Podcast

John Rubino: Get Ready for Accelerating Devaluation of All Fiat Currencies

Friday, May 20, 2011, 8:04 PM

"We are exporting our inflation to the rest of the world. We are forcing countries like Brazil and China to endure the pain that we should be enduring. Brazil’s interest rates are like 12% right now. China is doing something new every couple of days to scale back bank lending and consumer spending. They are countries where a big part of the population makes just a few dollars a day. Rising food and energy prices are devastating for these guys. They do not really control the global price of energy and food, yet they have to endure the pain of slowing their economies down and throwing people out of work. Have them have to spend more and more of their money on food and energy so we can keep on borrowing and growing.

Clearly that is unsustainable. At some point these countries are going to say “No, we want our currencies to depreciate, too. We want to be able to continue to export to you.” So what we will end up with is sort of like what happened in the Depression. Everybody was trying to cut the value of their currencies at the same time. What that leads to, obviously, is global inflation, instead of just localized inflation where a few countries are debasing their currencies. You have got everybody doing it at once. That is because the U.S., with the world’s reserve currency, basically controls this process. We have chosen to decrease the value of the dollar dramatically over the next few years. That is going to force the rest of the world to do the same thing or endure an overvalued currency and recession. No elected politician can put up with that.

So what’s out there? Maybe after a mini-recession or some kind of correction in the next year or two is another round an even bigger round of global inflation. Basically, all the fiat currencies of the world start decreasing in value at an accelerating rate. At some point, the whole concept of fiat currency, of governments in charge of their own monetary printing presses, is going to be discredited."

So states John Rubino, proprietor of DollarCollapse.com. In his eyes, the demise of the dollar and other world fiat currencies via inflation is now a sure bet. There is simply too much debt that needs to be repaid, and our political leaders are not going to willingly choose the short-term pain of austerity and/or default. Of course, the resulting collapse of our monetary system will be much more painful and destructive in the long run.

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Chris Martenson:  Welcome to another Chris Martenson.com podcast. I am your host, Chris Martenson. Today I have the pleasure of speaking with John Rubino, publisher of DollarCollapse.com, a popular online hub for news impacting the economy. John is the author of several well-received books foretelling years in advance the collapse of the housing market and the decline of the US dollar. Before starting his website, John was a featured columnist with TheStreet.com, Individual Investor, and a number of other influential financial publications. His perspective on Wall Street and the currency markets is shaped by his past roles as a eurodollar trader. He knows what he is talking about. He was an equity analyst and a junk bond analyst in the eighties. There is lots of experience here. With the dollar recently sliding to what I consider dangerous lows, I have asked John to come and share his thoughts on where it goes from here. Welcome John.

John Rubino:  Hey, Chris. Thanks for having me on.

Chris Martenson:  Oh, my pleasure. To set the stage, let’s talk about what led you to write The Coming Collapse of the Dollar and how to Profit from It way back in 2004. I am sure way before that was a popular thing to do. I like to think of myself as having been an early warning siren on this same subject, but you and your co-author James Turk; you were way out in front with this message. It was much earlier than most, including myself. So how did you see that? What dark clouds did you see on the horizon? What were you looking at that made you arrive at that conclusion?

John Rubino:  During the couple years before that, I had written a book on the coming real estate bust. I went into that piece of research with the idea that it was just the real estate market that was the problem. It would blow up and the US economy would go on as before. But as I dug into the research, I realized that we really had systemic problems. Things were much more serious than just home prices getting a little out of hand and mortgage money getting too easy. We were across the board taking on massive amounts of debt, which would inevitably lead us to do something extreme. Either we would collapse under all that debt and have a 1930s style depression, or we would inflate our way out of it, destroy the currency in order to pay back the debt in cheaper dollars, and have some an inflationary episode.

I knew James Turk, the founder of GoldMoney.com, because we had done a couple of articles together. I had interviewed him and found him to be brilliant and also a nice guy. I approached him and asked if he'd like to write a book on gold and the dollar. He liked the idea and we worked out a deal. So we spent the next year basically putting that book together. A lot of the writing is mine. A lot of the really deep ideas in that book are his, of course. 

The timing was a little early. It was only by about a year or so. It came out in 2004, and the dollar went up for the year after that. So had it come out a year later, it would have been perfect. Even so, gold was about $400 an ounce at the time. Silver was $4 or $5 an ounce. So in the ensuing six or seven years, most of the book's predictions have come true. We have been inflating away the dollar in order to pay off our debts. That has been causing precious metals to go up, which is to say that precious metals have held their value while the dollar has been going down. This process has really just begun. The US has done nothing to manage its finances in the meantime. Things have actually gotten a lot worse, since we have clearly made the decision to try to inflate our way out of all of our debt.

