Off the keyboard of RE
Published originally on Reverse Engineering on October 27, 2010
Discuss this article at the Economics Table inside the Diner
Examining the Monetary system and looking at the possible outcomes of Deflation or Hyperinflation have been a concern of mine since the Collapse of Bear Stearns. In honor of the Anniversary Week here on the Doomstead Diner, I dug up a pair of related articles on the topic I wrote in the Reverse Engineering Yahoo Group in October of 2010. This topic has since been explored inside the Diner in great detail at the Economics Table, in the Hyperinflation vs Deflation thread. It’s one of the most popular Dishes serve up in the Diner. Visit with the regular Diners and drop in your thoughts on this still unresolved question.
Liquidity Traps & Asset Class Sinkholes
|I want to examine a very important concept in the Inflationista-Deflationato
debate which I think has been overlooked in a contracting economy, what you
might call Liquidity Traps or Asset Class Sinkholes.For markets to operate efficiently, you have to have Buyers and Sellers of the
various Asset Classes, so that if you decide you want to sell something you own,
you can readily find a buyer for it at the price you think its worth, which in
general is something near what you paid for it at least. If you are an
Investor, what you hope for is that the asset has appreciated in price between
the time you bought it and when you try to sell it, that is how you make a
profit.As more and more asset classes were defined, markets developed to trade those
assets on a daily basis. To keep them operating efficiently, you have “Market
Makers”, Banks that have enough liquidity to put in a buy order at near the
market price for anything you choose to sell. It gets very complicated when you
talk about all the derivatives and abstract financial products out there now, so
I’ll simplify it here to the Used Car market.Lets say I have a Car as one of my assets which I decide to Sell, because I have
to pay my mortgage and have been laid off from my Job and my UE bennies have run
out after 99 weeks. In normal times, I might take out an Ad in the paper and
put a For Sale sign in the window of the car, and wait for a Buyer to come along
and give me the price I think the car is worth. However, sadly for me, times
are not normal, lots of other folks are UE and ALSO have their cars up for sale,
and no buyer shows up. So now I drive it over to the Market Maker, the Used Car
Dealer. In normal times, the Used Car Dealer will ALWAYS buy my car at some
price, just probably not anywhere near what he thinks he will be able to sell it
to someone else at. The difference between those prices is how the market maker
makes a Profit. Sadly for the Used Car Dealer at this time, he is overloaded
with inventory of Used Cars he can’t sell, and he won’t buy my car at ANY price.My car is an Impeccably Maintained Jag which I paid $120K CASH for new two years
ago, but now I can’t sell it to anyone at any price! My Jag is a Liquidity
TRAP. An Asset Class Sinkhole. It’s a lovely hunk of Metal, Leather and Glass
sitting in my driveway, but it has ZERO value because I cannot SELL it.Now, let us look at what has happened in the RE market, and then further the
commodities markets including PMs. Many people bought McMansions at inflated
prices, and besides that they didn’t even buy them in Cash, they have loans
outstanding on them they have to service. Now they want to sell off the
Vacation Home, but there are no buyers for it, so sad. The Market Maker here,
the Banksters ALSO can’t sell it, their Used Car lot of McMansions is ALREADY
full, so they don’t even want to Foreclose on it. Then they have the liability
on the Upkeep of the McMansion and the Taxes.The McMansion is a Liquidity Trap/Asset Class Sinkhole. It now has Zero value
because it cannot be sold to anyone. Nobody wants to invest money in something
they won’t be able to sell later if they need the money for some reason.
So now, let us assume you are just FLUSH with money, but you are really WORRIED
So you still are trying to protect your gobs of Money, and you run from the
To maintain some Liquidity here, Da Fed as World Market Maker keeps Buying any
Eventually for one reason or another the TBTF Banks will face a margin call here
Its never going to get that far of course, because the Illuminati are not going
Perhaps hyperinflation plays out in some neighborhoods at some time in this
Anyhow, as this Theatre plays itself out, I do see extreme Volatility in prices,
All the talk about the hyperinflationary end game here keeps me pondering on the
Now, let us take a trip back in Mr Peabody’s WAYBAC Machine to the Post WWII
At the same time on the “wholesale” Illuminati end, HUGE sums were loaned out to
Real Growth probably stopped around 1970 or so when the FSofA reached local Peak
Mathematically speaking, all the debt accumulated here at the individual,
Pretty deep into the Rabbit Hole now, with Da Fed and Da Goobermint basically
The ONLY way to Reboot is “Jubilee”, which is going to occur here in either
Picture the Austrian Scenario, where we let all the TBTF Banks INCLUDING the
The fairly obvious answer to this problem is that Da Goobermint will become the
In any event, what I am trying to demonstrate is that as far as
The folks in charge of Creating Money will do what they will, but they cannot
Off the keyboard of Jim Quinn
Published on The Burning Platform on December 3,2012
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
“Eyes blinded by the fog of things
cannot see truth.
Ears deafened by the din of things
cannot hear truth.
Brains bewildered by the whirl of things
cannot think truth.
Hearts deadened by the weight of things
cannot feel truth.
Throats choked by the dust of things
cannot speak truth.”
― Harald Bell Wright – The Uncrowned King
I consider myself a seeker of truth. It isn’t easy finding it in todays’ world. In an alternate version of the famous scene from A Few Good Men, I picture myself telling Turbo Tax Timmy Geithner that I want the truth and his angry truthful response:
“Son, we live in a world that has Wall Street banks, and those banks have to be guarded by puppet politicians in Washington D.C. with lobbyist written laws and Madison Avenue PR maggots with media propaganda. Who’s gonna do it? You? You, Representative Paul? I have a greater responsibility than you could possibly fathom. You weep for the average middle class American family, and you curse the ruling oligarchs. You have that luxury. You have the luxury of not knowing what I know. That the death of the American middle class, while tragic, probably saved the bonuses of thousands of Wall Street bankers. And my existence, while grotesque and incomprehensible to you, increases the wealth of these same bankers who destroyed the worldwide economic system in 2008. You don’t want the truth because deep down in places you don’t talk about in the food bank line, you want me on Wall Street, you need me on Wall Street. We use words like derivative, fiscal stimulus, quantitative easing. We use these words as the backbone of a life spent syphoning off the wealth of the nation. You use them as a punch line. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very debt that I provide, and then questions the manner in which I provide it. I would rather you just said thank you, and went on your way, Otherwise, I suggest you pick up 1000 shares of Apple, and hope our high frequency trading supercomputers can ramp the market for a while longer. Either way, I don’t give a damn what you think you are entitled to.”
I find myself more amazed than ever at the ability of those in power to lie, misinform and obfuscate the truth, while millions of Americans willfully choose to be ignorant of the truth and yearn to be misled. It’s a match made in heaven. Acknowledging the truth of our society’s descent from a country of hard working, self-reliant, charitable, civic minded citizens into the abyss of entitled, dependent, greedy, materialistic consumers is unacceptable to the slave owners and the slaves. We can’t handle the truth because that would require critical thought, hard choices, sacrifice, and dealing with the reality of an unsustainable economic and societal model. It’s much easier to believe the big lies that allow us to sleep at night. The concept of lying to the masses and using propaganda techniques to manipulate and form public opinion really took hold in the 1920s and have been perfected by the powerful ruling elite that control the reins of finance, government and mass media.
Peddlers of Propaganda
“Great is truth, but still greater, from a practical point of view, is silence about truth.” – Aldous Huxley – Brave New World
Adolf Hitler understood the power of the big lie over the ignorant masses who want to believe:
“All this was inspired by the principle–which is quite true within itself–that in the big lie there is always a certain force of credibility; because the broad masses of a nation are always more easily corrupted in the deeper strata of their emotional nature than consciously or voluntarily; and thus in the primitive simplicity of their minds they more readily fall victims to the big lie than the small lie, since they themselves often tell small lies in little matters but would be ashamed to resort to large-scale falsehoods. It would never come into their heads to fabricate colossal untruths, and they would not believe that others could have the impudence to distort the truth so infamously. Even though the facts which prove this to be so may be brought clearly to their minds, they will still doubt and waver and will continue to think that there may be some other explanation. For the grossly impudent lie always leaves traces behind it, even after it has been nailed down, a fact which is known to all expert liars in this world and to all who conspire together in the art of lying.” – Adolf Hitler – Mein Kampf
We are all liars. We lie to friends, family and co-workers. We convince ourselves they are only small lies and just protect others from being hurt. We would rather be lied to than face the blunt truth about our deficiencies, shortcomings and failures. Willfully believing mistruths allows a person to become dependent upon those promulgating the mistruths. It relieves them of their responsibility to act upon the knowledge that something is wrong and must be fixed. It is a cowardly path to ultimate servitude and destruction. The German people chose this path in the 1930s and the American people have chosen a similar and ultimately destructive path today. The United States Office of Strategic Services prepared a psychological profile report during the war describing Adolf Hitler’s method for controlling the minds of the German masses:
“His primary rules were: never allow the public to cool off; never admit a fault or wrong; never concede that there may be some good in your enemy; never leave room for alternatives; never accept blame; concentrate on one enemy at a time and blame him for everything that goes wrong; people will believe a big lie sooner than a little one; and if you repeat it frequently enough people will sooner or later believe it.”
