What is Inflation?

http://thedailybell.com/2623/Antal-Fekete-You-Have-Never-Ever-Seen-an-Elephant-Fly


"It is absurd to claim that paper drawn on 100 ounces of gold is sound, while paper drawn on 100 tons of steel is not."

I have been thinking about the idea of "inflation" in a different manner, since ZenB (I think it was) asked me a question in the Salerno thread.

In a fully free banking / free money / free currency environment, would we even think of the term "inflation"?

I don't think so. I think we would think of profit and loss. I think we would utilize forms of money and banking and currency that were the most efficient, effective and stable within the context of the circumstance at the time and place. We would not speak of inflation: if our choice was sound, it will add to our profit. If not, it will add to our loss.

However, this does not eliminate the need to discuss and learn about sound practices. I like the title of Salerno's book "Money: Sound and Unsound." It is worthwhile to discuss and learn about sound money practices. One would not argue against the utility of a book entitled "Business Practices: Sound and Unsound."

People should certainly be free to use unsound practices in business and in money. In business, if they do this often enough they will see bankruptcy. In matters of money, the same would apply. In a free market for money, we would not speak of inflation, I believe. We would speak of losses due to the use of unsound banking and money practices.

History demonstrates that paper backed by gold is quite sound. Paper backed by steel is not quite as much. This doesn't mean a businessman cannot utilize paper backed by steel in his transaction. It only means it is left to him and his trading partners to suffer the consequences (just another form of dealing with bankruptcy) without consequences shifting to the broader public (again, only in the context of a free banking environment).

Real Bills and Flying Elephants

http://thedailybell.com/2623/Antal-Fekete-You-Have-Never-Ever-Seen-an-Elephant-Fly

Comments in response to Dr. Fekete's editorial today at The Daily Bell.

AF: The bill and the cloth appear simultaneously and will disappear simultaneously. The former disappears when it matures, and the latter disappears when it is purchased by the ultimate consumer.

BM: So a real bill is not backed by gold (money), but is backed by merchandise. I know of no true hard money economist that the supports the view of money being backed by cloth (or flour).

AF: An increase in purchasing media that is matched by an increase of merchandise in urgent consumer demand is not inflationary.

BM: This is another theory that the central bankers use as an excuse to increase the money supply: the money supply must increase with the level of activity in the economy. It is a reason for man to substitute easily produced paper for true money.

As to not being “inflationary”, this is another trick of the monetarists. They speak of “inflationary” in terms of prices, but the true inflation (with all of the corresponding distortions and boom / bust cycle) come with changes in the money supply. Dr. Fekete is speaking of inflation measured in price increases, it seems.

Price increases are only one of the negative effects of monetary inflation, and perhaps not the worst. The worst is the transfer of purchasing power from the saver to the person who has first access to the funny money. This is called theft in normal society. It is apparently called real bills when one wants to hide the fact of this theft.

AF: The nature and origin of the discount rate are entirely different from that of the rate of interest.

BM: To the merchant, the economic effect is identical. Trying to make the legal distinction is irrelevant to the merchant’s cash flow.

AF: The two rates [the discount rate and the rate of interest] are completely independent of one another.

BM: No two rates are ever independent of each other in a relatively modern economy. All rates are relative to other rates. If the rate of one is significantly different than the other (adjusted for risk), the market will resolve this through pricing.

AF: Tradesmen processing semi-finished goods hardly ever pay cash for supplies to their suppliers. The prices they are quoted are not cash prices. They are "90 days net". The credit is part of the deal: you need not even ask for it. On the rare occasion when you don't need the credit you pre-pay your bill, having applied the discount to its face value.

BM: I am glad Dr. Fekete, at least, can see that real bills are credit, as he says so himself. He should teach his students accordingly. Some of his students do not learn very well.

Credit, not backed by gold (money). This is inflation.

Strauss-Khan: One Positive Outcome

Today we have the news that the case against DSK may be falling apart. There is a wonderfully positive side to this story - beyond the certainly positive outcome for justice in the case.

On a global scale, I cannot recall a US prosecution go so horribly bad in such a public fashion. There have been only a couple of US based stories of such turnaround - the Duke lacrosse team comes to mind, but not many more.

Consider: A high profile arrest of one of the most well known financial actors on the world stage. Drama on the plane just moments before take-off. Perp walks, passport stripped, resign from the job, no more dreams of French politics.

