Deflation is NOT a Pure Monetary Phenomenon

By: John Mackenzie | Thu, Jul 21, 2005
Print Email

It is the absence of real demand.

Central Banks around the globe have induced a supply side monetary orgy. One that has gone deeply awry, complete with perpetual and parallel moral hazards.

The powers that be have the world economy propped up with credits simply trying to inject demand into the system that's overdosed on their malpractice.

Cheap and easy credit is as addictive as a drug, but the patient has begun to show signs of self admission, the Betty ford Clinic is around the bend.

Demand is for the Credit drug is waning, sans the financial peddler's ever billowing ponzi paper circus, the cacophony of fraud has gone too far.

The current stage in contrarian media and to a far smaller degree mainstream financial media is the unending debate between the forces of inflation, deflation and disinflation. Given the high degree of conviction from all viewpoints, viewer mail has been piling up begging the question, what is ahead and why is there such an array of disparate points of view.

Actual 'Deflation' is has nothing to do with monetary phenomena. It is purely a structural and self correcting and natural baseline for our very existence.

Imagine an endless supply of money, not terribly difficult in the present environment; then conceive a resource we all presently require that is coming under increasingly constrained supplies.

Inflationist (Monetary Inflationist) would argue the increase in the supply of money is driving up the price of this important resource as the supply of money expands or more Dollars are chasing the same amount of the resource.

Now, suppose we were circulating Silver/GOLD/Platinum as money and not Fiat currency. Assume these precious metals were allowed to float in value determined by the market.

Let us now put a face on the resource and use Crude Oil as our baseline.

As the supply of Crude Oil declines, the amount of Silver required to purchase an equivalent amount of crude Oil might become to cumbersome for exchange, GOLD would be used in a fractional amounts until the exchange value of GOLD declined to the point whereby Platinum would be used in exchange.

The exchange value is merely another way of saying 'price,' the increasing quantities of Silver/GOLD/Platinum in exchange represent the diminished 'value' in exchange, price is a misnomer as facilitating a near zero cost of money is priceless to some, but in reality has little exchange value when broad conditions begin to change.

Fiat money may facilitate exchange in the absence of alternatives as has been the case throughout history, but in reality it was the lack of alternatives that lead to its acceptance and not fungibility and/or a store of value. These 'traits' were of course promoted by the very same money masters who owned the printing press.

If the amount (supply) of Crude Oil were to be consumed, there would be none left for exchange and the exchange value of Silver/GOLD/Platinum would then depend upon what remained in markets for exchange, no amount of these would be able to purchase Crude Oil.

An agricultural community in the Après-Petro World might produce delicious and healthy compost fed vegetables in a local environment, but demand honest exchange for their efforts (Labor), they may well be unwilling to accept Fiat Dollars, but instead would accept items they deem of value to facilitate their communities continued success.

They would seek a medium of exchange based upon the demands of consumers, on which served the necessary functions for a medium of exchange, 'real bills' would be an excellent beginning. Antal E. Fekete has provided volumes of precise, clear rationale.

Silver/GOLD/Platinum could easily facilitate the 'store of value' but might find themselves relegated to savings as opposed to fungible mediums of exchange should their value component rise to steeply. They might serve to meet final clearing of self liquidating credits accumulated over time, from one minute to one year.

It is important to note the quantity of Silver/GOLD/Platinum would not have likely diminished in a world whereby the supply of Crude Oil reached Zero. In all likelihood the supply of each, on a relative and per person baseline would have increased. Silver would certainly remain an important metal for any number of important reasons, and its supply would likely decline much faster than either GOLD or Platinum.

There is far more GOLD than is reported by the World Gold Council anyway, but the markets have had many decades to digest the immoral fraud perpetrated by this affront.

It is difficult to discuss a reduction in population, but this is precisely what will occur as the supply of Crude Oil begins to rapidly diminish. Many illusory theories will be put through their paces and fail the test of what constitutes common sense. Jan Lundberg has a great deal to contribute on this front and is a highly recommended read.

The wealth effect has allowed people to increase consumptive demand as their personal balance sheets improved. A polar opposite situation of the negative wealth effect causes demand to reverse, much like Peak Oil. Consumer wealth remains the housing bubble and much like the Internet bubble, it too shall burst.