Going forward, I know there are a lot of other things going wrong in the world, but just looking at the US finances would be enough to lead you to say that the world was headed for some a catastrophe. When it’s the biggest economy, the issuer of the world’s reserve currency, doing stupid things on this scale and clearly trying to destroy its own currency, you get a global crisis out there somewhere. That is really what we are looking at now.

Chris Martenson:  You know, John, if you said five years ago, “Chris, we are going to get to a point where US Treasuries are going to be at about the 3.4% range and the US government is going to be running its third consecutive multi-trillion dollar fiscal deficit (actually it is going to be $1.6 trillion) and the world has not sort of burst into economic flames,” I would have said that is insane. It is not possible.

Is any of this surprising to you? I mean, you saw the structural imbalances. You see the debt. Then you see the responses, and then here we are. What is surprising to you in this story? What is not?

John Rubino:  Well, the general shape of the world right now is pretty much what seemed likely at the time. But the numbers are still shocking. You know the trillion dollar deficits? I would have agreed with you back then that it was almost physically impossible. We would be violating laws of physics to have Treasury bond yields where they are now and a deficit where it is now. It did not seem possible.

What has happened of course is that we have got the government intervening in the bond market to keep rates low by buying massive amounts of bonds with newly created money. This is a situation that is really unsustainable. You have got massive amounts of new dollars flowing into the system in order to keep interest rates low. But the supply of new dollars pushes the value of the dollar down, which inevitably will push up interest rates. Who wants to own a thirty-year Treasury bond yielding 4.5 percent when the dollar is being debased by more than 4.5 percent? You get a negative long-term yield in an investment like that. So the people who are buying Treasury bonds right now are not doing it with an investment return in mind. They are doing it with other objectives. China has been accumulating US bonds for years because they want to keep US interest rates low so we will borrow money in order to buy their stuff.

Chris Martenson:  Non-economic participants. Is that what we call them?

John Rubino:  Yeah, basically. It is vendor financing. It is like when Cisco lends money to some company so they will buy Cisco’s networking gear. The works until the company you are lending the money to goes bankrupt. Then you are stuck with that debt. China is looking at something like that right now. Basically, the money they are lending us is going to have to be written off at some point. They are starting to figure that out now. The reason this is unsustainable is that all the guys who are buying Treasuries out there, they have more than they want. They are worried about it and are trying to figure out how to get out of their Treasury positions. China especially has been making a lot of noises about shifting out of their dollars and into other currencies and into real assets. They're buying oil wells, gold mines, and farmland around the world.

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John Rubino is publisher of DollarCollapse.com, a popular hub for news impacting the economy. John is the author of several well-received books foretelling (years in advance) the collapse of the housing market and the decline of the US dollar. 

Before starting his website, John was a featured columnist with theStreet.com, Individual Investor, and a number of other influential financial publications. His perspective on Wall Street and the currency markets is shaped by his past roles as a Eurodollar trader, equity analyst and junk bond analyst in the 1980s.


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29 Comments

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
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Posts: 2502
Infinite ballance.

Thanks Chris and John.

When Reality was created in the Big Bang an exact amount of powder had to be used. Too much and the Cosmos would have would have blown itself to dust. (Inflation)

Too little and it would have imploded on itself, Crunch. (deflation). The allowable error was infinitly small. God is comfortable with infinities. Ben and the boys are not.

This debt bubble of fiat money collapse has to be ballanced exactly by the power of the moving decimal point on Ben's magic computer. The chances of Ben producing a miracle are zip.

So which infinity does one bet on? The horns of the dilema. I throw sand in the eyes of the bull.  I am considering buying Zimbabwe dollars, now that they are going to back them with gold. Max Keiser said an interesting thing. Once one country goes to a gold standard, they will have have first mover advantage.

A lot of Zimbabwe dollars can be baught with a few Australian dollars, and when Bob falls off his perch I might be allowed to live in the land of my birth.

gak's picture
gak
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Posts: 12
Correction needed about Texas $1B gold investment

Chris,

I think you confused two Texas entities when you mentioned the Texas $1 Billion gold purchase.

The University of Texas endowment fund bought the $1 billion in gold.

The Texas teachers retirement service (TRS) did not buy the $1 Billion in gold.

