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Inflation does not diminish debt and it does not destroy wealth!

by on April 11, 2012
cpi-increases-1

It is not possible to ‘inflate our way out of debt’. It does not destroy wealth either. It transfers wealth.
Here’s Mark Faber spouting this annoying spin, but it is quite commonplace and especially the Austrians are famous for it. They use it to sell their specie.

It’s an annoying lie: as a society we can ‘inflate our way out of debt’. Nonsense: inflation is a growing money supply. Our money supply is debt based. Every new dollar in circulation is a new debt. Yes, it debases the original stock of money, but the value of the money supply (and thus the debt) in real terms remains the same.

All we can say is that by printing press inflation the Federal Reserve and the Government are taking on the debt, while diminishing the value of the debts of other players in the economy.

Likewise, inflation does not destroy wealth. It diminishes wealth of people holding dollars, but increases wealth of people spending the new dollars into circulation. The net asset position of society does not change. The value of the total money supply does not change. The value of the total debt (in real terms) does not change. It is just different people holding the bag.

So while it is true inflation can become a (easily manageable) threat for the individual, it solves nothing for society.

What could happen, is that the US Government goes broke and prints a few trillion to satisfy foreign creditors. These dollars would then be repatriated (there is no use for them overseas) and the US population would pay through rising prices. In this case too the total net asset position of the US economy would remain the same. Foreign debt would be replaced with domestic debt.

For the time being, however, M1 is contracting at a excruciating 11% per year in Europe’s periphery and growing at a paltry 1,5% in the US. This is depression, not inflation. Prices are rising not so much because of inflation, but because the Money Power’s speculators are buying up Oil and other commodities and that’s what’s driving up prices in the primary sector. These price rises must be passed on to the rest of the economy. In short: stagflation.

More:
We are in Stagflation
Inflation? Deflation? Stagflation?

32 Comments
  1. Larry permalink

    Like many terms in economics, inflation has multiple definitions which makes communication tedious. Some would say that it means an increase in pricing as measured by an arbritrary basket of goods while others will take its meaning to be an increase in the money supply. And there is an assumption that an increase in money supply will cause an increase in pricing.

    Of course, the price of goods may increase or descrese for a many reasons. For example, speculators may artificially increase the price of commodities; like oil, regardless and separate from the money supply.

    Economists seem to be fixated on the buggaboo of inflation, as defined as an increase in the money supply. This seems disengenuous to me; if additions to the money supply are truly that important – why don’t we measure it in a meaningful manner? It is wholly inadequate to measure it by a distorted reflection (arbritrary basket of goods) rather than directly and mathematically.

    Most importantly, if we are to measure the increases (M1, M2 and the eliminated M3) shouldn’t we simultaneously measure the decreases (destruction of money)?

    All money is temporary and as it is destroyed (principal repayments to banks) we should measure that activity. We know that everyday money is destroyed in this manner and as a result, some amount of new money must be created just to keep on par. And, the addition of interest sucks money from circulation and into the accounts of the lending class where it may or may not be returned to circulation.

    Economics should be taken from economists and made an engineering science. It is a sorry state of affairs that something as important as economics is left to a number of belief systems (e.g. Austrian, Kenysian, etc.) that directly contradict one another. Imagine if bridges were built by “belief systems” rather than engineers. They would be failing all across the country just like our economy is today.

    BTW, really good posts in this thread, it is refreshing to read such coherent exchanges.

    Larry

    • Yes, you can’t talk economics without using illustrations – http://www.youtube.com/watch?v=gogONWRmTbE&list=UU7e8-n8Gmfk0-I5UaDSJcbQ&index=32&feature=plcp. Addressing a previous comment I made – deflation would tend to hurt the people on negative side of the money supply, inflation would hurt the people on the positive side(assuming everyone wasn’t being hurt by bankers). The comments here that are squashed can be read if you press the reply button.

      • “The comments here that are squashed can be read if you press the reply button.”
        Excellent, thanks much!

    • “Economics should be taken from economists and made an engineering science. It is a sorry state of affairs that something as important as economics is left to a number of belief systems (e.g. Austrian, Kenysian, etc.) that directly contradict one another. Imagine if bridges were built by “belief systems” rather than engineers. They would be failing all across the country just like our economy is today.”

      This undoubtedly will make many of the people here happy Larry.

      It’s pretty amazing that such a relatively simple science can be obscured to such an extent. I’d be very happy to see people like philo, Marc Gauvin, Montagne and all the others organize the production of the means of exchange, instead of all the ‘philosophers’ and ‘politicians’.

