Deflation??

"...a debt is a saleable commodity, or chattel; and ...it may be used like money; and produce all the effects of money." --John R. Commons, Legal Foundations of Capitalism, (New Brunswick, NJ: Transaction Publishers 1995), p.246 Originally published in 1924 by The Macmillan Company

But what happens when more than 95% of the money supply is debt -- that is, I.O.U.s of one kind or another?

Hi Jake!

There's monetary deflation and price deflation. They're related. The law of supply and demand applies. The supply of money constantly grows most of the time. The only time it shrinks is when the supply of I.O.U.s shrinks. I.O.U.s such as fiat paper money, megabyte money, the note on the back of Bill's airline sleeve that promised you $10,000 for your Backgammon BR, T-bills, corporate bonds, etc.

As long as the supply of these I.O.U.s doesn't increase (or, rarely, decrease) quickly, nobody cares or notices much. When gold circulates, because of the small amount that can be mined each year, production usually slightly lags the need for more money caused by always increasing trade. Additionally, technological innovation and market competition cause the prices of things to go down. Under those stable money conditions, prices "deflate" slightly despite the slight inflation in money supply. No problem!

The problems happen when the supply of fiat or credit suddenly shrinks or grows a bunch. If the supply balloons, that's hyperinflation, if it shrinks a bunch, that's MONETARY deflation. Both lead to the economy shrinking or "deflating." For the same reason but by different paths. That doesn't happen to any great extent with gold circulating because the supply of gold remains RELATIVELY constant.

Deflation is scarier because it becomes self-feeding. Sellers are forced to drop prices because people have less money. If you have money, though, that's good because supply and demand means the value of the money goes up. After price drops, you can buy more for less. So, what's wrong with that?

The problem is that debt doesn't get smaller. If you owe $100, it doesn't shrink to reflect the fact money is relatively more valuable -- and while the price you get for what you sell goes down, the amount you have to pay for that I.O.U -- or interest on it -- doesn't shrink.  So, for all intents and purposes, during monetary deflation, debt gets relatively larger for those in debt. So I can't pay you so you can't pay Wally so he can't pay Bill and all those IOUs we wrote become instantly worthless -- or at least severely discounted -- because people don't trust them anymore and won't readily accept them in trade or for debt payments -- or they want big discounts -- or a lot more interest to off-set the greater percieved risk of default.  Even banks across the road from each other don't trust each other's I.O.U.s  I saw this happene in Moscow in 1998.  As a result, fewer loan/I.O.U.s are written and circulated. 

That shrinks the defacto money supply and the monetary deflation becomes self-feeding. So the biggest problem is that after deflationary shrinkage, money isn't available to service or roll-over other debt. Like, for example, Greek government debt. Or Uncle's debt. That in itself is bad enough but then Governments get desperate, and unlike the rest of us, if there isn't a gold standard or circulating gold, they run the presses to take care of their debts, special "projects" like wars, etc.

If they get it just right, the bankster-government axis prints up the same amount that's been destroyed by debt deflation. Fat chance. Remember Keynes' Follies, or, Prediction: The Limits of Economic Control Keynes' follies. But, to the extent they create money, it steals from everyone holding money and money demominated I.O.U.s and enables them to transfer that stolen money to their friends, neighbors, campaign contributors -- and their special projects. In the case of the U.S. government-bankster axis, wars for example.

Even if they're well intentioned, they can't return the money to the people -- the part of the existing economy -- who lost it and so that disrupts the whole rest of the economy. It shifts spending from the rest of the economy to the interests receiving the newly created debt-money from the government and Federal Reserve.  Usually, the banks. 

Duck & cover,
Rick

P.S. And, of course, this reverse Robin Hood effect makes the rich richer and the poor poorer. And so you get increasing wealth disparity.

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--"The End Game: 2012 And 2013 Will Usher In The End" - The Scariest Presentation Ever? | ZeroHedge
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--The End Game

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Slow learner?

AMY GOODMAN: Where do you get the money [to stimulate jobs]?

