand that, and those who are the most wealthy and powerful people do not want to understand that, and do not want anybody else to understand that, we are being driven faster and faster through to psychotic breakdowns of those systems, but that means war and martial law, with weapons of mass destruction there to make everything become orders of magnitude more insane than we can possibly imagine!

The only theoretical solutions require revolutions in the money system, with changes over the source of the money supply. However, that political economy revolution is not possible without embracing a greater human ecology revolution, (which also means now an even greater industrial ecology revolution too.)  The REAL system is a combined money/murder system, and any new system MUST be a new combined money/murder system.

The problem, obviously, is that the current systems are oscillating wilder and wilder, and those who control those systems will not consider doing anything else than them continuing to exercise and enjoy their privilege to make the public supply of money out of nothing, in ways that benefit those who are already the most wealthy and powerful, and who already almost totally dominate those established systems. Thus, the established systems will continue to oscillate in wilder and wilder ways, until they collapse into chaos, with the result being genocidal wars, and democidal martial laws, as they collapse into chaos, which, in turn will drive even greater wilder oscillations, beyond our imagination, as civilization goes through some series of psychotic breakdowns.

The ONLY genuine solutions MUST be a more regularized and rational set of death controls, or a murder system, which stabilizes a saner economy, that fits rationally within overall ecologies which make sense as systematic energy flows. However, the ACTUAL solutions are for the established social systems of fraud backed by force to become crazier and crazier, until they shake themselves apart, until the threats of force that actually back up the runaway triumphant frauds attempt to actually continue to do that, which means that weapons of mass destruction finally get used, and thereafter, those events blow the entire frame of reference away!

It is nice to imagine that that will be limited enough, so that enough people survive, and thereafter, appreciate more radical truth,  enough to develop better human and industrial ecologies, within the natural ecology. However, at the present time, there is not the slightest sign that that is possible. Instead, the insanity of runaway triumphant financial frauds, driving themselves through the madness of increasing oscillations, until they destroy themselves, and almost everyone else at the same time, appear to be the most probable future ... although we cannot say exactly when and how ...

Personally, I am getting more and more desperate thinking about the ways we are headed towards insane social storms, and the ways that there is nothing whatsoever that I can imagine which can be done about those events to prevent nor prepare for them, that appear to be practical and realistic and worth while. After spending most of my life learning about these kinds of problems, I am now reduced to being ~100% objectively depressed about what I believe is going to happen, especially since there seems to be nothing whatsoever that makes sense which can actually be done about that. These problems have been amplified to such an ASTRONOMICAL SIZE that nobody can understand them anymore, at least not in any effective ways that enough other people would also agree with.

Sat, 12/08/2012 - 08:25 | 3045255 Disenchanted
Disenchanted's picture

 

 

“For we are opposed around the world by a monolithic and ruthless conspiracy that relies
primarily on covert means for expanding its sphere of influence, on infiltration instead of
invasion, on subversion instead of elections, on intimidation instead of free choice, on guerrillas
by night instead of armies by day. It is a system which has conscripted vast human and material
resources into the building of a tightly knit, highly efficient machine that combines military,
diplomatic, intelligence, economic, scientific and political operations. Its preparations are
concealed, not published. Its mistakes are buried, not headlined. Its dissenters are silenced, not
praised. No expenditure is questioned, no rumor is printed, no secret is revealed. It conducts the
Cold War, in short, with a war-time discipline no democracy would ever hope or wish to match.” ~
John F. Kennedy, President of the United States.

Sat, 12/08/2012 - 11:11 | 3045380 Roosting Chicken
Roosting Chicken's picture

I think I'm following you (and that is some radical marijuana).  When the country was first founded the energy was with the people and continued through the industrial revolution.  Now that the people have been deindustrialized the energy has moved to the TPTB.  It has not been destroyed because it can't be, following the first law of thermodynamics.  You say that this can only move in one direction and that is further away from the people to the point of nuclear destruction.  While you have a firm grasp on the first law of thermodynamics you may be forgetting the second law.  If you think of the people as one system and TPTB as another system that have become more and more isolated, eventually some of the energy has to move back to the people until we are in equilibrium.  That is, the energy will not keep moving away from the people as long as the two systems are in contact and interdependant.  The only question then, is how that happens and how long that takes to happen.  I suppose it could happen through nuclear war but I don't see how this is necessary for it to happen, it could happen through revolution (HA, right).  It could happen through enlightenment after many years of post-apocalyptic depressions.  Like you say, it is not linear, it is cyclical, because entropy must be achieved.  It's the law.  But I'm guessing it takes hundreds if not thousands of years.  Go short on reindustrialization of the people. 