Trust me, they are not that smart.

http://blogs.forbes.com/robertlenzner/2011/04/17/university-of-texas-end...

Hth,

Gak

tictawk's picture
tictawk
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The entire structure of our

The entire structure of our economy is based on CREDIT and continuing INflation and we have passed the point of debt saturation.  After a 97% depreciation, should we worry about the remaining 3%?  I think not because our money supply is CASH and CREDIT with the latter being gargantuan (90%?) as compared to the former.  Leverage cuts both ways. The problem to be resolved is "how does this out-of-control debt based economic system restructure?  Will the Fed MONETIZE (hyperinflate) the bad debt or will default wipe out the lenders too?  I don't think it is possible to monetize ALL the outstanding debt because that means complete collapse of the entire economic system where no one is spared.  Any serious monetization will also result in a collapse in bonds / lending i.e. higher interest rates which will make debt burdens untenable and makes default the only viable option. Clearly there will be pain as we restructure.  A collapse in lending may force the Fed to back the reserve currency with gold or some valuable resource to inspire confidence in future lending.

Mark_BC's picture
Mark_BC
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Great interview, thanks. A

Great interview, thanks.

A couple points. One is regarding the idea that the Fed wants to inflate its way out of the US’s debt burdens. I don’t think this could work, even if the holders of that debt would allow them to do so without dumping it, because the US is a major import addict; it needs its foreign oil to function. So by devaluing the dollar all it does is make energy more expensive for Americans which hurts the economy from the other end. Then the government tax reciepts go down and this requires further printing and / or more debt creation (and now all debt creation is the same as money printing because only the Fed is willing to buy the debt). So eventually the money-printing party will end when energy becomes too expensive that stifles the rest of the economy. All money printing does is buy America some time. The US is precariously walking along a very craggy and narrow ridge line, climbing up up up, and both sides fall precipitously down to the same place – economic ruin.

Can anyone explain to me why the money printing is exporting the inflation to other countries like Brazil, before it hits the US so hard?

I am of the camp that sees this thing unwinding fast once the final string is broken – that being the world’s decision to give up the dollar as the reserve currency. Once that happens, the dollar would instantly devalue several times over, and then imported goods would skyrocket in price way beyond that initial devaluation shock because the US would no longer be able to afford to import them with its worthless currency. This will trigger a panic in the public, and hyperinflation would result very quickly ….. IMHO.

And here’s a little chain of thoughts I have been pondering lately. Let’s say this rapid hyperinflation happens in autumn or early winter. (It doesn’t even have to be a complete devaluation – just enough so that international suppliers no longer accept dollars for payment).

Therefore, the US wouldn’t be able to grow any food until, at the soonest, six months down the road. And because of its devalued currency, it would no longer be able to buy food internationally. And it could no longer buy foreign oil either (although Canada would probably come to its rescue for that).

The US would then need to somehow be able to feed itself off its stored food reserves to get it through the winter. How much food does it have stored? Thanks to the wonderful Just-In-Time efficiency craze of late, storage of goods along the supply lines is kept to a minimum. I seem to remember hearing there’s about a month’s worth of storage but I could be wrong, maybe someone can confirm for me? I think these are important numbers to find out, Chris do you have any insight into this?

What is the implication of this? Millions of people starving? What are they going to eat after the food reserves are gone, in the middle of winter? How can this be avoided? Is there any other factor that I have not considered which would save the US from this nightmare scenario?

One possibility would be for the US to use its gold reserves to buy foreign goods …. assuming it still has the gold, which I find highly unlikely.

Because of this conclusion, I am now making plans to leave the continent and get as far away from both the US and China as possible. The writing is on the wall; it is going to get bad. And it will not simply be the usual currency collapse and re-institution of a new currency, just like what has happened hundreds of times before throughout history. In the olden days people were tough and largely rural. They could take care of themselves. Now we have several cities with 20 million iPad addicts stuffed into sardine cans in the middle of baking hot deserts, totally unversed and unprepared for self survival.

It also means that the US will no longer be able to run a perpetual trade deficit, which means that it won’t be able to buy foreign oil, which means that in the time it takes to re-organize the country’s infrastructure to accommodate Peak Oil, the US will show little improvement in its economic predicament. This could take decades.

And add on to this the incredibly charged political atmosphere in the US which likes to blame everyone else but themselves for the problems. The people who slam the government for running trade deficits (the “right”) tend to be the same people who resist a transition to electric transportation, since it tends to be “liberals” who want to move away from an oil based economy to something more sustainable, but the political climate has become so polarized that no one on the “right” wants to admit that anyone from the “left” has a valid point (that a fossil fuel based economy is not sustainable), and vice versa (that perpetual deficits are not sustainable).