PAUL KRUGMAN: [Nobel winning economist] Borrow it, and then repay it later in better times, which is not at all --- that may sound funny, but that's exactly what we've done in the past. --"End This Depression Now": Paul Krugman Urges Public Spending, Not Deficit Hysteria, to Save Economy

So, Mr. Krugman, what about the ~$16 trillion or so "national" debt that has NOT been "repaid later" -- and has increased every year since the Eisenhower Administration -- not to mention the approximately $100 trillion in Social Security and Medicare owed to old folks since they paid in advance?

And you think Uncle Sam knows better what people want than they do themselves as determined by their voluntary buying decisions in markets? And so Uncle will spend that money -- removed from those voluntary markets by coercive taxes and borrowing -- on products and services that folks will prefer to buy instead? And Uncle will provide these products and services at reasonable prices from lasting enterprises? Solyndra for example? And the borrowing -- called "extortion futures" by some because it will be paid by extorting taxes from the kids, grand kids and the yet unborn -- isn't wasting our money, let alone the lives of the kids, grand kids and the yet unborn?

Really Mr. Krugman? OK. I have this bridge in Brooklyn for sale - - -

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The Baby Boom is Busted

There's now a baby BUST in progress in most of the "developed" world, not a baby BOOM. AND the birth rate has been declining world-wide as even many "developing" countries decline toward the 2.1 babies-per-woman population replacement rate.

Birthrates are falling nearly all over the world, and the speed of this change is breathtaking. As the population ages, this is creating great challenges. The Fertility Implosion www.nytimes.com

--CONVERSABLE ECONOMIST: Six Adults and One Child: The Coming Baby Bust

--Teen pregnancy rates decrease nationwide, increase in Amarillo area : News : ConnectAmarillo.com

--TONIGHT: Teen pregnancy hits record lows | KETK

And, the dirty little secret is it's putting the hurt on the world-wide social ponzis ...

--Ponzi Planet: The Danger Debt Poses to the Western World - SPIEGEL ONLINE - News - International Spiegel article, Ponzi Planet

You can see the recent world-wide "picture" of this phenom using "Gapminder's" graphical representation. HERE: GAPMINDER (World population -- babies per woman)

If you put your cursor point on any circle, you can see the country name. The "Children per woman" box is in lower right of the Gapminder window. The "children per woman" number for the country you have the cursor on pops up there.

Japan, Germany, Belaruse, Poland, Portugal, Italy, etc. all at about 1.4 children per woman are particularly interesting in the implications.  Other countries aren't quite so dramatic, but the trend is clear. 

Gapminder is a prize winning and popular innovation and can be used to graphically demonstrate all sorts of collected data. It also lets you go back in time to see how key ratios have evolved.  All in all, perhaps THE "killer ap." Hit 'Play' button at the bottom to see the population shrink over the years.

A Golden Future??

In a commentary published in Monday's Financial Times, World Bank President Robert Zoellick wrote that an updated gold standard could help retool the world economy amid tensions over currencies and the United States' monetary policy... --World Bank chief calls on G-20 to reconsider gold standard | Business | Deutsche Welle | 08.11.2010

NEWYORK (CNNMoney) -- A growing number of states are seeking shiny new currencies made of silver and gold. Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are
seeking approval from their state governments to either issue their own alternative currency or explore it as an option.... --States consider alternative currencies of gold and silver - Feb. 3, 2012

--Gingrich: U.S. should look at return to gold standard, money.cnn.com - Jan. 18, 2012

India is the first buyer of Iranian oil to agree to pay for its purchases in gold instead of the US dollar... sources expect China to follow suit. India and China take about one million barrels per day, or 40 percent of Iran's total exports of 2.5 million bpd. Both are superpowers in terms of gold assets. India to pay gold instead of dollars for Iranian oil. Oil and gold markets stunned

C:\USR\WP_DOCS\TROLLEY\BLURBS\BLURBS01.WP6 A Golden Future??

ECONOMICS IN ONE EASY LESSON

Economics is simpler than you think -- if you're an Austrian Economist (Hayek, Mises, etc.) rather than a Keynesian Economist (J.M. Keynes), monetarist (Milton Friedman), neo-Keynesian economist (Bernanke, Krugman, etc.).

1. The "law of supply and demand" applies to "money."

2. An increase in the "money" supply greater than the increase in production -- because of the law of supply and demand -- causes a general price inflation across the boards.

3. Credit (I.O.U.s of various types, including stock certificates, bonds, etc. -- that note on the back of granddad's cigarette pack), as Daniel Webster put it, is equivalent to "money" and has all the effects of "money."