And now, the case seems to have all fallen apart.

If one wanted to find a story to display the worst abuses of the US judicial system to the world, a better example could not have been created than the real-world story of DSK.

There will be discussion about the implications on French Politics, the conspiracy theories behind the story (anyone who DENIES a conspiracy here should be sized for a tin-foil hat). All of this is important.

But I find the exposition of the US judicial system to the scrutiny of the world to be the most fascinating and potentially most important part of the story.

The US judicial system is broken on many levels. There have been many stories known only by family and friends that demonstrate this. There are a few stories that hit a larger audience.

The story of DSK was the biggest story around the world on the day of his arrest. It has remained high-profile because of the financial drama around the world and the search for DSK's replacement at the IMF.

It is a story that was perfect in its design if one wanted to expose the faults of the US justice system to the ridicule of the world. This to me is the biggest part of the story today.

A Weak Currency is Good for Exports? Not!

http://thedailybell.com/2501/Ways-to-Invest-as-Faith-in-Fiat-Money-Withers.html

Posted by bionic mosquito on 06/16/11 11:57 PM

"When the FED adds to the money supply through QEs, it cheapens the USD/FRN and makes U.S. products more competitive in world markets."

This mercantilist strategy is not so cut and dry. Japan has had one of the strongest currencies in the last several decades, and still runs a trade surplus. Germany as well, first with the Mark, now with the Euro. Meanwhile, the US has had a relatively weak currency over the same time, and has also seen its balance of trade grow worse during this same time.

It is often said: in order to consume one must produce. True as it is, the opposite is true as well: in order to produce, one must consume. In order to manufacture, one must buy raw materials.

What good is it to an exporting firm to have a week currency, when most of the inputs to production (commodities) have global prices? One might consider that the reason Japan is so competitive is that the strong yen has kept oil, steel and other raw materials needed for manufacture at much lower yen prices than what the US has realized with the dollar. As material and energy is often a majority of the cost of any manufactured good, it would seem a strong currency is of more benefit to an exporting nation than a weaker currency.

Posted by bionic mosquito on 06/17/11 12:13 AM

I will add, this idea of weakening a currency to improve exports gets even nuttier. Most manufacturers produce more for their home market than for export - this is especially true for small businesses, but consider even US auto manufacturers.

So, for the majority of sales, a weaker currency is devastating, as it inherently increases the costs of commodities that are priced globally - again, likely a majority of the COGS.

Nuttier still, big business can often work around this - it is easier for General Electric to locate a factory in China or Vietnam than it is for Joe's machine shop. This is true for countless reasons.

So the small guy gets fried, and the big guy can get around it by relocating manufacturing overseas AND pick up market share in the home market after the small guy files bankruptcy.

And we wonder why the US continues to lose manufacturing to foreign firms.

Ultimately one must conclude that this idea of a weak currency helping exports is only a Trojan horse; it is the advertised idea to make palatable for the masses that which is only good for big business. Just one more illogical theory in a long list of theories taught at the school for the economically gullible.

Hugo Salinas-Price and Free Coinage

http://thedailybell.com/2497/Free-Coinage-Of-Gold-Silver--Then-And-Now.html

HSP: If silver is currently $36 dollars an ounce, a one-ounce silver coin can be successfully placed in circulation with a monetary, numeric face value of $60 dollars, which overvalues the silver contained in the coin.

These coins would be very useful to the population and would be eagerly snapped up in vast quantities. The population would save these coins and use paper money for transactions - Gresham's Law; individuals would dispose of their silver money only in situations of great need.

BM: I must not be reading this correctly, because it seems absolutely backwards to me. If I have a coin with one ounce of silver content, and on it is stamped “$60”, while an ounce of silver trades at $36, WHY would I NOT trade the coin in for 1 2/3 ounces of silver?

Additionally, the definition of Gresham’s Law is incomplete (and therefore applied incorrectly), as it often is when used by people who write on this subject. The law, more accurately stated:

“Gresham's law is an economic principle "which states that when government compulsorily overvalues one money and undervalues another, the undervalued money will leave the country or disappear into hoards, while the overvalued money will flood into circulation."[1] It is commonly stated as: "Bad money drives out good", but is more accurately stated: "Bad money drives out good if their exchange rate is set by law."”