America’s corruptible politicians, greedy corporate chieftains, criminal banking overlords, and despicable media manipulators all learned the sordid lessons of mass propaganda from the masters. Our willingness to lie and be lied to set us up to be manipulated by those who understood the mass psychology of a nation. Goebbels and Hitler were heavily influenced by the father of propaganda – Edward Bernays. He and his disciples are professional poisoners of the public mind, exploiters of public foolishness and ignorance, and never allow truth to interfere with a good story. What master manipulators realized is that it is easier to change the attitude of millions than the attitude of one man. By analyzing and understanding the process and motives of how the group mind works, the invisible government has been able to manipulate and regulate the masses according to their will without the masses knowing they are being managed. Bernays described this elitist view of the world in 1928:
“Those who manipulate the unseen mechanism of society constitute an invisible government which is the true ruling power of our country. We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society. In almost every act of our lives whether in the sphere of politics or business in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons who understand the mental processes and social patterns of the masses. It is they who pull the wires that control the public mind.” – Edward Bernays – Propaganda
The super-rich elite believe they are more intelligent, more capable of managing the affairs of state, masters of the financial world, and chosen to decide what is best for the masses. In reality, they are egocentric, psychotic, power hungry, myopic, self-serving ravenous vultures, feasting upon the carcass of a once great nation. Truth is inconsequential and irritating to their plans for world domination and control. Therefore, no truth will be forthcoming from any organization or person that is associated with the existing political, economic, financial or social order. Every bit of information that is permitted into the public realm has been vetted, manipulated and spun for public consumption. The public does not like bad news. They do not like hard facts. They do not like to think or do math. They want to be spoon fed mindless sound bites and happy talk. The oligarchs need to keep the masses sedated and subservient while they continue to plunder and pillage, so all data is massaged to provide a happy ending.
This is where I deviate from the ideologue one-trick ponies that refuse to see both sides of the issue. The ruling oligarchs are wealthy, influential, psychotic, amoral, and few. The masses are relatively poor, easily influenced, willfully ignorant, and many. The ruling oligarchs are most certainly evil, but the masses are not the hard working, stoic, downtrodden portrayed by liberal ideologues. One just needs to walk down the street in one of our urban enclaves, saunter through a suburban mall, or click on People of Wal-Mart to witness the tattooed, pierced, butt crack showing, slovenly, obese, and ignorant, attached to their electronic iGadgets, to understand how far our society has deteriorated. Every individual born into this world has the capability to become educated, think critically, not follow the herd, live beneath their means, and not be influenced by propaganda. Aldous Huxley understood in 1931 that those in power could use material goods to invoke passivity and egotism among the populace. He feared that truth would be obscured by an avalanche of irrelevance (500 Reality TV shows), cultural trivialities (Lady Gaga, Lindsey Lohan), distractions (Professional sports), and pharmaceutical enhanced escape (Prozac). He saw the possibility that we would grow to love our servitude as the pleasures of life provided by our controllers overwhelmed any desire to think or question authority.
“There will be in the next generation or so a pharmacological method of making people love their servitude and producing dictatorship without tears, so to speak, producing a kind of painless concentration camp for entire societies so that people will in fact have their liberties taken away from them but will rather enjoy it.” ― Aldous Huxley
By 1962 when Huxley wrote his last book, he was certain that his worst dystopian nightmares had been unleashed. His description of Western society fifty years ago could have been written today and accurately reflected our current economic paradigm. War, debt and consumption still make our world go round, but the end is nigh.
“Armaments, universal debt, and planned obsolescence – those are the three pillars of Western prosperity. If war, waste, and moneylenders were abolished, you’d collapse. And while you people are over-consuming the rest of the world sinks more and more deeply into chronic disaster.” – Aldous Huxley – Island
The pillars are crumbling. The $1.4 trillion wasted on two worthless wars of choice in the Middle East, the trillions wasted and liberties sacrificed for the never ending unwinnable War on Terror, the Keynesian spending frenzy that has driven the National Debt from $9 trillion to $16.3 trillion in the last five years, the looting of the American taxpayer by Wall Street and their co-conspirators at the Federal Reserve and in Congress, and the belief that ramping up the debt driven consumption that drives 71% of our GDP is our path to prosperity is absolutely freaking nuts. The pillars will not be abolished willingly. The ruling class depends upon their continued existence and expansion. There is the rub. The math doesn’t work. We’ve reached the point where continued expansion of debt and money printing no longer works. With a national debt to GDP ratio of 102% and a total credit market debt to GDP ratio of 350%, we have passed the Rogoff & Reinhart point of no return. This time is not different. A country cannot run trillion dollar deficits indefinitely and expect to not suffer the consequences. This is why those in power are increasingly resorting to propaganda, data manipulation, and outright lies to convince the masses of their omnipotence and brilliance in managing the fiscal affairs of the state.
“One believes things because one has been conditioned to believe them.” – Aldous Huxley – Brave New World
Through decades of mass media messaging the masses have been conditioned to believe whatever those in power want them to believe. To our invisible government rulers we are nothing but rats to be manipulated through food pellets and shock therapy. Pleasure and fear of pain are the drivers of our warped society. The ruling oligarchs truly think they know what is best for the masses and believe any means is worthwhile as long as the ends support their agenda. This is blatantly obvious to anyone with their eyes open and their brain functioning. Sadly, the government run educational system produces mostly drones that are barely able to tie their own shoes, spell Cat, or make change from a one dollar bill. Only 20% of all high school seniors score high enough on the SAT test to get a B minus in college and most of these kids come from private and parochial schools. This is exactly what those in power prefer. They want non-critical thinking, mindless consumers, who don’t understand the criminal nature of Federal Reserve created inflation or their enslavement in the chains of debt at the hands of their Wall Street slave owners. They certainly don’t want the masses to understand that real median household net worth is lower today than it was in 1969. Luckily for the oligarchs, 95% of the public couldn’t define the terms: real, median or net worth. Math is hard.
The average person is inundated on a 24/7 basis with pabulum from liberal network media talking heads, CNBC Wall Street shills regurgitating whatever their sponsors desire, Fox News blonde bimbos and neo-con war mongers programmed to spew Rupert Murdoch talking points, MSNBC tingling leg faux journalists, NYT intellectually corrupt Nobel prize winners, NAR nitwits repeating “best time to buy” on a daily basis for the last 12 years, and government agencies whose sole purpose is to manipulate data in a way that supports the agenda of those in power. The intellectually lazy and willfully ignorant masses are no match for those who control the message and the media. How else can you explain their ability to convince millions of drones to line up for hours in front of a store and stampede like crazed hyenas to grab a $5 crockpot, the Chinese produced gadget of the moment or a designer top made by slave labor in safety conscious Bangladesh factories? How else can you explain a population willing to be molested by government TSA dregs in the name of security from phantom terrorists, the passive acceptance of military exercises in US cities, unquestioning submissiveness as Presidential Executive Orders allow the government dictatorial powers based on their judgment, the monitoring of internet and voice correspondence of all citizens, and believing that FBI agents luring clueless teenage Muslim dupes into fake terrorist plots, providing the fake explosives, and then announcing with great fanfare how they saved us from another 9/11?
But, the prize for boldest, most outrageous, blatant use of propaganda and misinformation to cover-up their criminal looting of America goes to Ben Bernanke, his cronies at the Federal Reserve, and the Wall Street banks that own and control our Central Bank. Having the gall to portray themselves as the stabilizer of our economic system over the last 100 years is a putrid joke on the dying and broke middle class. Their mandate has been stable prices, full employment, and avoiding financial crisis. It is a tribute to Bernays and the rest of the public relations swine that the average American actually believes inflation is a good thing and it is under control despite the FACT that 96.2% of their purchasing power has disappeared since 1900, with the most rapid decline occurring since Nixon closed the gold window in 1971.
The average American actually believes Ben Bernanke saved us from a Great Depression when in actuality he saved the owners of the Federal Reserve from accepting the losses they generated through the greatest financial fraud in history. His “solutions” have zombified our economic system, just as the Japanese Central Bank did 20 years ago. He has destroyed the concept of saving, while rewarding the indebted and profligate with his QE to Infinity money printing policies. And the ignorant masses have been convinced by the corporate media and their corrupt government lackeys that Ben did this for them. Kyle Bass knows otherwise. He knows how the Fed and their backers have preyed upon the masses through their understanding of human psychology:
“Humans are optimistic by nature. People’s lives are driven by hopes and dreams which are all second derivatives of their innate optimism. Humans also suffer from optimistic biases driven by the first inalienable right of human nature which is self-preservation. It is this reflex mechanism in our cognitive pathways that makes difficult situations hard to reflect and opine on. These biases are extended to economic choices and events. The primary difficulty with this train of thought is the bias that most investors have for the baseline facts: they tend to believe that the central bankers, politicians, and other governmental agencies are omnipotent due to their success in averting a financial meltdown in 2009.
Central banks have become the great enablers of fiscal profligacy. The overarching belief is that there will always be someone or something there to act as the safety net. The safety nets worked so well recently that investors now trust they will be underneath them ad-infinitum. Markets and economists alike now believe that quantitative easing (“QE”) will always “work” by flooding the market with relatively costless capital. Unlimited QE and the zero lower bound (“ZLB”) are likely to bankrupt pension funds whose expected returns happen to be a good 600 basis points (or more) higher than the 10?year “risk-free” rate. The ZLB has many unintended consequences that are impossible to ignore.
Our belief is that markets will eventually take these matters out of the hands of the central bankers. These events will happen with such rapidity that policy makers won’t be able to react fast enough. The fallacy of the belief that countries that print their own currency are immune to sovereign crisis will be disproven in the coming months and years. Trillions of dollars of debts will be restructured and millions of financially prudent savers will lose large percentages of their real purchasing power at exactly the wrong time in their lives. Again, the world will not end, but the social fabric of the profligate nations will be stretched and in some cases torn. Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion. We believe that war is an inevitable consequence of the current global economic situation.” – Kyle Bass
What’s Normal in a Profoundly Abnormal Society?