3A. Most I.O.U.s start out as limited circulation I.O.U.s -- and stay that way unless a market is established which allows them to be traded, that is, makes them "liquid."

4. A sudden change in the amount of either "money" or credit -- in either direction -- disrupts trade and thus the advantages of specialization and division of labor -- which ultimately determine the physical level of well-being of the human race -- and make the "modern" large populations possible.

5. Without the advantages of trade (and thus division of labor), extremely large numbers of men, women and children would die.

6. Barring the crash of a solid gold or silver asteroid, a sudden change in the supply of gold and silver (transactional hard money) are highly unlikely.

7. Because their value depends on psychology rather on a directly perceived value of a strictly limited physical commodity, the effective supply of both credit and paper/megabyte money can change suddenly.

8. The supply of both credit and paper/megabyte money CAN change with extreme rapidity, paper/megabyte because it's easy to create, credit because it completely depends on confidence that the debtor can and will pay, and without that confidence, a credit vehicle becomes devalued or even worthless. That is, because people can lose confidence in an I.O.U. and so don't want it, it becomes less, or even completely, "illiquid." That is, "people don't want it" = "illiquid" = "devalued" or even "worthless."

9. Since most people hold money for later use, at least partially, it's important that people have confidence it will hold its trade value and NOT devalue. Thus, the main "psychology" that determines whether or not people will hold a particular I.O.U. is their expectation as to its future value. If they expect its value to drop -- or equivalently, expect prices to rise -- they will spend it quickly. That is, if they expect a general price inflation, they will lose confidence in their money and spend it quickly.

10. Once people in general start to spend quickly, this puts more money into circulation quickly, thus increasing its effective supply, which causes more inflation, more inflationary expectations, destroys more confidence, and so forth. The Austrian School of economics calls the rapid spiral that results a "crack-up boom" or "catastrophenhause." Others call it "hyperinflation." Which is why U.S. Federal Reserve Chair Bernanke and the FED are so concerned by peoples' "inflationary expectations." This is, of course, not a problem with transactional hard money -- which, barring that solid-gold asteroid, can't suddenly inflate -- or suddenly deflate.

Deadbeats?

There's always a discount on an I.O.U.  The amount depends on its
perceived likely-hood of being paid.  The dollar is, in essence, such an
I.O.U.  The perception of repayment is dropping and you can follow it
by watching the value of dollars on the market. --L. Reichard White, Tuesday, November 09, 2010 11:04 AM

Learning curve

~"There is a test of Keynesian economics going on all around the world.  In the U.S., in Europe, even China.  The idea is that you can spend yourself out of an economic downturn.  This is an experiment that has never been tried before."--Dan Hertzberg, Editor Wall Street Journal, BBC WORLD NEWS, February 9, 2009, ~06:37:06

"We're all Keynesians now." --U.S. President Richard Milhous Nixon, 1971

"It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics ...where it is often impossible to bring one's ideas to a conclusive test either formal or experimental." --The original Keynesian, John Maynard Keynes, December 13, 1935 from introduction to his "THE GENERAL THEORY of EMPLOYMENT, AND MONEY"

The Keynesian Dead End, Spending our way to prosperity is going out of style --http://online.wsj.com, JUNE 26, 2010

Your comedian wasn't funny.

After recording the  Peter Schiff vs James Galbraith interview on CNBC 4/26/10 , it seemed appropriate to post the following email to CNBC:

Subject: 4% interest rates for 20 years???? Your comedian wasn't funny.

Hi CNBC!

It doesn't matter whether Prof. Galbraith is right about interest rates remaining at 4% for 20 years (like drawing 10 blackjacks in a row in Vegas. -- OK, 20), it's the "off balance sheet" unfunded liabilities that everyone so glibly dismisses with a single sentence.

The minimum estimates of the cost of those (Social "Security" and Medicare -- before Obamacare) was somewhere around $66 trillion.

The debt clock currently shows them at about $108 trillion.

Health, happiness, & long life,
L. Reichard White

P.S. OK, like drawing 100 blackjacks in a row. And as Prof. Galbraith suggested in a backhanded manner with his "U.S. controls its currency" comment, inflation is the nearly inevitable outcome.