      • http://www.youtube.com/watch?v=Ci4Wrq4afIU I called Montagne to have a debate with him. He has about 1% correct that no other monetary reformist has. The other 99% is b.s. Then he accuses everyone of plagiarizing him. What he’s an expert at is linguistic manipulation/hypnotism. I got him to say everyone could have an interest free loan at the same time to buy a $100k clock radio in this audio. Listen to the guys who post his videos. I know they mean well, but they’re definitely not helping his cause. He came up with a plan when he was 17, 40 years ago and argues that makes him the expert. He refuses to accept there are numerous community currencies that aren’t inflating out of control and no one is parasiting off of. I think he believes bankers reverse engineered his work thousands of years ago. He doesn’t think bankers even know what they’re doing to extract their wealth.

  2. Billions in wealth being extracted by parasites and people will bitch about how much cheaper a candy bar was in 1935. Inflation = big boogeyman.

    • If that isn’t the truth I don’t know what is.

    • philo, what is your take on Marc’s statement below?

      • http://www.gcnlive.com/mediaPlayers/livePlayer.php I’m listening to some boobs trying to figure out how to cut out the bankers right now.

        • lol, you are directing me to Alex Jones?? haha

          You go here boy
          http://www.billygraham.org/radio_index.asp

      • Collateral should have nothing to do with the issuance of currency. Using the example of the parable of the tourist, hotel clerk, butcher etc., to understand the role of currency in the economy, an economy that obviously has assets valued in millions, and only $100 to make the economy function, one can see this truth. I’m listening to “Crash! Are You Ready?”.

      • It’s true, with a non-parasitic monetary system, the hierarchical or tiered society we have now will naturally even out by free market forces. I just heard a claim today that a quarter of the US GDP is going to black op programs like underground tunnels. I don’t know if it’s actually that much but obviously a large percentage of what everyone produces is going down rat holes.

        • I was trying to find out how you think about inflation in the way Marc proposes to assign credit: ad infinitum as long as there is collateral.

          • There’s generally a consistent amount of currency in circulation per person. If this is doubled for instance, yes, prices will go up. If bankers counterfeit, prices will go up. If everyone defaulted on their loans, prices will skyrocket and there will be no jobs and no food on store shelves.

            • If money is doubled and production stays constant by virtue of the perception of money as a scarce thing of value prices will go up, if wealth increases in tandem then an increase in price does not manifest. Hence we cannot conclude that an increase in the money supply in and of itself necessarily causes a rise in prices. It is the change of money to wealth that causes a change in prices, interest achieves this systematically. If bankers issue money into circulation against no new wealth then as in the previous examples prices will tend to rise.

              That everyone were to default on their loans is not a very meaningful hypothetical scenario given that money is just numbers in accounts so it is hard for everyone to default on all loans as banks extract loan payments from said accounts. A more meaningful hypothetical scenario would be if everyone paid all their debts (not possible with interest) all money would be removed from circulation. This in the current mind set this is perceived as a crisis, because people mistakenly view money as a necessary requirement without which nothing can be created, without realising that if we all paid our debts we would have 100% of our wealth in freehold, precisely the state of affairs that the current system prevents form occurring. If we perceive money as a record of wealth being transacted then the perception is very different, no money means no trade and in a world of abundance no trade means no need.

              In my book I point out that contrary to conventional perception in today’s skewed world, a stable money system that exihibits little to no transacations is illustrative of the healthiest economy as all wealth is freehold and few transactions are required to maintain wealth. In contrast and in the current system, a low level of transactions is indicative of an unhealthy economy as it usually indicates the absence of money not the absence of need. A stable money system accomodates any period of economic equilibrium where financial inputs and outputs are at a minimum precisely because society is content that its needs are mostly met, whereas the current system precludes any such equilibrium by design.

              • Nice, thanks. The final paragraph is quite instructive.

                if money is doubled and production stays constant by virtue of the perception of money as a scarce thing of value prices will go up, if wealth increases in tandem then an increase in price does not manifest. Hence we cannot conclude that an increase in the money supply in and of itself necessarily causes a rise in prices.

                Agreed. Now we’re on par.

                • I could see how if production doubled for everyone, you would need double the currency to maintain the same amount of transactions. Otherwise you’d have to double the transactions. There would be twice as much wealth being produced daily than before.

              • There are people with large promissory obligations and small checking/savings, and people with large checking/savings/physical bills, so yes, you could have massive defaults and its happened before – hyperinflation. That’s how the currency supply exists – a generally equal amount of p. o.’s to deposits/phys. bills/coins.
                Wealth has nothing to do with the size of the currency supply. Time and population does. You could create, own and consume twice the wealth there is with the same currency supply as long as everyone was fully employed all the time and no parasites were extracting wealth. It would just be flowing faster. Even a contracted supply wouldn’t cause any problems if everyone lowered their prices at once and the bank didn’t force forecloses. But, as we know, it’s the banks job to screw everyone.