“The real hopeless victims of mental illness are to be found among those who appear to be most normal. Many of them are normal because they are so well adjusted to our mode of existence, because their human voice has been silenced so early in their lives, that they do not even struggle or suffer or develop symptoms as the neurotic does.” They are normal not in what may be called the absolute sense of the word; they are normal only in relation to a profoundly abnormal society. Their perfect adjustment to that abnormal society is a measure of their mental sickness. These millions of abnormally normal people, living without fuss in a society to which, if they were fully human beings, they ought not to be adjusted.” – Aldous Huxley – Brave New World Revisited
No sane person could honestly say that what has happened to our society over the last forty years, and particularly in the last five years, is normal. But somehow those in power have convinced the masses that $1.2 trillion deficits, 0% interest rates, declining real wages, the highest average gas prices in history, pre-emptive wars, policing the world and buying rubber dog shit produced in China with a credit card is normal and beneficial to our economy. It seems that I and a few million other people in this country are the abnormal ones. We choose not to be led to slaughter by our masters. The seekers of truth have turned to the alternative media and are able to connect with like-minded critical thinking individuals on websites like Zero Hedge, Jesse’s Americain Café, Of Two Minds, Mish, Financial Sense, among many other truth seeking blogs. This is dangerous to the powers that be and they are using their political clout and extreme wealth to try and lock down and control free speech on the internet. If this is accomplished all hope at disseminating truth will be lost.
Abraham Lincoln once said that he believed in the people and that if you told them the truth and gave them the cold hard facts they would meet any crisis. That may have been true in 1860, but not today. The cold hard facts are available for all to see:
- A $16.3 trillion National Debt
- 47 million people on food stamps
- Over $222 trillion of unfunded Federal entitlement liabilities
- Over $5 trillion of unfunded State entitlement liabilities
- True unemployment above 20%.
- True inflation above 5%.
- A stock market at the same level as 1999, with a 10 year expected annual return of less than 4% – Stocks for the really, really long run. 10 year bond returns of 0% will be a miracle.
- A savings rate of 3.7% and with Bernanke’s ZIRP, no incentive to save. Real hourly earnings continue to fall.
- Baby Boomers within 10 years of retirement have saved an average of only $78,000, and more than a third of them have less than $25,000. More than half of U.S. workers have no retirement plan at all.
- A crumbling, decaying infrastructure, with 150,000 structurally deficient bridges, bursting water mains, and an overstressed electrical grid.
- Horrific government public education producing millions of low functioning morons.
- Rotting social fabric, with 40% of children born out of wedlock (72% of black children) and a 50% divorce rate.
- An energy policy based upon unicorns farting rainbows and press releases about green energy and the miracle of shale fracking, as average gas prices in 2012 and 2011 were the highest in U.S. history.
As the pitiful excuses for statesmen in Washington D.C. pander and posture about the dreaded fiscal cliff which was purposely created by the oligarchs as a show for the masses, none of the true issues above are being addressed. The dramatic compromise that will ultimately be reached between the equally corrupt parties will be hailed by the corporate media and Wall Street shysters and an HFT supercomputer engineered stock market rally will ensue. The cowardice of these politicians is revolting. As Huxley knew in 1958, politicians and propagandists prefer nonsense and storylines to truth, knowledge and honesty.
“Human beings act in a great variety of irrational ways, but all of them seem to be capable, if given a fair chance, of making a reasonable choice in the light of available evidence. Democratic institutions can be made to work only if all concerned do their best to impart knowledge and to encourage rationality. But today, in the world’s most powerful democracy, the politicians and the propagandists prefer to make nonsense of democratic procedures by appealing almost exclusively to the ignorance and irrationality of the electors.” – Aldous Huxley – Brave New World Revisited
We want to be lied to because the truth is too painful. Hope and denial with a dash of delusion is the recipe the mindless masses prefer. The average person doesn’t want to understand the chart below. They want to believe the U.S. will dominate economically and lead the world for decades to come. We are still the bright shining beacon of democracy on the mountaintop. Even though the facts unequivocally reveal a declining empire, the masses desperately grasp at straws in the wind. The United States share of world GDP will be vastly lower in 2021, as the hubris of declining empires never allows them to take the necessary steps to reverse the decline (Rome, Great Britain).
It is fitting that during this magical Christmas season of fantasy, delusion, debt fueled material over-consumption and fairy tales, we look at the biggest fairy tale of all – the great jobs recovery. I know from the two thousand Obama campaign commercials I was forced to watch in the last few months and 500 robo-calls at dinner every night that we’ve added 4 million jobs due to Obama’s wise economic policies. The magical journey from a 10.3% unemployment rate to a 7.9% rate is a humdinger. I stumbled across a myriad of charts on those truth-telling websites that I had previously mentioned.
“You shall know the truth and the truth shall make you mad.” ― Aldous Huxley
The first chart that grabbed my attention shows the historical relationship between the U3 unemployment rate reported to the masses versus the U6 truer picture of unemployment, along with the percentage of people unemployed for longer than 15 weeks. A funny thing happened shortly after the election of Barack Obama. From 1994 through 2008 the gap between the U3 and U6 rates consistently ranged between 3% and 4%. Suddenly, the gap surged to 7% and currently sits at almost 8%. The figure reported to the masses of 7.9% is so much easier to digest than the 15% to 17% that captures the truer level of unemployment. If the gap between these two figures had remained at the levels of the previous 14 years, the unemployment that should be reported to the masses would be 11%. That is unacceptable to those in power, so the data is massaged and the propaganda machine spins the storyline necessary to confuse and mislead the masses.
The next two charts from Mike Shedlock again reveal truths the existing social order doesn’t want you to know. Even though the working age population has grown by 10 million people since 2008, the BLS expects critical thinking people to believe the labor force has only grown by 1.3 million people. You see, the unemployment rate is calculated using the labor force. If your economic policies don’t create jobs, just adjust the labor force dramatically lower based on nothing. In desperate economic times, people do not voluntarily leave the workforce. Only a non-thinking drone would believe that 8.7 million Americans voluntarily left the workforce since 2008, when only 4 million left the workforce from 2003 through 2007. It is not a coincidence that student loan debt, which was taken over by the Obama administration in 2009 rose by $300 billion. Those in power have doled out these billions with no concern for credit risk or academic credentials in order to reduce the number of people in the labor force. Unemployed union Twinkie workers seeking a new career in lesbian studies can get a $20,000 loan from the American taxpayer to sit in their basement along with the 500,000 other University of Phoenix enrollees. The future $300 billion taxpayer bailout was worth it to keep the unemployment rate low enough to insure Obama’s re-election.
The Obama PR machine never fails to expound upon the fact that the economy added 4.9 million jobs since January 2009. In the same timeframe, uncovered employment rose by 6.6 million. Inquiring minds might want to know what an “uncovered” job entails. Selling your accumulated Chinese crap on Ebay is an uncovered job. Calling yourself a consultant while sleeping until noon is an uncovered job. Day trading Facebook and Apple stock is an uncovered job. Trash picking is an uncovered job. The truth is that real jobs are 1.7 million lower than they were at the depths of the recession, while bullshit jobs paying virtually nothing and offering no benefits have surged by 6.6 million. These facts don’t make a great campaign commercial. The number of employed Americans is at the same level as mid-2005, even though the working age population has grown by 18 million. Since 2008 there are 3 million less full-time jobs and 3 more part-time jobs. This trend is accelerating as small businesses react rationally to the oncoming Obamacare train, resulting in aggregate work hours declining and wage growth stagnating.
Zero Hedge reveals more truth about our glorious jobs recovery with the following two charts. They obliterate the false narrative spun by liberal ideologues that the reason for the increase of those not in the labor force is due to Baby Boomers retiring. The truth is that while those in the 55-69 age brackets have gained nearly 4 million jobs under President Obama, everyone else has lost just over 2.5 million jobs. Is this a positive development or a sign of extreme desperation among older Americans who have seen their interest income vaporized by Ben Bernanke and there food, energy, and healthcare expenses skyrocket?
Those in their prime earning years of 25 to 54 still have a net cumulative loss of 2.2 million jobs since 2009. Recent college graduates, with their billions of student loan debt, have nabbed 400,000 TGI Fridays jobs, singing happy birthday to 3 year olds, with their newly minted college degrees. This is the “normal” healthy jobs market sold to the American public by the propagandists and politicians.
The final jobs chart that portrays the truth of what has been a decades’ long spiral downward paints a picture of a country that once created wealth through producing goods from the 1940s through 1970. Since 1970 we’ve degenerated into a debt creating country that consumes foreign produced goods and makes entitlement promises it can never keep. Selling houses to each other, peddling crap on Ebay, and eating out three times a week has shockingly failed to propel our economy. The jobs picture has deteriorated rapidly since 2008 and is not improving, despite the best propaganda money can buy. There is absolutely no chance of any substantive improvement over the next four years based on the policies in place and refusal to acknowledge the economic realities that we face.
The accumulation of material possessions through the use of consumer debt, peddled by bankers and reinforced through relentless corporate marketing propaganda has left the country’s citizens weary, miserable, greedy, indebted and sick. Our obsession with technology has merely provided another means of distracting ourselves from confronting the dire challenges that must be addressed. We can ignore the facts but that doesn’t mean they do not exist. The abnormality that grips this nation is breathtaking to behold, as the status quo cheer on and encourage consumers to buy more things with money they don’t have in order to support an economic recovery that is dependent upon zero interest rates for Wall Street banks, QE to infinity, and the delusional desire for a miraculous return to the good old days when getting something for nothing was possible. We can no longer deny reality. If we want to add 30 million people to Medicaid, it must be paid for. If we want to wage never ending wars and police the world, it must be paid for. If we want a Federal government to spend $3.8 trillion per year, it must be paid for. Nothing is free in this world, but more than 50% of Americans seem to believe that to be true.
“Our economy is based on spending billions to persuade people that happiness is buying things, and then insisting that the only way to have a viable economy is to make things for people to buy so they’ll have jobs and get enough money to buy things.” – Philip Elliot Slater
We are seen by those in control as nothing more than common house flies caught in their web of lies. Your owners don’t care about you. They only care about their own wealth and power. They want to control and manipulate you. They want to keep you enslaved in debt and running on the treadmill of consumption. They want passive, non-critical thinking drones to do the menial service jobs that remain in this country, while they use their control of our financial, political, tax, and legal systems to ransack and pillage the wealth of the dwindling middle class. The truth is the continuation of our current economic system is mathematically impossible. Your owners know this. This is why the use of propaganda, misinformation, fake data, and false storylines has taken on astronomical proportions. The time for passivity and accepting the deceitfulness of our leaders is coming to an end. While you’re waiting in line this Christmas season at Wal-Mart to purchase a fabulously priced shirt that only required the deaths of 112 Bangladesh slave laborers, try to figure out how we got here. Your owners think they have you by the balls.