The lowering of interest rates caused housing prices to increase, and refinancing simply allowed people to tap the accumulating wealth in their real estate.

Reality is that DEBT has supplanted the moneyness of money and become widely accepted as such. DEBT is not money, money is only perceived to retain its moneyness as long as it facilitates exchange. CONFIDENCE in our ability to take a Dollar and exchange it for goods and services we require in order to exist remains a deeply rooted, but entirely fallacious assumption on the part of those holding dollars.

When we are unable to purchase what we need for any amount of money, what is money's value let alone price. We will still demand the necessities, but will monetary phenomena dictate demand in the absence of confidence?

This is unlikely, highly unlikely.

At present the 'productivity miracle' is a structural phenomena, or more closely aligned with common sense, 'productivity.' During prior economic contractions, productivity fell. Market participants (Proprietors, Partners and Corporations) held on to their work forces as production was scaled back.

Enter the age of 'Globalization' whereby 'Labor Arbitrage' is being leveraged to increase productivity: lowered prices, increased wages, and increasing profits.

Unfortunately, these gains are accomplished outside of the United States. Yes, U.S. based multinationals were racking up record profits overseas while laying waste to the structural foundation within our borders. Our ability to produce what we need was diminished with little regard to actual costs. Our ability to accomplish gains in productivity was exported along with increasing amounts of Fiat promises, DEBT and delusion all for the sake of profits.

Therein lies on of the greatest short comings of economics.

For all of the data being peered over, very few value judgments are being made with respect to the true costs of doing business, all costs. Social and environmental are all but ignored.

Productivity is a natural phenomena, one that is a key component of structural deflation.

When everyone in a market based economy performs in conjunction: prices fall, income and profits rise. Productivity driven deflation is good as it gets for our economic environment.

Sadly, we no longer produce the majority of what we require, let alone aspire to consume.

There remain many unanswered questions with respect to the power 'to coin money' and 'regulate the value thereof' given the Constitutional Congress.

More importantly and aside from the unending debate centering around this empowerment is the question of why the value of money should be regulated by anything other than the market.

Value: An amount, as of goods, services, or money, considered to be a fair and suitable equivalent for something else; a fair price or return.

Regulate: To control or direct according to rule, principle, or law.

The rule of law was unclear and left to future generations to settle; unfortunately they did not manage to constitute clarity and left the moneyness of money to predatory banking interests who took full advantage of the open ended implications.

Denying the Federal Government the specific power to emit bills of credit has deteriorated to such an extent as to be unimaginable to our founding fathers. Their efforts were the result of a considerable debate among many disparate parties.

The relevant sections of the Constitution eventually approved read:

Article 1 / Section 8: The Congress ... shall have power ...

2: to borrow money on the credit of the United States ...

5: To coin money, regulate the value thereof... and of foreign coin, and fix the standard weight and measures.

Article 2 / Section 10: 'No state shall coin money nor emit bills of credit nor make anything but gold and silver coin a legal tender in payment of debts ...'

Clearly, today's Fiat money is entirely unconstitutional.

States lost their previous sovereign power to coin money and to issue paper money. In addition, states were restricted as to what they could declare as legal tender.

The natural question arises as to whether the Congress may legally issue paper money; Bills of Credit are often cited as the leading inference.

As with most things Constitutional; if the power was not explicitly given, it is denied.

Legal tender was defined, but the paper money issue was left open as the future potential remained unseen. In the case of further attrition from Europe, war would require 'issuance of bills of credit,' look no further than the War of 1812.

Dispossessing Congress of this power was nearly impossible or so difficult as to be ineffectual under the duress of looking through the future's glass.

The abuse of the power was separated from the states, but the intent remained amorphous as to the how its application constrained Congress. Intrinsically, it was left for future generations to resolve.

And unresolved it remains to this very day.

It was understood the Federal government would be the only creator of money, the net benefit suggested too be a stable currency and by extension the Federal government must also be, by law, the ONLY controller of the value of money.

Since 1913, the Federal Reserve Act removed from Congress all rights to create money or to have any control over its creation.

There were prior pivotal events: President Lincoln's ascension of Centrist government, wars of opportunity and credit fueled boom/bust cycles prior to the Federal Reserve Act, but it was this single act that nailed the coffin shut.