                • memehunter permalink

                  Excellent comment, Marc.

                  To Philo: “Even a contracted supply wouldn’t cause any problems if everyone lowered their prices at once and the bank didn’t force forecloses.”

                  Yes, but there is always a time aspect. If you are the first to inflate or the last to deflate, this is where you gain a larger share of the pie. And that’s what Money Power is doing on a grand scale.

              • memehunter permalink

                I am posting my comment again because it is hard to read otherwise (sorry):

                Excellent comment, Marc.

                To Philo: “Even a contracted supply wouldn’t cause any problems if everyone lowered their prices at once and the bank didn’t force forecloses.”

                Yes, but there is always a time aspect. If you are the first to inflate or the last to deflate, this is where you gain a larger share of the pie. And that’s what Money Power is doing on a grand scale.

                • yeah, it’s an annoying wordpress bug: the further the comments get nested, the more illegible they get.

  3. Anthony,

    Money supply has nothing to do with inflation and deflation. It is all about the ratios money:debt:collateral. Interest is the only factor that systematically alters those ratios by not being
    bounded and by debt always exceding the money supply. Other factors such as physical destruction (e.g. natural disaster) can affect this ratio too, however, from the perspective of money system stability (not to be confused with economic stability), the physical disappearance of wealth has a bounded lower limit of zero. So, inputs and outputs are bounded and output never exceeds input, even if the collateral disappears!

    This goes to prove that stability of the money system is entirely independent of the fortune or misfortune of the economy. All that is achieved by stable money is the elimination of money being a systematic cause of instability in the economy which should not ever be confused with a stable money system translating into “a stable economy”. The economy is a vast thing that ultimately involves all natural resources in existence and all the possible relationships between these, it is truly beyond man to “stabilise the economy” in a methodical and predictable fashion. All that can be achieved is to optimise human behaviour so that it has the least impact on the whole with respect to demands made on the whole. In this regard, most of industrialisation is a chimera and unwittingly it carries a cost of entropy that implies virtual slavery to maintain and even then it is fragile. This is why I predict a post usury society to be much more biological in nature, usefull knowledge will be around the support of viable biological systems with lesser dependence on non biological production, perhaps only communicaitions and some transport may remain the rest will be the result of undertstanding vialble biology rather than dominating it by homocentric “products”.

    This is an important point we should keep in mind, one thing is to have a stable money system and another is to have a stable economy. It is clear that an unstable money system will destabilise any economy but it cannot be said that a stable money system will fix any broken economy. Hence the imperativeness of getting the simple technical solution implemented before the economy is past repair so as to free mankind to seek balance . The last chapter of my book here: http://www.bibocurrency.org/English/BOOK%20DOWNLOAD.htm, talks about this.

    • “Money supply has nothing to do with inflation and deflation. It is all about the ratios money:debt:collateral.”

      IS this really true Marc? I’ve been thinking about it. I wish it were true, it would make life easy. But is it?

      if everybody can use the house he is buying as collateral, he basically has limitless credit. This will drive up prices.

      • No, you can’t use the same collateral over and over again until collateral is paid for it has a lean on it.

        My point was that inflation comes about by altering the ratio of money:debt:wealth through debt
        growth by interest which is compounded on the aggregate level. Money supply is a direct function of trade.

        What has happened, is that by virtue of debt growth our economies have been forced to maximise production to keep up with debt growth and stave off inflation by creating greater and greater collateral and higher and higher book value. Remember that on the aggregate debt growht is exponential (compound).

        When we can no longer keep up with the growth on the basis of our native production we need to steal others but that just engenders more debt and destructive production (war machine), this leads us to the situation where in order to back new money at the rate required, we must “invent” value e.g. return on investment becomes the basis of new investment and so we create a speculative or bubble basis for money creation.

        When one steps away and looks at all this on 60 year basis, one can clearly see how for any given piece of collateral we have inflated the ratio of money:collateral. By removing interest and allowing everyone to issue credit as a function of the transacations they perform, the system automatically stabilises as long as all transactions pass the Passive BIBO test i.e. price=debt=current account entry.

        • Larry permalink

          Marc, I think you are correct on this and will support your assertion with an example. In 2008, the entire economy began crashing largely due to mortgage backed securities (MBS) and collateralized debt obligations (CDO).

          The housing boom created a lot of new money which was collaterialized via the homes. The big problem was that the mortgages were bundled in big chunks (MBS) and then sold to banks and new money was created to buy them via CDOs. So as you have said, the same collateral was used more than once which created a huge problem as the boom became a bust.

          If a homeowner were to default on thier mortgage, yes they could lose their home but what about the CDOs that were created based on the same collateral? Supposedly, there was a mechanism in place to prevent this as deeds were traditionally registered with
          counties/parishes.