“They spend billions of dollars every year lobbying to get what they want. Well, we know what they want; they want more for themselves and less for everybody else. But I’ll tell you what they don’t want—they don’t want a population of citizens capable of critical thinking. They don’t want well informed, well educated people capable of critical thinking. They’re not interested in that. That doesn’t help them. That’s against their interest. You know something, they don’t want people that are smart enough to sit around their kitchen table and figure out how badly they’re getting fucked by a system that threw them overboard 30 fucking years ago. Because the owners of this country know the truth, it’s called the American Dream, because you have to be asleep to believe it.” – George Carlin
How many Americans are awake enough to handle the truth?
All I want for Christmas is the truth.
Off the Keyboard of Steve from Virginia
Published originally on Economic Undertow on September 14, 2012
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
Ongoing rush of monetization world-wide took a predictable step yesterday as the Fed Chairman announced open-ended lending to mortgage industry. This is on top of ongoing lending to the government (LSAP/Operation Twist) and the promise of ‘unlimited’ lending to banks (by way of governments) in the European Union. On the way is more central bank lending in Japan, UK as well as more stimulus in Chinaand elsewhere.
As was pointed out in the Economic Undertow short-version:
Modernity cannibalizes its capital, as such our crisis is irreversible. Conventional marketplace remedies such as debt jubilees/write-offs, re-distribution, bailouts, stimulus, austerity policies, monetary easing, etc. have no effect on outcome other than to worsen conditions. These are efforts to reclaim capital that no longer exists. Consequently, remedies accelerate unraveling process by increasing gross debt (claims against capital) while exposing remaining capital to consumption at higher rates.Economists insist that capital is symbolic (money) rather than material. Capital = resources (Daly), all industrial money is debt. Abstract money is infinitely reproducible, material inputs are not.
The central bankers endeavor to reproduce as much of the abstract ‘money’ as possible, hoping that consumption can grow to ‘normal’ levels. The central banks lend, this is all they can do. Despite talk about ‘tools’, they only have one: making- or not making loans. The banks’ only form of medicine is more of what put the world in the hospital in the first place!
The economies are like a car that cannot start. First one person then another puts the key into the ignition and cranks the engine. New people arrive and say, “I can start the car,” and take their turn with the key. They declare the problem is with the battery or the starter or the engine or the electrical system. Each believes the other simply does not know how to start a car. The gas tank is empty the car will not start regardless of who turns the key. Eventually, the battery fails.
Battery Failure = Great Depression
Most of the people in the world do not want a second Great Depression. There are also very few on this planet that do not acknowledge the possibility/likelihood of another depression. The people will do whatever it takes to forestall it. If this requires believing the establishment’s lies … they will become believers. They will repeat whatever lies they must to themselves, to their children, they will live the lies until they are submerged by them.
When the central bankers promise the children that they will save them, the children act accordingly … even though the fact of the central banks having to make such promises speaks for itself. When the Fed and the rest are the last line of defense, there really is no last line of defense.
What people don’t understand is the nature of our crisis, it is an energy crisis in drag. High real input prices due to scarcity are stranding trillion$ of infrastructure used to waste resources, (sunk capital investment). There is no coming back from this. When capital resources are gone they are gone forever, wasting infrastructure is worthless junk. The process has arrived at the point when the various actors are beginning to come to understand what ‘forever’ actually represents and that they are confronting it.
The monstrousness of our predicament is almost beyond the ability of the human mind to grasp its scale. We burn up our resources today, there will be no more resources to burn for millions of years. We’re it. Apres moi le deluge!
Central bankers cannot issue value-on-demand. They cannot offer anything other than symbols for value, items that have worth only under circumstances that do not currently exist and cannot again! They cannot print crude oil, topsoil, surface water, they cannot increase waste-carrying capacity, they can add to the assault on these things by way of their lies and the willing credulity of others. They can only make matters worse, the central banks are at odds with themselves.
As far as it goes, the entire world is in the grip of resource deflation, from which there is no escape. Our voracious machines dig the graves of our grandchildren faster and deeper, capital is destroyed more utterly, what remains becomes unaffordably expensive, at some point the costs are bankrupting … see ‘Greece’.
Greece is all of our futures, our children’s futures, our grandchildren if they are very, very lucky and can dodge the consequences of our stupidity and blindness. They will live in small villages, they will till what fertile soil they can find, they will make things by hand they will wish all of us had died before we were born.
Loans without end … just not for you!
Tens of millions are unemployed worldwide! The solution is to offer loans at near-zero cost to bankers! That will solve the problem … right? Let the Fed Chairman’s friends take they money and run … to Peru!
Figure 1: This graph of Fed total assets and liabilities from Cleveland Federal Reserve Bank (click on for big). This amount is set to grow by another US$480 billion per year into the foreseeable future. Keep in mind, the central bank balance sheet expands because the private sector balance sheet contracts. Fed credit supplants private credit, it is not added to it. If there is no private sector deficiency there is no need for easing! The end of the day has no net increase in available funds for the public, only balance sheet problems pushed further into the future.
The breakdown of Federal Reserve balance sheet can be seen on the Fed statistical release page. Regardless of what the report says, all assets held outright by the Fed are loans made by them: the purchases of Treasury- or agency bonds are loans to these agencies.
The flow of credit is from the central bank into reserve accounts at the Fed (not circulating currency). Reserves do not appear in the greater world unless there is demand for them in the form of redemptions/depositor withdrawals that exceed the requirements of ordinary, day-to-day business. A good example of this excess depositor demand would be a bank run.
What the central bank has done is guarantee all bank deposits by offering what amounts to unlimited reserves.
It’s not clear guaranteeing deposits is what the Fed Chairman intends to do. Bank runs are underway in Europe, China, Argentina and elsewhere. The reason is there are no effective lenders of last resort, the consequence of central bank over-promising/making unsecured loans. When central banks leverage themselves they become no different from ordinary, commercial banks/shadow lenders who are insolvent because of their unsecured lending. The central bankers promise ‘unlimited’ supplies of liquidity, they cannot possibly deliver it. The central banks are collateral-constrained. There is less good collateral available: collateral is capital, there is a shortage of it: our crisis is the consumption of capital. Adding claims against what little remains is pointless particularly when the form of the claim is accelerated consumption.
The Chairman guarantees bank deposits with the left hand while making the guarantee necessary with the right.
More left hand-right hand: or perhaps left foot-right foot: the central banks place the petroleum industry’s boot on the throat of the world’s economies (click on for big):
Figure 2: Brent crude continuous front-month contract, chart by TFC Charts: the financing needs of the petroleum extractors is at odds with those of the extractors’ own customers (Guardian):
Further quantitative easing in doubt as petrol prices near record high.
The Bank of England could be prevented from boosting the economy with another round of QE if inflation rises
Petrol pump prices jumped to 139.7p a litre this weekend, within 3p of the 142.5p record set in the spring, according to figures from the AA.
The cost of diesel also rose as Europe’s major refiners blamed hurricanes in the US and a string of refinery shutdowns for a spike in the cost of crude oil.
A rising oil price will spook the Bank of England, which has relied in its inflation forecasts on a fall in oil prices linked to falling demand across the world. The central bank’s monetary policy committee, which sets interest rates, could be prevented from adding to its £375bn programme of quantitative easing to boost lending in the economy if inflation takes hold, analysts said.
Higher pump prices will also add to concerns that the UK will join continental Europe in a stagflation trap as inflation rises while growth remains flat.
Fears that the economy will remain in recession for the rest of the year were heightened by a report on Monday that found optimism among UK businesses has hit a 20-year low.
There is an upper bound to the price of petroleum, where the costs of consumption become unaffordable and demand is constrained. In the US, the price is a little over $4 per gallon of motor gasoline: at this level the entire fuel wasting enterprise becomes unaffordable, including the precious tract house- and office developments, sectors of the economy the central banks are desperate to revive.
Figure 3: Got gold? (TFC Chartz, click on for big) How about silver? It is hard to see a green light given to Wall Street asset speculators that won’t push up the price of all commodities. Unlike crude oil, which cannot rise in price without self-limiting demand destruction, gold is not strategically important. An ounce of gold can be bid up to a cool million dollars per ounce without effecting the so-called ‘productive’ economy. Gold is a fetish, like a Tiger tank or a Warhol Car Crash: a very high price might reflect uncertainty about the worth of other goods (including currency) but the implied shortage of gold would not materially effect output of necessary goods.
The central banks think only of creating asset price ‘bubbles’, in our ruin of a world there is nothing left.
Off the keyboard of RE
Recent data brought to light by Zero Hedge shows a significant Credit Contraction in the Shadow Banking sector of the money supply. In his recent Banking Bits & Pieces article on Economic Undertow, Steve from Virginia once again hammers down on the fact that Central Banks don’t really “Print Money”, rather what they do is make loans against some kind of “collateral”.
‘Money printing’ is inaccurate and false: central banks cannot create new money, they are balance sheet constrained. They cannot lend without collateral. They cannot lend above the ‘face price’ of the collateral, which is almost always another loan. What central banks do is shuffle the custody of loans between agents, moving up or down the yield curve in the process. The central bank can offer credit as long as there is ‘good’ collateral offered by the private sector lenders. Without the good collateral — exhausted resources are not useful — the banks cannot lend.
Steve is for the most part of course correct here. The Central Banks do not really create money, it is in fact created in the Private Sector first by Commercial Banks in making Loans to the Biz Community for projects/ideas deemed Worthy enough to hopefully eventually pay off these loans complete with the Interest Charge attached to them. At least that is how it works in the world of Small to Medium Size Biz, not so true in the Grand World of Conduit Biz.