Sat, 12/08/2012 - 11:11 | 3045381 Roosting Chicken
Roosting Chicken's picture

I think I'm following you (and that is some radical marijuana).  When the country was first founded the energy was with the people and continued through the industrial revolution.  Now that the people have been deindustrialized the energy has moved to the TPTB.  It has not been destroyed because it can't be, following the first law of thermodynamics.  You say that this can only move in one direction and that is further away from the people to the point of nuclear destruction.  While you have a firm grasp on the first law of thermodynamics you may be forgetting the second law.  If you think of the people as one system and TPTB as another system that have become more and more isolated, eventually some of the energy has to move back to the people until we are in equilibrium.  That is, the energy will not keep moving away from the people as long as the two systems are in contact and interdependant.  The only question then, is how that happens and how long that takes to happen.  I suppose it could happen through nuclear war but I don't see how this is necessary for it to happen, it could happen through revolution (HA, right).  It could happen through enlightenment after many years of post-apocalyptic depressions.  Like you say, it is not linear, it is cyclical, because entropy must be achieved.  It's the law.  But I'm guessing it takes hundreds if not thousands of years.  Go short on reindustrialization of the people. 

Fri, 12/07/2012 - 22:30 | 3044746 rbg81
rbg81's picture

Want to know the real way to starve the Beast?  Create an Occupy-like movement that will demand that Banks pay HIGHER interest rates on savings.  A lot of people are pissed that their getting zilch on their savings--tap into that Populist Anger.  If Banks had to pay higher rates to assuage the Public, their US Treasury would too.  That would make Bernake and Obama shit their pants.  If the Government had to pay higher interest rates, then the Charade would start to unravel and the whirlwind would begin.

Fri, 12/07/2012 - 23:37 | 3044880 OneTinSoldier66
OneTinSoldier66's picture

I proudly wear my END THE FED T-Shirt. Try it, you might find that you like it!

Sat, 12/08/2012 - 05:21 | 3045167 cynicalskeptic
cynicalskeptic's picture

If banks weren't getting all that 0%  money  from the Fed they'd HAVE to pay higher interest to get funds into their bank to build up their reserves.  But NOOOOOOO government 'lends' them a ton of money for free so the banks won't be declared insolvent and as a bonus pays them interest on it when it's held as a reserve.

All that money that's EARNED through your labor is grossly devalued by the tons of created out of thin air free money provided by government.  Money that represents labor and value created is competing with 'counterfeit ' money created out of thin air that represents neither labor or value.

Long gone are the days when banks wanted and needed YOUR money.  All the money earned by all the workers in the US is nothing copmpared to the TRILLIONS created out of thin air by government.   Of course the side effect is a DISINCENTIVE to save and a lack of any appreciable earning power for savings.  You're cheated out of the interest your hard earned money SHOULD earn and your savings for retirement can't earn any appreciable interest either.

Worse the excess money created by government causes inflation whoch makes the money you DO have worth even LESS.  So you're robbed by not being paid the interest your money should cpmmand but your money loses purchasing power because of the inflation caused by all this excess money creation. 

Sat, 12/08/2012 - 09:00 | 3045271 rbg81
rbg81's picture

Cynicalskeptic:  Excellent summary of how the current situation impacts the average American.  Unfortunately the Status Quo will never be fixed because most people are too preoccupied or, in most cases. unsophisticated to understand the underlying problem.   Most people have know that they're losing ground, but its so gradual that they are not spurred into action.  Also, there is no law or tax they can point to that provides a clear understanding of why things are going wrong.  Its like dealing with the weather--it just is and there appears to be no one to blame.

But, of course, much of this money IS going somewhere.  Its going to fund Government entitlements, both individual and corporate.  The #1 receipient of this cheap $$ is the Government.  Without it, the deficit would explode and the Entitlement state would collapse.  Its the perfect stealth tax.

Sat, 12/08/2012 - 13:28 | 3045451 rufusbird
rufusbird's picture

It does work...

" People are stashing more money in locally owned banks and credit unions in the central San Joaquin Valley, while one of the nation's largest banks has seen deposits nose-dive at its branches in the region.