This vicious political environment is not conducive to solving problems; rather, as Chris points out, it tends to lead to fascist dictators rising to power and starting new world wars. So I don’t see the situation improving in the US for decades, maybe not even in our lifetimes, so I see no point in remaining in North America or Europe.

KugsCheese's picture
KugsCheese
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The Dollar

If things get ugly (i.e. US hyperinfaltion), there is no way the commodities will continue to be traded in $'s.   For foreigners that will create way to much volatility for their economies so maybe Yuan or Euro will take over.  

KugsCheese's picture
KugsCheese
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I would rather do quick

I would rather do quick pain.   Let the US fall apart.  Groups of States will reform other countries.   It is the only way.   Currency collapses end in about 1.5 years.   Productive persons will reconstitute life.  Bring it on.

KugsCheese's picture
KugsCheese
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Criminals have cars and

Criminals have cars and trucks for food raids.   It is not so obvious that a farm will be safe.  But it looks like the Founding Fathers' advice still applies: arm yourself, form militias, and remove your government when it no longer represents the interests of the people.  And there is no proof that gold will function the same way in the future.   Many countries have went through multiple currencies (the US: "Not Worth a Continental" and Greece: 5 currency collapses in 1900's and China for millenia).

idoctor's picture
idoctor
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Speaking of being prepared

Speaking of being prepared we may need calculators that handle plenty of zeros.

Zero stroke

From Wikipedia, the free encyclopedia

Zero stroke or cipher stroke was a term used to describe a mental disorder reportedly diagnosed by physicians in Germany under the Weimar Republic and which was caused by hyperinflation that occurred in the early 1920s. The disorder was primarily characterized by patients' desire to write endless rows of zeros, which are also referred to as ciphers.

Cause

The disorder was supposedly caused by the dizzying speed of hyperinflation and the calculations required to conduct commerce under its effect. It has been said that during the worst period of hyperinflation that in the time it took to drink a cup of coffee, the price for the cup could double.[2] The fast pace of hyperinflation caused people to quickly buy goods when they received their wages.[2] Workers would demand to be paid at the beginning of the day for their work and after they were paid, they would be given half an hour to run off to buy goods before their earnings became worthless.[2] The requirements to calculate and recalculate commercial transactions in the millions and trillions made it practically impossible to do business.[2]

Description

Zero stroke has been described in slightly different terms by various authors.

One Time article that reported on the condition described it as follows:

With the price of bread running into billions a loaf the German people have had to get used to counting in thousands of billions. This, according to some German physicians, brought on a new nervous disease known as "zero stroke," or "cipher stroke," which may, however, be classed with neuritis as cipheritis. The persons afflicted with the malady are perfectly normal, except "for a desire to write endless rows of ciphers and engage in computations more involved than the most difficult problems in logarithms."[3]

Another newspaper article at the time described the condition as:

Zero stroke is the name of the latest German ailment. It is the nervous affliction of bookkeepers who grow dizzy from the number of ciphers that must be set in a row after the integers before German marks are sufficiently numerous to come within hailing distance of real money.[4]

Cashiers, bookkeepers, and bankers were reportedly the most prone to this affliction.[2] Besides a compulsion to write endless strings of zeros, individuals that suffered from this condition would reportedly become confused when referring to numbers and would state that they were ten billion years old or had forty trillion children.[2]

Later John Kenneth Galbraith would describe the condition in his 1975 book Money: Whence It Came, Where It Went:

'Zero stroke' or 'cipher stroke' is the name created by German physicians for a prevalent nervous malady brought about by the present fantastic currency figures. Scores of cases of the 'stroke' are reported among men and women of all classes, who have been prostrated by their efforts to figure in thousands of millions. Many of these persons are apparently normal, except for their desire to write endless rows of ciphers.[5]

File:GermanyHyperChart.jpg

Thinkor's picture
Thinkor
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Posts: 32
Exporting inflation

Rubino thinks the US is at fault for exporting inflation, but I disagree.

The US exports too little and imports too much.  The US needs to increase its exports and decrease its imports.  The simple way to do that is by devaluing the US dollar.  The ROW (rest of the world) has the opposite problem, but the solution is the same, for ROW currencies to rise in value relative to the dollar.  Although printing more money may not be the best way to go about devaluing the dollar, it is certainly one way to do that and the devaluation in itself is the right thing to do.  This causes problems for the ROW because adjustment is painful and in an effort to avoid an adjustment, which in the long run is necessary, they inflate their currencies as well. That is their choice.