Conduits are Biznesses like the Railroads, the Electric Grid and the Telecommunications Network. In order to build such large scale Conduits, Credit has to be extended on a MASSIVE scale, and only a few people are ever deemed “Credit Worthy” enough to get those kinds of loans. The way they get them is through issuance of Bonds, all underwritten by TBTF Banks the very same people are in control of. As a result, these folks have a virtually unlimited supply of “Capital” to work with to build or create any sort of Network/Conduit they would like to build.
Since the Age of Coal at least, all of these Conduits have been extremely Energy consumptive, and as Steve also often points out, are never truly “productive”, but always subsidized by the further issuance of Credit. In order for people to buy the services that say the Electric Grid or the Telephone network provide, still MORE loans are issued out, more ” Money” created. This money then flows back inward toward the Central Conduit structure, but it really never is enough to pay off all the costs involved and the Interest Charges on the originating loans to build said infrastructure. Thus eventually, all such things as Railroads and the Electric Grid get dumped into the Public Sector as the costs of maintaining them and paying off their debts exceed the cost of the revenue they bring in. By this time of course, those who built them to begin with have extracted as much personal wealth as possible from the venture, and protected themselves from the BK of the company as a whole through the legal construct of the Corporation. His Railroad goes Belly Up, but JP Morgan walks away a few Mega Bucks richer afterward.
In order to keep the whole game rolling along, further loans have to be issued in order for people to continue to buy the Services they have become accustomed to of easy Transportation, easy Communications and Lights that go on at the Flick of a Switch. The Debt Overhang of course becomes ever larger all the time and evermore of this debt gets shifted to the Public Sector which essentially has become DEPENDENT on all these sytems along the way.
See, once Railroads are BUILT, nobody wants to go back to Teamsters and Wagon Trains pulling Freight, once Electric Lights are available, nobody wants to go back to Gas Lights or No Lights. Once the Internet is built, nobody wants to go back to the Telegraph. PROGRESS!
Problem here is of course, all that Progress carried with it endless and ever increasing debt load and energy requirements to maintain. All possible to do as long as the system as a whole was growing and the energy to maintain it all came cheap. Combine increasing cost of accessing energy along with a debt load shovelled onto the Public dime over decades and in fact a couple of Centuries if you go right back to the Railroads, and eventually here you run up against the situation that those in charge of Credit Creation STOP issuing it to just about everybody, except the occassional Bubble Company like Facepalm. Unlike the Railroads though, that Conduit is so patently STUPID it didn’t last 5 minutes in open trade.
So what is likely to occur here with imploding Credit availability at even the HIGHEST levels of the Supranational Corporations and the Nation-States? Sandor, one of the regular Commenters on EU and a Lurking Diner made the following analysis of the situation:
In response to dolph and many others that insist inflation will prevail by pointing to the past, be aware that current conditions do not resemble those of Germany 1929 or the Holy Roman Empire or even Zimbabwe. This kind of reductionist thinking is a symptom of a desire for easy answers aka ‘perceptual flattening’. What Steve is pointing out in this post is that deflation is happening in the shadow banking system, to an extent which is significant and difficult for the central planning authorities to combat. Most money is created by commercial banks through extension of credit. If loans cannot be effectively serviced in aggregate, debt-deflation will happen.
The current policy of monetary LTRO/QE/Twister is basically a giant rollover/duration extension. They are not printing money. They are extending and amplifying duration risk, aka ‘buying time’. Peak credit is tied into peak EROEI. Inflation is no longer a given outcome at an energy extraction ceiling, even if that is the tendency of humans throughout the brief period of modern societies. Predicting the demise of the USD and all fiat currencies is quite fashionable on the fringe blogs, but there does not appear to be enough gold and silver alternatives to go around. Fiat currencies are flawed, but are far more practical than lugging around metal everywhere or bartering for everything. There are further steps that will probably be taken in order to combat the specter of ‘deflation’ including outright USD devaluation (debt restructuring), negative nominal interest rates and/or demurrage currency. These may appear ‘inflationary’ on the surface but are rather symptoms of fighting deflation. They are new monetary medicines to ‘stimulate’ a preference for goods/services over cash in a flagging patient that is already resistant to all the old drugs. Do 80 year old men need Viagara? Is there a point in the life cycle of a nation where it’s OK to consume less?
I suppose the debate comes down to what happens when the doctors reach the end of their rope and all the experimental drugs have been tried. The ‘West’ are at/near quasi-deflation now, and the extreme resistance to it makes it appear that inflation is going to be unleashed in a deluge any day now. But there are relative price limits of energy and food at which the global economy can function at present rates of demand. These limits, and the limits of present technology on the rates of resource extraction effectively govern how much ‘inflation’ will actually happen. Inflation happens when demand expands because more people have an income that supports more consumption and the servicing of debt. These conditions are on life support in the US/Europe/Japan, on the edge of rolling over into negative.
Whether or not and for how long the USD and US/German Bonds are a good (deflation) bet is a policy timing issue. It is important to clarify the discussion going forward to note that this question and the inflation/deflation question are related yet technically distinct. The world has seen a massive and unprecedented inflation/credit expansion from 1947-2008. It’s an open question whether ultra long-term debt restructuring will give rise to massive inflation. When it’s coming from very high levels of aggregate demand like Japan, Europe, US/Canada, it seems unlikely, short of currency devaluation, which amounts to a haircut for the creditors and would only serve as a temporary spur to wages and prices. And while initially nominally inflationary, such a move would only serve to choke off credit further, a deflationary outcome in a monetary system based on debt and interest. Given the instability of human psychology, the political cult that ‘something is better than nothing’, and the precarious balance of resource distribution networks, it seems likely that we will revisit both extremes in the next 12 years.
Again, for the most part I agree with Sandor’s analysis. On the Central Banking level, the CBs are exchanging “Cash for Trash“, accepting a lot of worthless Collateral in exchange for fresh injections of Cash. This provides some liquidity to the TBTF Banks, but they aren’t any more Flush than they were before, and they still have no Credit-Worthy Borrowers to lend to for the most part. So the Money distribution to the society pretty much stops at this very high Wholesale level. Overall this creates deflationary pressure through the system, and it is showing up mostly inside the Shadow Banking system. There is still speculation ongoing in the Commodities markets by the Prop Desks of the TBTF Banks and some Price Inflation there as a result, however medium-long term that cannot hold up as Money Distribution to the End Konsumer continues to be restricted. Restricted how? By AUSTERITY measures of various sorts, which include all sorts of things like Public Payroll cuts, reduced Pensions and Private Sector Bankruptcies.
I also agree with Sandor that the current dynamic will lead to more experiments with money creation, including Demurrage and Currency Devaluation, but at least as far as the latter one is concerned you have to ask “Devaluation with respect to WHAT?” All the major currencies are valued with respect to Each Other, with the Dollar providing the Benchmark Measure as World Reserve Currency. The only thing the Dollar really can devalue against is the Oil it serves as a proxy for, and that is going to happen organically regardless. It might also devalue against Gold if Gold is sought after as a “Safe Haven”, but poor distribution of Gold and Limited Quantities of it make it an unlikely future Currency. So you STILL have Deflationary pressure here regardless of Devaluation and regardless of transition to PMs. None of these techniques makes any more money Circulate in the real economy, which continues to be starved for Cash.
Demurrage Currency and non-debt Money like Greenbacks could put some money back into circulation, but the Distribution Mechanism for them remains a bit Mysterious at this point. In Lincoln’s time, Greenbacks mainly got issued to pay for the War Effort. Hiring Soldiers, paying Arms Dealers, that sort of thing. Without a vast ramping Up of the Military effort here, who would Da Goobermint issue Greenbacks to, and for what?
The system at the moment regardless of the Currency chosen still depends first on the Wholesale Level Money Distributors of the TBTF Banks, and then below them the smaller Commercial Banks which distribute money in the form of Loans to many Biznesses. Here in the FSofA, there really is no alternative Money Distribution system to this. Only if Da Goobermint undertakes a Massive Make-Work project might they do Retail Distribution of Money on the kind of scale required here, and generally speaking the only such Make-Work project Da Goobermint will undertake in such a situation is WAR. A successful War Effort holds the promise that you can extract some Profit from those you defeat in the war if you are successful with it. In the case of WWII, the post-War extraction method was to create a bunch of Debtor Client States to the Industrial Monopoly held mostly at the time in Anglo-Amerikan and Kraut hands, all through the same Banking Interests and families that made the original Bretton Woods Agreements. They got a 70 year long Wealth extraction scheme going with that one in the aftermath of WWII.
What remains quite unclear resultant from the current Spin Down is exactly what type of Wealth extraction scheme might be undertaken to try to pay off the costs of the next Global War for Dominance of the Monetary System? Even Slave Labor cannot pay its own way, much less pay off outstanding debts of the losers of the next Global War, which in reality will be EVERYBODY. Rebuilding all the stuff which gets destroyed THIS TIME with a Marshall Plan just won’t happen, the Cheap Energy to do that with just not is there anymore to do it with ALREADY, and in the aftermath of such a Global War a good deal less will be available. Much energy will be Konsumed just to fight the War, and beyond that much if not most of the infrastructure required to extract such energy will have been DESTROYED.
It’s a Morton’s Fork no matter how you cut it here, nobody can Win, everybody will Lose no matter what. The best you can hope for is to Cut Your Losses. Global Thermonuclear War including the exchange of MIRV equipped ICBMs betwen the major powers which have them is the worst scenario for a rapid destruction, and one can only HOPE that is not undertaken. Next down the list would be a Global Extermination campaign undertaken by the Illuminati to eliminate a significant portion of the population through Biological Warfare/Pestilence Propagation. A Georgia Guidestones type scenario. Further down the List of Bad Outcomes is Global Warfare which though not Thermonuclear everywhere, still so destroys the current infrastructure that we get a Rapid Devolution to Mad Max. Down the list after that one are Global and Independent Civil Wars virtually in all Nation–States, which set Brother Against Brother, and likely end up in the type of Multiple-Orkin Man scenario I see as a high probability outcome. Note that this is FOURTH down the list of Bad Outcomes.