No one's quite sure why, although the trend coincides with the rise of public sentiment against big banks in the depths of the recession.

About three years ago, political pundit Arianna Huffington and her Huffington Post website launched Move Your Money, an effort to encourage people and businesses to shift their money away from the largest national banks -- largely perceived as the main contributors to the economic crash -- and into smaller community banks.

Since that time, deposits in 11 community banks headquartered in Fresno and Tulare counties grew about 10%, rising by about $346 million between mid-2009 and mid-2012.

During the same period, deposits at Bank of America's 34 branches across Fresno, Kings, Madera and Tulare counties tumbled by more than $640 million, a 19% drop."

Read more here: http://www.fresnobee.com/2012/12/01/3085905/deposits-shift-to-valley-ban...
Fri, 12/07/2012 - 19:20 | 3044264 Zap Powerz
Zap Powerz's picture

Obama said in 2006:

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” he said on March 16, 2006. “Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership . Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.”

Now he wants the debt limit raised to infinity.  Does that mean his leadership is an infinite failure?

Fri, 12/07/2012 - 20:06 | 3044389 francis_sawyer
francis_sawyer's picture

Leadership?... No ~ it simply means he's a goddamned ignorant lying son of a bitch programmed puppet ass fuckwad... Feel free to clarify at will...

Fri, 12/07/2012 - 22:13 | 3044680 Yes We Can. But...
Yes We Can. But Lets Not.'s picture

I'll play.

He's a feckless, sophomoric, incompetent, narcissistic, perpetually lying, believing-in-gubmint-as-the-solution boob pushing a counterproductive failed ideology destined to result in disaster that will harm most Americans and all of their descendants.  He thinks he knows what he is doing.  He thinks his henchmen - Biden, Bernanke, Geithner, Axelrod, Jarrett, Reid, Pelosi, Cabinet, czars, and the rest know what they are doing.  They do not.  We will all one day bid him good riddance as he claims his well-deserved throne atop the scrap heap of history next to the remains of the likes of FDR, Stalin, Mao.

Sat, 12/08/2012 - 01:38 | 3045049 Anusocracy
Anusocracy's picture

Come on you guys, you know you're holding it back.

 

Sat, 12/08/2012 - 03:07 | 3045122 SanOvaBeach
SanOvaBeach's picture

And of course, your a fucking genius that shits ice cream.  Since your so smart you ass-wipe, why not run for office and set us all straight!

Sat, 12/08/2012 - 06:55 | 3045206 StychoKiller
StychoKiller's picture

Careful what you wish for...

Sat, 12/08/2012 - 06:55 | 3045207 StychoKiller
StychoKiller's picture

Careful what you wish for...

Daid gummit!

Sat, 12/08/2012 - 12:00 | 3045444 imapopulistnow
imapopulistnow's picture

Bobby Bowden for Prez?

Sat, 12/08/2012 - 17:34 | 3045931 SanOvaBeach
SanOvaBeach's picture

7minus ass-wipes!  It is east to click a minus, but really hard to type out a solution.  Fuck you, the -7 ass-wipes..............

Sat, 12/08/2012 - 22:54 | 3046299 Yes We Can. But...
Yes We Can. But Lets Not.'s picture

Why do I "not run for office and set us all straight?"

 

I would not initiate a run for POTUS for precisely the same reason Obama should not have in 2007 - because I am not prepared for the job.  I would be doing the country a horrific disservice, just as Obama did/has.

However, at least with me, you'd not get the failed ideology, the gross narcissism, the race baiting, the divisiveness, the bowing, and the nasty First Lady. 

I'd suck as POTUS, just not nearly as bad as Obama.  I'd also:

1) Invite you to the White House to inspect my hardcopy birth cert

2) Not lie about having registered with selective service

3) Show you a social security card not fraudulently obtained

4) Move my lips on occasion whilst not lying

5) Tell you, straight up, who my actual biological father is

6) Not have two bio's written about myself, filled with fantastic shit

7) Show you my hardcopy college and grad school transcripts

8) Write my own shit - no prompter.  If it sucks, it sucks.