          No problem for the mega banks – they simply created MERS, a holding company for mortgages. Our usurocracy is loaded with instances where collateral is abused by the mega
          banks and in recignition of this fact, the mega banks have created a “safeguard” – the government steps in to back their loans via taxpayers.

          • There’s no reason the there isn’t a booming economy all the time other than bankers contracting the cash supply. Don’t get sucked into the drama they create, like creating new debt by transferring debt(dollars) that already exists. Obviously, if the first debt is extinguished, the second “debt” cannot be extinguished using the first debt(dollars). I’m trying to say that money can be the only debt there is and no one should be collecting usury off of its existence. Collateral/deeds should have nothing to do with the issuance(loans) of currency. Small amounts should be loaned to a lot of people so that a few can always save enough to buy a small home, or those with a small home already can save to upgrade to a bigger home. No more mortgages.

            • Philo,

              I don’t quite understand what you are proposing. It seems to me that you are suggesting that the money need not be backed by collateral and that a minimum sufficient amount should do
              as long as it is interest free and circulates rather than being hoarded. I understand that point of view and if indeed it is what you are saying please consider the following:

              1) The only practical function money has, is to measure value and its divisions i.e. it is a unit of measure.
              2) As a unit of measure, money needs to have a stable (not necessarily fixed) value. Note stabiity means that there exist an upper and lower bound by virtue of the design (i.e. without having to add energy to the system. see the Stable Currency Unit Theorem here: http://www.bibocurrency.org/English/stable%20money.htm
              3) As a unit of measure it must be “issued” or “invoked” as you wiill, in a stable (bounded) ratio with respect to the value that money represents in transactions which in turn necessariy implies a bounded ratio to the physical wealth that embodies that value.

              All these considerations require that money be issued/invoked in direct proportion to wealth being transacted. That is if the ratio is low then money will rise in relative value and users will come to revive the absurd money fetish. While if the ratio is high, then users will tend to abandon the unit for other surrogates e.g. gold etc which will bring us back to the money fetish.

              The only way to avoid these is precisely by:

              a) Defining a fixed reference value as a numèraire.
              b) Money can only be invoked in the context of a transaction of wealth.
              c) Avoiding any central control of money issuance or other types of control.
              d) No interest. Banking services like any other service have a fixed and negotiated price.

              Each implementation governance can invoke non normative measures as they wish accoriding to local customs and practices that do not undermine the mathematical principles underlying standard system stability. For example, requiring users to guaranty their negative balances with a pledge of corresponding personal wealth (including proven earning capacity) may serve as a non normative measure to induce greater responsibilty in some cases. In others, such as Japan social stigma may prove sufficient. In either case the local non normative measures do not affect the core BIBO specification.

              Marc

              • Marc, I have nothing against anyone hoarding a bunch of pieces of paper. They probably aren’t going to have the same purchasing power as they did when the person earned them. There’s nothing wrong with that. Money is valued by people generally having an idea of what they can purchase with it and what they’re going to have to do to earn it. Bankers collateralize loans of paper to create the illusion they’re risking something.

                • Money in the first instance, is not a piece of paper it is a record that can be represented as a piece of paper for time shifting transactions as well as anonymising them. Thus, the function of money is first and foremost to act as a record of value. When money is viewed for what it really is, then both hoarding and thoughtless expenditure disappear without in most cases if
                  not always, the need to manipulate people’s behaviour.

                  People will simply realise that their negative is a debt to others and their surplus is a debt to them, both cases are undesirable but at the same time money is always accessible for whatever transaction, any time, any place see ASTA3 Requirements here: http://www.bibocurrency.org/English/ASTA3.htm.

                  Thus, the attitude becomes to think hard about your transactions to keep your balance close to zero while accumulating as much of the freehold wealth that you believe you need, knowing that whenever you reach zero balance everything you have becomes freehold and if you spent well as low maintenance as possible.

                  Finally, a large positive balance is nothing to boast about because you are most likely undertaking gratuitous risk. Thus, the measure of one’s true wealth is the balance between personal wealth i.e. home and meaningful belongings and community well being that acts as a buffer for the individual while at the same time reassuring reciprocity in trade.

                  In short, a BIBO standard, when resources permit, leads to frugal abundance and heightened awareness of the not only one’s circumstances but the economy as a whole. A good place to be.

                  • Marc, Yes, the paper represents book entries. There should be a lot of people on the debit side, probably the youth of the nation, so that the elder can save credits to buy and improve homes, transportation etc. Keep everyone employed with no parasite bank. Brokerages should handle all checking and pooling of resources if one chooses to invest in stock. They would all be local brokerages.

          • my last comment went to spam I think.

            • corrected….

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