Over on the OTHER SIDE of the the Bell Curve of Probabilities are the GOOD outcomes like a vast new Energy Source is accessed, or En Masse the Societies all over the Globe move quickly toward developing Sustainable Systems which will replace the ones failing now as we speak through “Conservation by Other Means“, a term coined by Steve on Economic Undertow. This basically represents the Economic Triage of entire Societies off the Oil Jones as they are cut off from the Life Blood of Credit with which to buy said Oil. Lowest on my list of Probabilities is that Jesus Christ will descend from Heaven to General the War Effort of Good vs. Evil here, or that Aliens will emerge from Underground Cities to Duke it Out either with each other or J6P.
Outcome Number 4 appears to me to sit in the Central Portion of the Bell Curve as the Highest Probability Outcome.
Large societies become Highly Dependent on Money Manufacturing to run the various complex systems that evolve. In the past, that included large trading networks run by folks like the Babylonians and the Romans as well, all based on the Ag Production of those societies and Conquest of ever larger portions of the surface of the Earth, eliminating competing Hunter-Gatherers along the way. When these systems failed, said societies got overrun by “Barbarians”, basically the “Uncivilized” portion of the population of the Earth still extant out there at the time. The transition to Industrialization took even the basic Ag Society and rendered that one Uneconomic, since of course an Industrialized Farm could produce so much food so much cheaper than the non-Industrialized one. The further systems created to run said society all are even MORE dependent on functioning MONEY than the Ag Society was. In such an Ag based society, even after the failure of the Monetary System, it was possible to revert to Barter for a while until things calmed down, with fairly restricted losses to total population, on the Biblical Percentages of around 25% of Total Population taken out by the Four Horsemen of the Apocalypse.
Revelation 6:8 And I looked, and behold a pale horse: and his name that sat on him was Death, and Hell followed with him. And power was given unto them over the fourth part of the earth, to kill with sword, and with hunger, and with death, and with the beasts of the earth.
The Industrial Society is not so Gifted with the relatively quick transition back to a Barter Economy that the basic Ag Society. is. What is truly “productive” Work has become extremely Abstract in the Industrial Economy. MOST of the population in the IE works in jobs that only are marginally important to survival at best, and almost all of those jobs are dependent on vast Energy consumption as well. Taking a society OFF of the Oil Jones is not much different than going Cold Turkey off of Heroin. It can’t be done without a whole lot of PAIN, and even after experiencing said Pain there is no guarantee you will survive the transition.
For the most Powerful Nation States, none of them will go “Quietly into this Good Night“. All will struggle to maintain some sort of functioning Monetary System, Greenbacks are possible, Demurrage is possible, SDRs issued by the BIS are possible, Hell even Gold is possible here as the Deep Panic really sets in. In my estimation, none of them can work, in the end because of a Fundamental Principle Nature always Obeys in our Frame of Reference, which is that you CANNOT MAKE SOMETHING FROM NOTHING. Whatever the Money is, it must represent Resources which are actually THERE. If the resources relative to the total population base are NOT THERE, no money of any sort can represent them.
There is still Oil out there, and there is still a lot of good arable land as well. However without vast changes in methodology, what is left of the resource base cannot match the population base. I am well aware of other means and methods for Food production, Peter here on the Diner details how Hydroponics can be used for copious food production in the absence of Fossil Fuels. Diner A. Gelbert in his article in the Waste Based Economy series also detailed possibilities for energy production that might be pursued, but the fact is they are NOT being pursued and it is unlikely they will be in anywhere near sufficient time to pick up the slack from Lost Oil Energy production. We had the CHANCE to stop this Runaway Train probably last time in the late 60s to early 70′s with the Back to the Land Movement, but that was undermined and coopted out of existence by vast Debt Expansion.
The only possible result here now is massive CONTRACTION, and no Monetary Policy can stop that, because you CANNOT MAKE SOMETHING FROM NOTHING.
More from inside the Diner on the Hyperinflation/Inflation/Deflation Question. Click here to read the full debate ETERNALLY in progress.
Ashvin Pandurangi of TAE wrote:
I recommend everyone here to take a look at FOFOA’s latest (behemoth of a) post – Hyperinflation or Deflation?
The most interesting thing for me is that I agree with 99% of what he writes in that post, and I think he provides A LOT of genuine insights (such as the importance of comparing marginal [i]flow[/i] of dollars in the “physical plane” – US public deficit vs. trade deficit), but I still strongly disagree with his theoretical foundations, general worldview (including his very benign view of the monetary system – i.e. no malicious intent) and many of his conclusions.
However, I DO agree that dollar HI is a) very likely in the medium to long-term (let’s say 8-20 years) and b) much more likely than a prolonged period of regular old inflation. With regards to a), FOFOA doesn’t think that sort of timing is very important, but I most certainly do.
Anyway, it is a great post, even though it is very difficult to get through in one sitting.
I read through some of this eruption of prose from the keyboard of FOFOA, and will finish eventually but after skimming what I didn’t read in detail, the main problem here is the fact FOFOA refuses to make any kind of timing bet, which is rather critical in all of this.
Even deflationistas like myself will grant that the denoument of currency collapse can come in the form of a hyperinflation. I maintain however that an HI cannot be supported until and unless Da Goobermint or the Banks which control it start handing out free money to the end consumers. The “Free Money” could comein the form of Goobermint “Make Work” projects like the WPA or a straight Dole, or from the Banksters it could come in the form of massive new loans made to EVERYBODY, from corporations to municipal Goobermints to keep paying their workers.
At the moment, neither of these outcomes is on the horizon for the FSofA, and for 99% of the people out there, Dollars are a SCARCE commodity and hard to come by. HTF can you get an HI out of something so scarce? If you take the definition of an HI as 6% monthly inflation, you’ll double prices in about a year. If that occurs with gas here now, gas sales will PLUMMET because people don’t have the money to buy gas even at current prices.
Contrast this with the situation in Greece if/when they reissue Drachma. The Greeks will issue this TP to pay all their pensioners and Civil Service workers to keep them employed. Any beginning devaluation against the Euro of say 50% will rapidly further devalue. There is no tie to actual productivity in a Drachma reissue. There is no tie to Drachma and Oil to run the economy. The Drachma is meaningless.
The Dollar remains meaningful as long as its tie to Oil remains in place, and as long as dollars are scarce in the real econmy. Though I did not read all the way through FOFOA’s post, I don’t see where he ties together the proxy status of the Dollar as representative of a given quantity of Oil. Long as Saudi’s will take Dollars for Oil and the dollars are scarce to end consumers of said oil, you just can’t support an HI in the Dollar.
The MOMENT the Saudis will NOT take dollars for Oil is the moment it can HI. Then they become as worthless as New Drachma. Everybody who has any Dollars in the Bank of Sealy will try to dump them all at the same time, and whatever is left on the shelves of Walmart will FLY off those shelves at rapidly increasing prices. Then you’ll get your HI until all the warehouses and distribution centers are cleared of goods. Of course, Da Goobermint will likely step in here with Ration Coupons and so forth to stop that scenario from occurring.
At the moment though, there is little danger the Saudis will stop taking Dollars for Oil, because the House of Saud has a Gun duct taped to the side of its collective Sheik Heads. The Gun is the Big Ass Military,and without it the House of Saud is TOAST. The Sheiks will be LITERALLY eaten alive by the population surrounding them. This is the POLITICAL side of the equation that FOFOA never seems to deal with, all his arguments are economic ones.
In any event, for most people it is the TIMING that is most critical here. That the currency will collapse at some point is inevitable, but when do you divest and what do you do in the meantime? My “solution” here is to reamin as liquid as possible so I can divest rapidly for hard goods when the final collapse comes. To be able to do that, I forgo investments that in the interim might provide an increasing pile of funny money if I choose correctly.
Finally, on the Gold issue, the deal with Gold is that even assuming it holds some value that Fiat does not, by the time you work your way down to trading in Gold, there will just be nothing around worth buying for it. The whole JIT system will collapse, all trade with China will collapse, there just will not be anything to buy once Gold is all there is anyone “trusts” anymore. No Letters of Credit, no Bankster will be trusted for anything. You can’t move a Global Economy shipping Gold Bars from one place to another, its even probably impossible to do it moving piles of Gold from one holding cell to another in the Basement Safe of the NY Fed.
Meanwhile, until Da Goobermint starts handing out Free Money to J6P the way it does to the TBTF Banksters, I don’t think we will see HI in the Dollar. For sure, it has to wait until after both the Euro and Yen collapse also. Not on the immediate horizon, IMHO.
As the spin down proceeds along here, the circular nature of Money Creation and Destruction becomes ever more apparent, even I think to the Casual Observer now. Reason it is becoming much more obvious now than in the past is that BOTH Money Creation and Destruction are occurring exponentially more rapidly these days than just a few years ago.
We have all been Witness to TARP, QE1 & QE2, and the EFSF Slush Fund, which in combination add up to TRILLIONS of some Fiat created over the last 4 years since the 2008 Financial Crisis. This non-stop creation of credit to maintain liquidity has provided an enormous amount of Fodder for the arguments of Hyperinflationistas and Gold Bugs alike. According to BOTH John Williams and Speedy Gonzalo Lira, all this Printing SHOULD have resulted in HI of the Dollar in around 2011 at the LATEST, if you read their arguments in 2009-10 anyhow. Here we are in 2012 though, and it still does not take a wheelbarrow to buy a Loaf of Bread, though Bread IS more prcey today than in 2009.
Why has HI not occurred as of yet in the Dollar? A few reasons for this. First of all, the Dollar is just a COMPARATIVELY valued currency, valued against the worth of other currencies in operation. It’s not a good currency, but compared to the other main currencies it is valued against, it is positively Sterling! Bad as FSofA debt is, it is better debt than that owed by the various PIIGS nations. Its better than Glow inthe Dark Yen.