9) Be happy to tell you how I financed my education at State U

10) Turn the WH into a bunker, and proceed to prosecute 'em

Sun, 12/09/2012 - 12:54 | 3046939 LawsofPhysics
LawsofPhysics's picture

You are an absolute moron if you really think anything but local elections really matter.  The Corporation for the United States of America has owners.  This is the very real truth of the situation in the America.  What happens in the boardrooms of the elite (who all went to the same schools and belong to the same "clubs") is what really matters.  Wake the fuck up!!!!  There is no longer any accountability and hasn't been since America closed the silver/gold window.  Recognize that once a realitive few control the money supply and can print to infinity, they can buy anything including your "representation and then do whatever the fuck they want.  Nothing will change until everyone at all levels of society is held accountable for the actions and are made to suffer real consequences for bad behavior.  If there were real consequences, then the owners, management and shareholders would be forced to pay back creditors with their own private wealth when they bankrupt a company.  Instead these fuckers get a motherfucking bailout and everyone else pays while they keep their beaches houses and extravogant lifestyles. 

Wake the fuck up you ignorant fucking sheep.

Sat, 12/08/2012 - 12:56 | 3045146 AmCockerSpaniel
AmCockerSpaniel's picture

FDR does not belong on the same line as Stalin & Mao. For one thing we would never had banks that were TBTF, and their CEO's getting 30 billion dollar bonuses (2008, 2009, 2010, 2011) while the people are being lied to. We would still have Glass–Steagall, and no free trade, plus jobs (real jobs that pay real wages). We would never have a supreme court ruling that a corporation was equal to a person like "we the people". Our votes would really count. Oh; And we would have SS & Medicare too, and not some for profit company taking our money, and doing what ever to keep from spending it on us.

Fri, 12/07/2012 - 23:55 | 3044915 rbg81
rbg81's picture

God forbid someone in the Media should call the Ass Clown in Chief on his stupendous hypocrisy.  They never will though 'cause they might lose their place in line to give him fellatio.

Sat, 12/08/2012 - 12:26 | 3045474 buckethead
buckethead's picture

The talking points going "FORWARD" will be like this; "President Obama sought to raise taxes on the wealthy, who incidentally, can afford it, but the Obstructionists in the House thwarted his efforts through procedural terrorism."

I'm thinking you guys knew at the onset we would be hearing "Bush and the Republicans did far more damage to the economy than we knew initially".

Not necessarily untrue, but more partisan blathering.

 

Well... that said, the main post (article?) stated that a deflationary environment would make government debt more easily sustained/managed. I fail to see how this is so, as the debt is already incurred, and it is nominal. If there is deflation, those debt dollars would become more costly to raise, would they not?

Sat, 12/08/2012 - 09:09 | 3045279 WarriorClass
WarriorClass's picture

The America we grew up in no longer exists.  It has been taken over by an illegitimate government that arbitrarily enforces laws against one group, us, and not another, the oligarchy (i.e. Corzine), wants to force us to pay for the murder of unborn children and support sodomite marriage and unconstitutional wars, while violating every part of the constitution at will.

 

To pay taxes to this anti-Christ government is to be complicit with it, and suffer it's fate in hell.  This is deadly serious.

 

If you pay taxes, you are guilty.

Sat, 12/08/2012 - 09:38 | 3045298 overmedicatedun...
overmedicatedundersexed's picture

..