Regulation of the 'value' of money was essentially swept into the dustbin.

Congress delegated its money creating right to an international banking cartel, the Federal Reserve System and to the commercial banks of the many countries.

By creating money, banks provide the exchange medium by which the economy needs to function.

This control rests in private hands.

The banking cartel is concentric, emanating out of the Bank for International Settlements in Basel, Switzerland.

This banker's bank exercises immense power over economic cycles, business activity, income and wage distribution and economic volatility.

The BIS, as well as its Central Banks such as out Federal Reserve remain entirely independent in their monetary policymaking. The Federal Reserve is not required nor does it seek the approval of any branch of the United States Government for its policies or actions.

The very System itself decides on the desired result and targets policy action to achieve the stated ends to which there is little, if any political responsibility for the country's economic policies.

Government's fiscal actions well within the economic sphere of our Federal Reserve Bank; They own the United States Treasury which issues 'Bills of Credit;' namely: bills, notes and bonds.

The supply of money and credit assists in determining the general level of interest rates paid for the use of money, employment, prices, and economic growth or so conventional economic theory holds.

Many economists believe the money supply is the most important determinant of these variables.

I would argue it is the 'Quality' of money that prescribes the determinant. Value in its pure form, a fair and suitable equivalent based in principle, but determined by the markets in which it circulates as a media for exchange, the value, self regulating.

Alan Greenspan, once again, waxed poetic on interest rates addressing the conundrum as baffling, but not threatening as this time it is truly, well possibly, different. Miracles do happen according to Alan, but then everything is a miracle of Central Banking according to Chairman Greenspan.

In 2002 Sir Alan was direct and to the point during his the lecture in Brussels. In addressing the instability within the Global Financial System Chairman Greenspan spoke directly to the fact that we could all lose our savings in the blink of an eye.

In a rare moment of clarity, Sir Alan unloaded, this degree of truth has not been spoken since the sixties by the Chairman. The 'Wip Inflation Now' period of his career steered simple, eloquent and all to common sense into the present cesspool of political pandering.

Chairman Greenspan understands that interest rates represent the cost of capital, but more importantly the cost of living.

When business/households borrow to conduct their short, intermediate and long term operations; interest charges are added to every niche, corner and link within the economy. Interest is continually forward shifted until it eventually reaches the consumer.

This is essentially the 'real bills' effect in reverse. Perfect, elegant and criminal as banks are not actually necessary for an economy to function, they may provide a discounting market for cash flow, but beyond that, they are predatory and usurious entities.

If the cost of interest cannot be paid by business/households; output is unsustainable at the present cost of 'money' and business activity is curtailed.

Credit becomes difficult to obtain and investment in plant and equipment declines. Big business remains at the head of the credit line. Witness General Motors, $300 Billion in DEBT with $15 Billion in cash...

This is the equivalent of the average small business servicing $3 Million in DEBT with $150,000... this situation cannot last very long, choked by the interest alone even if allowed to borrow at the discount rate, the monthly interest payment alone would be $10,625.

At this rate, you would be out of business within 14 months.

This would be ONLY servicing the interest on the DEBT.

Forget about turning on the lights, paying employee, rent, keeping suppliers happy and socking some dollars away for a rainy day.

When investment in DEBT falls, companies find their orders slump, so they reduce their workforce in order to cut costs in addition to cutting their own orders for intermediate good they use to produce.

Income and output collapse.

'Too many dollars are chasing too few goods,' is the Keynesian holistic inflation mantra.

The twin towers of deficit destruction require higher interest rates to keep capital flowing to the United States.

Inflation fighting is considered tantamount to success while 'Price Indexes' for both business and consumers are fraudulently adjusted by laughable government accounting bodies.

Pent up purchasing power and savings are practically non-existent.

Killing the economic patient is considered effective treatment for our inflationary illness.

The very charter for 'Price stability' so endearing to the Federal Reserve is a sham, a complete farce.

The endgame is in play, make no mistake, we are heading directly into the abyss.

No amount of money, credit and or liquidity is going to halt our demise.

Not that these criminal bastards won't try...


Author: John Mackenzie

John Mackenzie

John Mackenzie manages private capital.

Copyright © 2004-2015 John Mackenzie

All Images, XHTML Renderings, and Source Code Copyright ©