The ABSOLUTE Truth of course is that ALL Fiat is diminishing in it’s relative worth against Oil, which in this industrial cuture provides the underpinning for the value of all Fiat. PMs play a tangetial role in this, their worth depends on valuation against both the Oil resource and the perceived Safety of PMs while Fiat loses its value. Overall though, Gold is a minor player in a much bigger game, and Gold cannot abosrb the lost value in Industrial Equities. Put it this way, if you took all your Monsanto,IBM,GE etc Stock and tried to convert it to Gold, at current valuations for Gold there is not enough around to place all that value. Gold would have to raise in value by orders of magnitude to take on the current valuations, and that is not going to happen. Why? Because the current valuations of equities are entirely WRONG to begin with! You cannot transmute false valuations in equities (or real estate or derivatives etc) into “real”valuations in Gold anymore than you can transmute Lead into Gold. The shit simply isn’t WORTH what the “market”says it is worth, because the “market” marks to MAKE BELIEVE now, not any real valuation.
Anyhow,it is the recent IPO of Facepalm that leads me to write this analysis, because inside the Diner the case was made by GO that $100B worth of fiat was created in this IPO, which is for the most part true. At this point, Morgan Stanlety who underwrote the IPO is going to have to Borrow money to buy the stock itself and keep the price propped up at anywhere near its IPO price. MS can only do this for so long though, even with an open spigot from Helicopter Ben. The rest of the competitors to MS will see this weakness and keep dumping stock forcing MS into a deeper hole to prop it up. The OTHER sharks in the water will eat MS ALIVE if they persist in propping it up.
So,the $100B or so created to purchase this stockrather quickly goes up in flames here without EVER making it out into the Main Street Economy to Hyperinflate anything. Rinse and repeat said process with all the recent IPOs from Poopon to Zinger to the “new”GM.They are ALL losing their value, all the money created to buy them is going right up in SMOKE here.
Forget HI, even just keeping regular Inflation going is a daily job for Helicopter Ben that overall he is losing. None of the Funny Money being created makes it any further out to the Real Economy than the Bonuses paid to the Banksters for making these deals and setting up a new paper construct, in this case Facepalm. Facepalm has no real good revenue model here, it is a fucking FAD. In the end, social networking and Tweeting the details of your daily life is just BORING. Really, even the Tweets of Bill Gross are BORING,and he is worth BILLIONS.
Facepalm is a fabulous example for what is going on in the Grand Schema here, which is to try to keep this monetary system running blowing ever more and newer Bubbles,but the latest Bubbles are so full of HOLES they capture no Air whatsoever, not even for a MOMENT after they are offered up for consumption.Railroads,Carz, they captured some air for a while when the Black Gold came a-bubblin’up from Jed Clampett’s farm, but these things at leasthad some SUBSTANCE to them. Virtual Creations on the internet HAVE NO SUBSTANCE. In REALITY,they are quite worthless things. Facepalm is a MIRAGE of wealth,though to be sure Suckerbug cashed out himslf on this mirage. For everyone ELSE who invested in it, you are the Suckerbug’s Sucker holding the bag.
Posted originally on TBP on 25th April 2011 by Reverse Engineer in Economy
Tonight’s topic is a tough one. The bickering regarding precisely how the monetary system will collapse framed around Inflation and Deflation is getting us precisely NOWHERE. The reason for this I think is because it is mostly ex-post facto analysis of the money supply and asset values, and this bogs you down in conflicting numbers, many of which are not even certain to be valid given how the data is manipulated these days. So what I am going to try to do in this post is look at precisely how fiat money accrues value and how that attaches to physical resources, energy and labor to create an economic system. It’s a Theory of Everything kind of post, and I have no idea how its going to come out here as I begin. My objective in developing a TOE here is to try to get a better idea of how the folks in current control over the monetary system will behave as the system disintegrates. I am trying to figure this out, and I do not have an absolute answer, but writing about it helps me to frame the questions, and responses I get help me refine it. I am just “thinking out loud” as I go, and no besides everything I remember I haven’t done ANY research for this post. Its a thought experiment.
Now, I am using “disintegrates” with respect to the economic system not in the colloquial meaning of being hit by a Phaser blast and vanishing, but in a more pure concept of dis-Integration, where to be integrated means to be connected. The problem we are faced with at the moment is that Money is becoming less and less connected to Real Value. This is not simply because a lot of it is being “printed” by the various CBs around the world, but rather because it is becoming further disconnected from the value creation mechanism of the money itself. Lots of freely floating money in the market certainly should devalue it, but competing against that is what causes fiat to have any value at all, which is Interest. If you create more money but at the same time make that money more expensive in terms of interest, the money will retain value with respect to whatever it is buying. So the freshly printed money the Greeks need right now is still actually worth something because the interest rates they have to pay for it are skyrocketing upwards.
In the Fiat system as it has been pursued since around 1692, CBs have had a virtually unlimited ability to create money. Money is a great Lubricant for trade, it allows you to rise above a pure barter exchange mechanism utilizing a portable store of value. Whatever that store of value is has to be recognized as such all across the trading markets, which these days are global and interconnected via computers. It wasn’t always that way though, certainly not in 1692, at that time it was all Paper that had to hold value across the world. How do you go about making a piece of paper a valuable instrument of monetary transaction across societies? To do it, you need to have Banking Houses established in different societies which all recognize the paper as holding value. A note written by the House of Medici in Venice has to be recognized in the Mongol Empire as “Good as Gold”, so that when the Note arrives by Camel train with Marco Polo, the Credits it represents actually buy real goods for Ghenghis Khan, so he can buy more Saddles for the Mongol Horde and expand his Raping and Pillaging Empire a bit further. Needless to say, if you actually have control over the trade routes and have warehouses stocked with real goods those credits can buy, the Paper has very real value.
It is of course very important for anyone running such a monetary system based on Notes they create that they in fact do maintain real value to buy goods and services. It is not generally in the interest of a Bankster to create worthless notes, because once those notes stop functioning to buy goods and services, the Bankster is outta biz. It should be noted here that the TBTF banking houses which grew out of this era have NEVER allowed their notes to go completely worthless, although any number of small countries have been in some way shut out of the system and seen this occur. Argentina, Weimar Germany, and Zimbabwe are all examples of small countries who got shut out of the credit system periodically and saw their currencies completely lose value. All paper currencies amount to is a Note of Zero Duration with no coupon attached issued by the Central Bank of a local Goobermint. Long as it is respected internationally, it holds value to buy goods and services. When it is not, Hyperinflation results. As Jesse points out on Café Americain, Deflation, Hyperinflation and Stagflation are all possible outcomes for a collapsing monetary system, your main problem is to figure out how the politics will evolve to force a given choice.
As the Global system of trade grew in size and complexity, a mechanism needed to be created to both perpetually increase the Money Supply to match the growing population AND to insure that the notes they created would retain their value. How do you do that? You do it through the Bond Market, which essentially attaches all the Value a given society can create through its Labor and Natural resources to a Bond of the perceived value of those assets. So if a given country has a lot of Coal in the ground and Laborers to dig up the coal, you issue out a Loan in the form of a Bond to start money circulating to pay the laborers to dig up the coal, and attach an interest rate to that loan to in theory compensate for the risk involved in getting the project going. As long as you have new projects and new ways to use labor and natural resources to keep expanding, you can keep expanding the money supply and keep sieving back interest on the money you create, and of course if you have a monopoly on this money creation you get fabulously wealthy in the process.
The primary Debtors to attach here in this process are the Sovereigns, since they have the power to Tax the entire population on some portion of their productive enterprise. So for the most part, Sovereign nations have always been the biggest debtors. (This begs the question of why Sovereigns that can issue their own money have to go in debt to get it. That question is a whole other rant. Part II coming soon to a Theatre Near You.) However, through the Capitalist era, its also been possible to Loan large sums of money to individual Entrepreneurs and Corporations to build large scale projects, and then in addition to that the advent of “Home Ownership” in the post WWII years allowed large scale loaning of money in aggregate on the retail level to individuals. All 3 of these classes of Debtors accumulated a very large Debt through the post WWII years to finance further expansion of this system. It is this debt overhang now that is causing so much worldwide havoc with the monetary system, and it is not just in the FSofA. Every last country connected up to this banking system is in precisely the same pickle, even what appear to be net creditors like China. This because the savings they accumulated is mostly irredeemable debt. It is irredeemable debt that cannot be serviced anymore, because the growth necessary to service it simply is not happening. The lowest level debtors, J6P Home “Owners” are the ones being hit first here, because J6P is not getting ANY kind of Bailout. Stuff like HAMP is just smoke and mirrors to bail out the TBTF Banks, not J6P. The Sovereigns are being Bailed out, but the peripheral ones are seeing their Interest Rates rise to compensate for the risk that they won’t pay off and to maintain the value in the money they are being issued through the loans. The least affected so far are the TBTF Banks, which are being issued money at near ZIRP to speculate in the markets which they are not accountable for, it’s other Low Hanging Fruit who will eventually lose their shirts. Long as that speculation continues, regardless of whether these companies actually turn a profit the managers and executives can pay themselves quite well and the wheels keep turning on the bus.
The thing to remember here is that the CBs cannot keep issuing money in perpetuity, because if they do so the money will go worthless and no longer measure the value of what it is supposed to be buying. As the Sovereigns become increasingly unable to Tax enough money to pay their bonds, they will fail and I do not see it as likely that after anything bigger than about Portugal you will see the CBs bailing out Sovereigns. To do so, they would have to create valueless money, and that is not in their interest to do so.