Fri, 12/07/2012 - 18:23 | 3044123 francis_sawyer
francis_sawyer's picture

Alan Parsons bitchez!... [The Remix]...

~~~

http://www.youtube.com/watch?v=3mjMLL9yXxI

Fri, 12/07/2012 - 20:40 | 3044475 Dick Fitz
Dick Fitz's picture

Really like that remix.

Fri, 12/07/2012 - 21:54 | 3044645 francis_sawyer
francis_sawyer's picture

Fucking ROCKS dude... I don't usually like remixes... But this one was def...

Fri, 12/07/2012 - 23:04 | 3044805 obejoyful
obejoyful's picture

Awesome, thanks dude, great song and memories.

Sat, 12/08/2012 - 06:55 | 3045202 Disenchanted
Disenchanted's picture

 

 

+1 on the APP

 

"Where do we go from here now that all of the children are grown up"

circa 2012 addition: and living back here at home

 

edit... Probably my favorite APP tune: Old and Wise

 

Fri, 12/07/2012 - 18:29 | 3044127 Yen Cross
Yen Cross's picture

 Does anyone REALLY believe in the popular VOTE?   " Get a job Amerika"...  Quit thinking about just 'your-selves'/

   Tell Mike Bloomturd that you consume 32OZ corn syrup drinks, because his policies have consumed "rational food prices"...

 Tell FEMA they belong in the basement like GOA "VEGAS Jacuzzi BOYZ"...

Fri, 12/07/2012 - 18:33 | 3044144 El Oregonian
El Oregonian's picture

DIEBOLT = DIEVOTE

Fri, 12/07/2012 - 18:36 | 3044137 Landotfree
Landotfree's picture

Another stupid ZH article. 

"to avoid a systemic collapse reciprocal debts have to be either renegotiated or condoned"

There is no way to avoid a systemic collapse.   You have built a system which is either system is expanding or is collapsing or about to collapse.   The article is so stupid I don't even know where to start.

"Unfortunately governments and banks will go for more inflation. "

Sorry you idiot, the government and banks do not have unlimited power to expand the system, the Romans were down to chipping the edges off their silver coins.   The government and the banks are crying for inflation but it's nowhere to be found... the system expanded from $455B in 1944 to $51T in 2007 at roughly 7% annually rate of increase.  Unfortunately or fortunately it's over... the system is now unable to expand no matter how hard they try... 5 years of their so called QE and they have produced around $1T of new credit to the system.... the system is at $52T, it should be north of $70T.   Inflation is dead and has been for 5 years, it will be dead for 3-7 more decades is my guess.   Liquidation of the unfunded liabilities will have to start at some point, my guess 1-2 billion unfunded will have to go.   

http://2.bp.blogspot.com/--RkLZLRlRi8/UGAGOUg7fNI/AAAAAAAAABs/HHgMlfUYP2...

 

Fri, 12/07/2012 - 18:55 | 3044185 MrTouchdown
MrTouchdown's picture

Depending on who you ask, it's between $84T and $144T. $52T is the dream number. If inflation were really dead, then the gov't wouldn't keep changing how they measure it. Don't believe the goal-post moving bastards, heh. The whole point of the article is that they will TRY to inflate until such time that the whole currency becomes unusable as a currency and everything collapses - just like what ended up happening with your Roman coin example. There are ways to avoid the collapse, but none are policially viable.

Fri, 12/07/2012 - 19:26 | 3044206 Landotfree
Landotfree's picture

It has nothing to do with what is asked.  The exact figures are published quarterly, see Federal Reserve Z1 report.  The US credit system is around $53T of the worldwide system of about $200T.

You are correct it is like the Roman empire but you are pointing to the symptom instead of the problem.  The Roman empire was not able to expand the system, which is a requirement if you attach interest to your medium of exchange.   The system is unable to expand, eventually it will start to go at a negative rate like in 2008-2009.   Yes, the credit system was going negative at an annualized rate.

Banks and government and everyone else wants inflation, inflation is dead.   Total credit debt of the system has gone nowhere even after everything that has been tried.

http://www.mybudget360.com/wp-content/uploads/2012/02/total-credit-marke...

You can get the raw data if you want.

If banks and government could cause infinite inflation you would be speaking Italian.  Fortunately, humans do not have unlimited power and all of their financial systems come to an end.  

"If inflation were really dead, then the gov't wouldn't keep changing how they measure it."

You are talking about price inflation, not inflation.  Inflation is the increase of the money supply, credit is used as money, the money supply is borderline collapsing, definitely not expanding at a great rate and not really able to pay the interest on the previous interest owed.

Fri, 12/07/2012 - 18:56 | 3044189 JLee2027
JLee2027's picture

There is no way to avoid a systemic collapse....inflation is dead.

Very strange comment, but thought provoking. How does it collapse w/o inflation? If massive liquidation are forced no one will want dollars so that will make them worthless, aka, hyperinflation. Am I wrong?

Fri, 12/07/2012 - 19:20 | 3044215 Landotfree
Landotfree's picture

What comes after hyperinflation, more inflation? No.  As the system has to expand exponentially.  Every system ends in deflation ie death.   Is the Roman Empire finanical system still inflating?  Maybe that will help. 

