September 3, 2010 – 8:18 pm

Originally posted at Stockmarket-Implosion.

“Inflation is always and everywhere a monetary event,” so sayeth Milton Friedman. Following this intellectual tradition, recently Mish and other analysts define inflation as an increase in the money and credit supply. They then point to a myriad of the examples of the deflation they claim that we must be in: the crashing of the housing market, the parched riverbed of what once was the corporate-paper Ponzi Stream,  the “zero velocity” of our money (which  is being hoarded by the ailing banks), and massive mark-to-market destruction of the capital of a national economy built on hot air. Facing a mountain of evidence such as this, who could argue against it? No one in their right mind.   But no one in their right mind should miss the bigger picture, either.

Swirling around outside of all of the narrow definitions preferred by academics and investment advisers is an undeniable reality to which they turn a blind eye.  The Federal Reserve note is crashing against gold. A glance at the chart makes this reality as undeniable as it is untenable, for us all.

Despite all the disparaging remarks against the old “relic,” the banks and currency traders all know that gold is the origin, the precious metal around which the values of all currencies fluctuate. Real money, defined by reality, not some politician or slick banker.  So, as the dollar goes against gold, so goes the dollar. And that Federal Reserve note goes not so well.

If gold is the origin, then it is not rising against the dollar, rather it is the dollar falling in intrinsic value. This is not a monetary or credit market event. This is an independent, and ubiquitous event. It affects all of us who spend the legal tender counterfeit. All of us.

And even as the counterfeiters who brought us the bubbles and bursts prime the pump and push out mountains more of their waisted toxic by product, an angry nation turns away saying, “we have had enough”-

There are various theoretical reasons given for the liquidity trap, but let’s just focus on what is happening now and what is likely to happen in the years ahead. Presently, excess reserves are not inducing lending for several reasons, and adding to them further will not make much difference.

  • First of all, banks are capital constrained, not reserve constrained.
  • Second, interest rates could not fall far enough during this business cycle to enable troubled debtors to refinance their way out of trouble, so now banks remain worried about the volumes of bad debt they are carrying and how future loan losses will impinge on earnings and capital.
  • Third, deflationary expectations are beginning to work their way into banks’ loan evaluation process on a micro level; in more and more areas, loan officers are looking at households with shrinking incomes and firms with deflating revenues.
  • Fourth, the private sector has too much debt, and many households and firms are trying to reduce debt, especially as more of them worry about deflation in their own incomes or revenues.

But through it all intrinsically, the dollar falls. Why? Devaluation against gold is not a monetary event, it is acknowledgment that the world no longer has confidence in the confidence scheme, they will no longer see the emporer’s new cloths.

Can any deflationist explain why in the midst of historic “deflation” gold is near it’s historic high? Has any deflationist noticed? Unlikely. For them it seems enough to cherry pick events in the economy and pick their definition to suit it. But it is precisely in the crosscurrents of events outside of the banks and credit markets that the dollar’s ruination lies.  Most resort to the ad hoc explanation that “gold does well in times of distress”, in contrast to the historical evidence that in true deflations (in the context of a gold standard), gold’s fiat-money price actually goes down.

But we don’t have a gold standard.  Our money is not gold, for the first time in history.  Gold is money separately.

Rising gold is not a signal of inflation, nor “deflation” — it is undeniable proof of the dollar’s demise and devaluation. Period.  More telling than monetary “proof” of either inflation or deflation is the fact that we are immersed in a bona-fide banking panic — like grandpa used to enjoy.   Such panics may or may not cause true monetary deflation; but it is certain that there is no deflation in terms of dollars today, in this panic.  If there was, the Federal Reserve and the powers-that-be would have a lot more trouble printing dollars in response to the crisis.   The supply of dollars would be constricted; hence “money would be more scarce” (and its buying power would go up, the end result of this deflation).   As it stands, their trouble is not printing, but getting the money flowing from the vise-grip of the their bankster masters who they enable and rescue.  Downstream of the dam deflation trickles, upstream the pressure builds.

By allowing banks to “muddle along” and heal these wounds using low interest rates provided by the Fed, the Obama Administration is embracing a policy of deflation that has horrible consequences for U.S. workers and households.

Fed Chairman Bernanke and the other members of the FOMC are killing the real economy to save the banks — but none of the benefit flowing to the banks is reaching U.S. households. In fact, the Obama Administration has been providing political cover for the Fed to conduct a massive, reverse Robin Hood scheme, moving trillions of dollars in resources from savers and consumers to the big banks and their share and bond holders.

For now the dam is holding, but if that dam should break, the tsunami would be greater than the biblical one. Will it break free? The answer to that is a monetary event. Will the dollar recover against gold, i. e. will the price of gold go down? What are the odds? No one can tell the future, but the words “slim,” and “none,” come to mind.

One can get legitimately confused trying to understand the inflation or deflation dynamic vs. gold looking at yearly inflation numbers (whether defined in money-quantity or CPI terms). Over the long haul, earning dollars is like running on a treadmill, which is exactly what you would expect from a long-term devaluation.

The assault began with the Federal Reserve Act in 1913, when the traditional US dollar was still defined to be one 20th an ounce of gold. That is, gold was $20 an ounce. The Federal Reserve Note is now 1/1250th of an ounce.  Throughout it all, there were periods being called “deflation” (1930s and present) as well as “inflation” (1970s) and “disinflation” (1990s).   All this means is sometimes the market “needed” dollars faster than the government was creating them.   But it always found a way to create them.  So at the end of a century, while certain times might “feel” inflationary or deflationary based on the comparative demand and speed of printing, the end result compared to gold is simply devaluation.

The key is, for the bankers, that they be able to rob the people’s held currency of intrinsic value, gradually (and sometimes in leaps and spurts, when things get real dicey). It matters not if the resulting consumer/asset price inflation does not show up immediately. In fact, it is better if it does not … then the value-robbing aspect (devaluation) is hidden. The resulting CPI inflation, disconnected from its cause, is much easier to blame on those “greedy bakers and tailors.”

Deflation may push down prices of the day denominated in dollars of that day, but rising gold is pushing the value of all the dollars is down faster. All Fiat currencies die. The Federal Reserve Note is on its deathbed.  Debasement and deflation will be with us for years, and years to come. Unless gold crashes. Any takers?

So, standing here in the chilly, darkening twilight of Ponzi finance, the question we ask is, which one will win? Will the supersonic death spiral of the currency force hyperinflation, or can contemporary “deflation” catch a falling dollar?