Now, it is unclear as to whether Sir Isaac Newton as Master of the Mint back in 1692 really understood all the implications of a velocity based money supply of perpetual growth, but IMHO by the 1970s when Local Peak Oil was reached here in the FSofA and when all the bad Loans to South America made by my Dad and other apparatchiks of the system in the name of Chase Manhattan, JP Morgan et al went South, the folks running this system were quite aware of the flaws and that it had a limited lifespan. The last 40 years have been spent manipulating the system to consolidate ownership and further capture the political process, quite successfully. However, the whole ball of wax is now up between a Rock and a Hard Place GLOBALLY, which is why the idea Capital will take off and run for cover outside our own borders is IMHO ridiculous. There just isn’t anywhere to run now, all the sovereigns are in the deep doo doo, so the idea you can pull value from any of them through taxation is ludicrous. People are going to rapidly be moving to subsistence level almost everywhere, there is not going to be surplus to sieve anywhere. If the surplus does not EXIST, no financial instrument can make it exist. Of course, people can be starved out of existence to reduce demand, but they do not go quietly into that Good Night either. So this requires military action which draws down your own surplus, such as it might still exist. See the Roman Empire to understand this problem.
This still does not answer the question of how our Goobermint and Da Fed will behave as the debt default moves up the chain to the Too Big to Bail. This besides nation-states like Spain includes our own States like CA, IL, NJ, TX et al. They cannot issue high interest bonds to rollover the debt they already cannot afford to service, but with low interest there is no incentive for anyone to buy this debt. No incentive for anyone except Da Goobermint, which wishes to perpetuate itself. So the TBTF Banks will offload sovereign bonds on Da Fed, which serves as the “Bad Bank” upon which to dump all your losing bets. The large Banking Houses will consolidate down to just holding and trading about anything perceived as an asset holding real value, commodities for the most part. Regardless of the numerical denomination, with respect to each other these commodities will more or less move in tandem in perceive value, though it is likely in this scenario that PMs will crash with margin calls across other commodities Put it this way, if you are a Sovereign Nation holding a few tons of Gold and you need to buy Rice to feed the population, you are going to put that Gold up for sale at whatever the market will bear, elsewise your people are likely to Riot and string you up by the Gonads.
At this point, you have major banking houses owning large quantities of “stuff” everybody needs at a relatively high dollar denominated value. There are two roads possible, one is to issue money on the retail level to J6P to be able to buy the stuff at these high prices. In a country where most of the population is employed through Goobermint Trade Unions, you could just start indexing and raising the salaries to meet the rising costs of the commodities, but that isn’t the model the FSofA is working under. Rather what you see at the moment here is wage depression, more unemployment and further loss of purchasing power amongst the people who would buy the commodities for end use.
The most sensitive commodity here in the FSofA would be refined gasoline for private automobiles. As the price continues to rise here, it has to force people to start conserving and cutting back on usage. This would force inventories to rise as long as the supply chain is still producing the same amounts, but it may not be doing that. Libya for instance is not contributing its share to the supply chain at the moment. However, what is produced will move in the direction where the most people still have money to pay for it, and that would be toward the western nations with some percentage of the population still solvent. Less wealthy countries will begin to see shortages.
It is unclear how high a price the remaining solvent people in the FSofA can tolerate for gas before it forces too many people out of the market to maintain the distribution chain. I’m going to make a WAG it could go to $10/gallon at some stage before there is a complete collapse of distribution, but even a perpetuated period at the $5 range will have a devastating effect on commerce and GDP.
Similar effect here with Food, which as a percentage of the budget of even the lowest paid of the still employed here is relatively low, compared to countries where people subsist on $2/day. I think most Amerikans could withstand a doubling of food prices as long as they are still employed, simply by buying cheaper foods. As long as the SNAP card program keeps the unemployed fed, again we can see a steady rise in these prices that is compensated for by a forced economic rationing.
The problem is much larger and more immediate in the poorer countries of the world, and this is the most destabilizing aspect of the spin down. Again unclear is exactly how many places we can try to police to keep the Oil moving out of the M.E., so this can force a breaking point to occur much faster than just the economics.
In no scenario I can imagine would it behoove our Goobermint or Da Fed to keep issuing essentially free money to the States and Municipal Goobermints. So like Meredith Whitney, I see a period coming of Defaults through these entities, with less and less money circulating through their economies, which means ever falling tax receipts to fund their local Goobermints. This doesn’t mean an overnight failure of the monetary system, but it will put many places in a grinding down phase of increasing poverty which will be very difficult, complete with the kind of social dislocation you see now in places like Greece and Portugal, getting worse as time goes by.
Is this Inflation or Deflation? You could look at it either way, since core commodities will be increasing in price but real wages and purchasing power will be decreasing. Far as Hyperinflation goes, that is another phenomenon altogether, more Political in nature than economic. A given currency has to be more or less abandoned by the BIS and the country cut off from the international trade system to get a hyperinflation rolling. It does not seem likely that the BIS will abandon the Dollar as a currency unless and until there is a workable alternative to it, and there isn’t one on the Horizon at the moment. There will thus be political pressure both internally here and internationally to withdraw credit issuance by Da Fed, which Da Fed is looking for ways to do ever so gently so as not to rock the boat too much, but at this point it is a very unstable boat and very sensitive to perturbation of any kind. The effect remains possible of a virtually instant Lock Up in the financial markets if too much liquidity is withdrawn from the market, because without that liquidity a few margin calls can cause a cascade selling event on the markets with no bottom in sight. The Doomer in me waits impatiently for that day, because it would be a sight to behold indeed. It would make the Flash Crashes we have seen as Coming Attractions look like Chump Change. Credit where credit is due however, Helicopter Ben and the other Geniuses running the Super Computers for the PPT have demonstrated they have the ability to freeze, re-capitalize and manipulate these markets at will, so such an instantaneous crash may never happen. I have been regularly wrong in looking at the collapse at the gross market level because I underestimated just how smart these folks really are and how much control they actually do have over the markets. They cannot stop the eventual recognition though that the system is globally bankrupt, several times over actually.
To conclude this portion of the argument, I don’t think that examining the prices ex-post facto is the best way to understand how the collapse will proceed. In essence what we are looking at is a failure of the Credit-Debit model of the Bond Market at the Sovereign level. Because of the simultaneous geometric growth in population size and the tandem consumption of resources upon which to build those large populations, the ability of Sovereigns to tax out their populations to pay off on Bonds predicated on growth has for all intents and purposes disappeared. Without that ability, what gives money any value at all? Fiat money is a debt instrument, a Note of Zero Duration based on future production that isn’t coming down the pipe. So the fiat system will collapse as a result, though it can be a long grinding collapse because all production does not cease instantly everywhere.
Far as utilizing PMs as money, they do not represent Debt on future production but rather are the result of past production, the effort to dig up and smelt the relatively rare metal and then coin it. What value they actually hold depends upon exactly what there is available to buy with them, and whether it is in surplus or not. Anything still in surplus you will be able to buy with very little Gold; anything not in surplus you may not be able to buy with all the Gold in your basement safe. What you are dependent on here is the overall ability of your society to produce a surplus of food to feed the population, at its most basic level. Here in the FSofA, as long as some portion of the Oil Conduit keeps moving and we can as a society produce a surplus of food, the PMs will hold some value, but trading with them will likely become difficult and dangerous, and the Goobermint confiscation of such things becomes ever more likely if they gain any traction as a trading mechanism. I do not think they will gain such traction in most places, so I think the value of these metals will fall with respect to more necessary items.
In the medium term as a result, I see fewer Dollars being available to J6P to buy STUFF, which thus will continue to keep the Dollar valuable to J6P through its scarcity. I just do not see it likely that Helicopter Ben and TPTB will start sprinkling down higher wages and free money to J6P. In this environment, prices can rise as commodities become more scarce and Profit margins disappear on production, but as long as the Dollars are scarce to the consumer of the end products, you cannot support a Hyperinflationary event. The abandonment of the Dollar on the international level of trade by the BIS would cause a Hyperinflation, but there isn’t a readily available alternative to it right now so such an abandonment does not seem immediately likely.
However it does play itself out on the monetary level, inflation or deflation, the primary problem you are going to have is decreasing availability of the products of industrialized society. No matter how much Gold you have, if you want to buy a Plasma TV you won’t be able to do so, because the Plasma TV factories will shut down. Not ENOUGH people will have Gold to buy Plasma TVs to make running such a factory model profitable. You probably won’t miss a Plasma TV all that much, but when the profit margins in producing food along the industrial model disappear, this you will miss VERY much. It is as we approach that stage of the Spin Down that how you position yourself will become very important, because no group of people anywhere ever goes Quietly into the Good Night of Starvation. The industrial model of food production will be replaced on the local level in areas that can produce food for their populations. Farmland that is dependent on water pumped up from deep aquifers utilizing the thermodynamic energy of Oil will no longer produce, so these are not good long term areas for survival.
You cannot know how the climate might change in the future, but where you settle yourself must most certainly right NOW have enough Water dropping down as rainfall or sluicing down from mountains during the spring thaw. Water is NUMERO UNO in picking your hole. After the water, the condition of the local soil for supporting agriculture is the next bet you make, unless you are near a Coast where there is still good fisherie not contaminated by Radioactive Cesium and Iodine effluent from Fuk-U-Shima Nukes or Spilled Oil from BP’s Macondo Well in the GOM. After the water and food are covered, the next one to consider is Energy resources. The best places have all of these things, but of course in the future they will be popular places every last Zombie out there wants to migrate to. No guarantees you or your progeny will be able to keep or “own” the land you live on because you bought it with 10 pieces of Silver from the last Goobermint to run the show in that neighborhood. Your only Property Rights are what you can Protect and Defend, and nobody can do that effectively alone. So pick a place somewhere on the face of the earth with the Water and the Food resources and Good People you affiliate with well, and make yourself ready to defend that little patch of land. Because when this monetary system crashes and when the industrial model goes the way of the Dinosaur which they both inevitably MUST, that is all you will have left. If it is not enough to support you and your Tribe, you too will go the way of the Dinosaur.
See You on the Other Side.