(from Wikipedia)

Gresham’s Law will result in exactly the opposite of what HSP suggests. The overvalued $60 coin will be eagerly driven into circulation, driving out other forms of money that are artificially undervalued by government decree. The undervalued money will be hoarded or driven underground.

HSP: How can we return to such a sound and realistic economy, where precious metals become once again money itself, because people think in terms of quantities of precious metal, either silver or gold?

First, we do not believe any change can be effected by a decree of any sort. The change must come in a roundabout way, insensibly. The problem of an overnight change, from the whole world's way of economic calculation by simple numbers, to calculation by quantity of precious metal is simply overwhelming.

BM: HSP states “First, we do not believe any change can be effected by a decree of any sort.” Then he goes on to make a decree. In fact, he makes a very bold statement: “There is only one way to achieve this.”

Really?

Please, just leave it to the markets. All that is necessary is to remove legal tender laws, remove tax consequences based solely on the type of money used in a transaction, and do not classify currency gains and losses as taxable events. The market is quite capable to figure this out in a manner and time far more efficiently than anyone person can imagine or decree.

All the Monetary Pixie Dust in One Place

http://thedailybell.com/2494/Should-Public-Banks-Print-Money-Without-Holding-Reserves.html

Posted by bionic mosquito on 06/14/11 09:41 AM

"Anything that confuses people about money and banking is probably helpful to Anglosphere elites in their quest to keep their Money Power franchise intact - which in turn funds their quest for a new world order."

Quite true. We will see many of the confusing (and false) theories posted here today:

1) There is not enough gold to fund modern production

2) Money is created for the principal, but not for the interest

3) A gold standard won't work, as the elite have all of the gold

4) Politicians can control the money supply better than central bankers can

5) The money supply must grow with the size of the economy

6) The source of commercial credit is not saving but consumption

7) Gold and silver should be the only money, but the state must operate the mint

8) Why limit the growth of the economy to the growth in gold?

9) Access to credit needn't be contingent on someone else's agreement to give it up

10) The growth of the money supply doesn't matter, as long as prices are stable


It should be a fun day.

In the end, free-market competition in money and credit is the only proper answer, as DB often suggests. No legal tender laws, no government monopoly of money, no adverse tax consequences based solely on the type of money chosen for use.

The (relatively) free market has solved "money" in the past; the (relatively) free market has solved the problem of the production and distribution of far more complex goods than money today.

"Money" is a relatively simple problem for a free market to solve. Leave it to the market.

Mark Skousen Part II

http://thedailybell.com/2489/Anthony-Wile-with-Mark-Skousen-on-the-Failing-Dollar-the-Growth-of-Liberty-and-the-Success-of-FreedomFest.html

DB: Are we headed toward a double dip recession for the world and America?

MS: Only if the US government blunders more than they have already.

BM: The US never left the first dip. The government doesn’t have to blunder anymore, continued recession / depression is baked in the pie. If the government stopped any additional spending, the current programs (both military and social) are unsustainable and enough to bring the economy and the dollar down.

MS: Both have risen so much in the past ten years that I'd be surprised if they keep going. There's got to be a major pullback, and if the US gets its act together, we could see a significant correction. We've already seen it in silver. But as long as the Fed keeps pumping cheap money into the monetary system, and keeps interest rates artificially low, commodities like gold and silver should do well. Oil too.

BM: Enough hedging and contradiction in this statement to make any outcome be the predicted outcome.

“There's got to be a major pullback, and if the US gets its act together, we could see a significant correction.”

The US getting its act together is a political impossibility, but Skousen is theoretically correct.

“We've already seen it in silver.”

Hard to call what happened in silver a major correction. Viewed from the perspective of even a year ago, silver is significantly higher.

MS: I'm very bullish on high-income dividend-paying stocks and funds.

BM: He can only be high on these if he believes that “the Fed keeps pumping cheap money into the monetary system, and keeps interest rates artificially low….” So he must also believe that gold and silver are going higher. But wait, he hedged that comment earlier.

MS: [The dollar is] in a bear market, that's for sure, but once the Fed reverses course and raises rates, and the government stops spending like a drunken sailor, I see the dollar recovering.

BM: Another greatly hedged statement. When does he see this reversal of course for the Fed and the government? It seems the only possibility of a reversal of course is if the Fed decide saving the dollar is more important than supporting Congress, Then, Congress will take over Fed activities (likely incorporate the Fed into the Treasury). A greenbackers dream, and the certainty of a hyper-inflationary nightmare.