So, in a sense, the US is doing the right thing, trying to lower the relative value of the dollar and the foreign countries are doing the wrong thing in resisting that relative devaluation.

Instead of inflating, countries could go through the pain of adjustment by relying on changes in wages and prices, but the sad fact is that workers tolerate inflation better than they tolerate nominal wage reduction.   And bankers always of course prefer inflation because they get the new money first.  Politicians like inflation too, because they prefer to have voters angrier at the businessmen who have to raise their prices and the ever unpopular "speculators" than to have them angrier at the politicians.  They also like to protect the bankers, because the bankers bankroll the politicians, while the lower classes typically have no interest in politics until it is too late.

Now, in fact, the US doesn't export ALL its inflation, just some of it.  That's why the dollar is falling relative to other currencies over the long haul.  The devalution of the dollar relative to the Chilean peso, for example, creates stress on Chile.  The Chilean leaders know that the US has to devalue, but they also have to contend politically with the stressed factions in their own countries.   So, Chile prints up some pesos to buy dollars to resist the relative devaluation, but they don't let it go as far as it need go to completely offset the devaluation.  Then, they have done something, and they tell the stressed factions: See what we have done for you, but you have to be realistic, we have to let some relative devaluation occur.  This delays adjustments, smoothing things out politically.  Then the Chilean peso begins to climb again and the cycle begins again with the factions being stressed again.  So, the dollar goes up and down, the peso goes up and down, and over the longer term, the dollar falls relative to the peso. 

This up and down motion with a declining trend (for the dollar) is reminiscent of the problem of boiling a frog.  You can't squeeze people relentlessly.  They may rebel, whether politically or violently, if you keep squeezing them, but if you put in a period of relaxation, like when you are acting to delay adjustment, the political problem doesn't get out of hand.  Economists don't like this, because it seems irrational and inefficient, but it seems so only because they fail to understand the political problem.

DavidC's picture
DavidC
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Government intervening?

"What has happened of course is that we have got the government intervening in the bond market to keep rates low by buying massive amounts of bonds with newly printed money or newly created money."

Chris, minor point in a good interview, but surely it's the Fed intervening? I agree it's the Government issuing, but it's the Fed buying them in, it now being the the World's largest holder of US Treasury bonds.

How the UK can be the number 4 largest holder, with all our problems, defeats me!

DavidC

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Abandon Ship
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I agree with Mark_BCs

I agree with Mark_BCs comments. The reality is that the bond holders control the show, not Governments. If the bond holders dump their bonds, then the rise in interest rates will suck huge amounts of money from the economy. This is against the backdrop of stagnant to falling wages. Hence discretionary spending as well as investments decrease. This is deflationary not inflationary.

Mark_BC's picture
Mark_BC
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Hey everyone, I just watched

Hey everyone, I just watched this very interesting video on the history and future of monetary policy, "The Secret of Oz" by Bill Still. It offers some intriging insights, and does not paint such a favourable picture of gold and silver as money, as many of us on thse blogs tend to believe. His mantra seems to be, "It's not what backs the money, it's who controls its quantity." Any thoughts would be appreciated.

Edit: sorry, I guess I shouldn't have hijacked this thread for this.

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NZSailor
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Posts: 59
Oil as the ultimate currency....

Another fantastic interview, Thanks Chris et. al.

The debate over the future value of gold, silver, treasuries, US dollar etc. is one that keeps most of us awake at night but two points I took away from the interview were as follows:

Gold, silver and fiat currencies only have as much value as we (or more accuratly TPTB) assign to them, however, the true store of value now and even more so in the future is oil... it is the very air that modern societies and economies need every day to survive.  How can we hold physical oil in the way we hold physical PM's?  It makes me want to own a tank farm or build a small scale refinery.  Ok, so maybe those aren't viable options and I realize that oil prices are going to be just about as volatile as other commodities in the short term but in the longer term I can't imagine a better investment in which you could put your money and walk away for 20 years knowing it will increase in value.  How to do that is the question.

When it becomes generally recognised that we have in fact reached peak production and suppllies are constrained it is going to be geopolitically a much less friendly world.  Whether we want it or not the US military complex will continue to play an increasingly dominant role in American policy and we will forever have a presence in the middle east to keep our hands on the oil.  Scaling back the military budget- no way...as Bush (Cheney?) said- "The American way of life is not negotiable."  I know the mantra is to focus on the positives/the oportunities but I worry we are going to see a much more devisive, militaristic world with much less freedom and that makes me really sad.