The system has barely expanded since 2007 and just to keep it afloat they have had to pull out all the tricks, now you have to pull out the tricks at an exponential rate.   The system is lacking about $20T and that amount is going up daily.   Attaching interest to your medium of exchange and it will end the same way every time.   Last time 100-120 million got liquidated this time, my guess 1-2 billion.   

Humans have no ability to expand exponentially forever... that would require unlimited power.   If the system were inflating properly, it would be well north of $75T right now and adding at a $5-6T rate.

How does it collapse w/o inflation?"

Inflation means expanding or increasing.

Collapse means deflating or decreasing.   

The system is not expanding at all, it started to collapse in late 2007-2008, it took through the baby out the window to stop it, next time it will take much more, why?  The system requires exponential growth.   The equation always wins the war as the only way you can win long term is to have unlimited troops.

 

Fri, 12/07/2012 - 21:05 | 3044533 myptofvu
myptofvu's picture

I don't follow you on how the money supply is not increasing. The Treasury sells bills that the Fed buys and places in the asset collumn then gives the money to the banks who lend it to institutions who place carry trades or buy anything that has a yield and anything left over gets fractional reserved to death. So I'm not following how the money supply is not growing. 

Fri, 12/07/2012 - 23:36 | 3044878 centerline
centerline's picture

Find some old articles around here.  The shadow banking system is collapsing.  The hole is being filled.  The money supply is "shifting."  Everyday people are the fuel for the economic engine.  That engine is built on perpetual growth.  When the people can no longer absorb further debt, expand, or otherwise provide more yield it is game over.  And, like a business, the system can operate for quite some time on cash flow alone even if there is no growth.  When cash flow finally dries up though... lights out.

Sat, 12/08/2012 - 05:58 | 3045169 Element
Element's picture

The article and comments sound like a repost from 2009/2010.

Just add in some Trav, Mako and B9K9.

http://www.zerohedge.com/article/uk-holdings-us-treasuries-go-exponentia...

Sat, 12/08/2012 - 10:31 | 3045341 centerline
centerline's picture

Good link.  Thanks.

Yeah, nothing has really changed over the last couple of years except confirmation that the world is locked on course - heading right into something downright nasty.  The big question for me is simply whether or not we are heading for a disorderly or orderly liquidation.

 

Sat, 12/08/2012 - 09:17 | 3045282 Landotfree
Landotfree's picture

myptofvu

"I don't follow you on how the money supply is not increasing."

The credit system which is used as money but is not money is barely increasing and actually started eating itself in 2008-2009 for the lack of expansion, the system demands increasing amounts as you have attached interest to the medium of exchange.  

In 2011-2012, the credit system has increased ie dead cat bounce but it is barely increasing, certainly not enough to keep the system working normally, this is after all the tricks have been pulled.   The credit system should have nearly $75T in it on the US side, yet it is struggling to even get to $55T.   

There is no defeating the equation long-term unless you have unlimited power, exponential growth, I have seen no evidence that Man has unlimited power.   If governments and banks have unlimited ability to inflate than you would be writting in Italian and be a part of the Roman Global Empire, fortunately Man has no ability to grow or provide exponential growth for long... usually about a generation.   This ponzi scheme will fall apart just like all the prior ones... unable to expand at an exponential rate.   Nothing different than the Madoff scheme, it's just been going on for 6+ decades where Madoff could only get his to about 2 decades.

http://www.federalreserve.gov/releases/z1/Current/z1.pdf

If the money supply was growing at such a great rate then I would imagine nobody or very few would have a problem paying their mortgage.  No?   The global credit market ponzi scheme popped in late 2007, in 2010-2012 you are getting a dead cat bounce, of course it has taken a great deal of effort to even get that.... the power needed tomorrow to sustain the system will be more than today... and so on and so on.  

Fri, 12/07/2012 - 21:37 | 3044599 chubbyjjfong
chubbyjjfong's picture

"If the system were inflating properly, it would be well north of $75T right now and adding at a $5-6T rate."

 

Well guess what, the system isn't inflating properly because the system is Fucked!  That is why we are experienceing deflation like a kick in the guts.  The layman (99% of us) are tapped out, WE DON'T GOT NO MONEY AND WE CAN'T BORROW ANY MORE!  When the 1% that holds all the wealth deleverages, what do you think they will do with it? Burry it in a hole?  No.  They will buy anything and everything sending inflation on its path to Never Never land. Game well and truely over.  I really don't understand your angle at all i'm afraid.

Fri, 12/07/2012 - 23:10 | 3044816 Doña K
Doña K's picture

<<<They will buy anything and everything sending inflation on its path to Never Never land>>>

So then what you're saying is "BUY GOLD"

 

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