Again, thanks for the great interviews that help me get my head around whats coming...  now to go research options for micro-refineries.

Chip

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Kevin_CA
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The Secret of Oz

Mark_BC,

I just watched the video and I certainly agree with some of Mr Still's assertions.  However, switching to the type of monetary system that he proposes will create more and bigger problems than it solves.

The type of monetary system one favors is determined by how much one stands to benefit or suffer from it individually, and whether you are a net producer or consumer, whether you are a net lender or a borrower, whether you are a spender or a saver, and how one answers questions like "What is economics?", "What is money?",  "What is the purpose of money?", "What characteristics should money have?", "How much money should there be?", "What is inflation?", "Do I want a monetary system that benefits me at someone else's expense?" to name just a few. It's not until these questions have been answered that you can answer Mr Still's question--"Who controls the quantity of money?"

Let's start by going back to the very basics and defining "economics" and "money".  I would say that economics is simply "the exchange of goods and services".  I would define money as "a medium that allows for the efficient exchange of goods and services".  Money is the means to an end.  Money isn't really worth anything in and of itself.  It is the goods and services that can be bought with money that really matters.  Money is what one receives in exchange for goods produced or services provided.  Money is also what one gives in exchange for goods or services received.  In other words, money is what allows you to exchange goods and services that you provide for goods and services that are provided by someone else.

Hopefully, there is no disagreement or controversy in these two definitions.  I would like to think that these definitions are universally accepted.  If so, we can move on to "What is the purpose of money?".  First of all, money should be able to provide a "measure" of value.  Ideally, the amount of money someone is willing to give to you/accept from you in exchange for a particular good or service that you are selling/buying allows you to determine how valuable that good or service is in comparison to other goods and services in the market.  Many, including myself, also feel that money should also provide a "store" of value.  I should be able to save money that I earn today and spend it at a later date without having to worry about a loss of purchasing power due to a general increase in prices.  I should be able to save during my working years in order to eventually retire and live off of those savings.  I should be free to forego spending on goods and services today in order to spend on goods and services at a later date.

I'm sure there are some readers who have now started to disagree with me and will claim that saving money hurts the economy and spending money helps the economy as whole by creating jobs, etc.  Some feel it's important to erode money's purchasing power over time in order to discourage savings.  That's okay, we'll just have to agree to disagree for the time being.  Let's move on to "What characteristics should money have?'.

Aristotle is attributed with claiming that money must be durable, portable, divisible, and have intrinsic value.  I think he left out the most important attribute of money--scarcity.  In other words, the amount of money should be finite.  No one should be able to create money "out of thin air" as they see fit.  (Or dig more of it up out of the ground for that matter.)  No one should have the ability to expand or contract the money supply.  Which leads to my next question, "How much money should there be?".  In my opinion, a perfect monetary system would consist of a fixed number of units of currency that does not increase or decrease in number, but is infinitely divisible in powers of ten using the standard metric system prefixes.  Fortunately, this is possible in today's world thanks to computing and networking technology.  By being infinitely divisible, this unit of currency would have plenty of liquidity.  This would allow for expansion of the economy due to increases in population and growth in economic activity without transferring purchasing power from savers to those creating the money (the bankers) as we experience in our current monetary system.

Two other questions that stir up debate are "What is inflation?" and "What causes inflation?".  Depending on who you ask, some will say that inflation is "a general increase in prices".  Others, including myself and those that subscribe to the Austrian School of economic theory would define inflation as "an expansion of the money supply which causes a general increase in prices".  (Austrian economists feel it's important to distinguish between the cause and the effect.)  Others would also define deflation as "a general decrease in prices".  However, I would define deflation as "a contraction of the money supply which causes a general decrease in prices".  Personally, I find it easier to avoid the terms "inflation" and "deflation" in order to prevent confusion and just use the phrases "expansion of the money supply" or "contraction of the money supply" when referring to inflation and deflation and use the phrases "a general increase in prices" and "a general decrease in prices" when referring to the effects of inflation and deflation.

A monetary system where unlimited amounts of fiat money are just simply created by democratically elected politicians that promise to spend it on entitlements is not sustainable.  There will be no end to the demands of the electorate on the politicians.  The burden of a national debt would certainly be eliminated, but there would be no restraint on government spending/expansion of the money supply.  There would be no incentive to work (produce goods or provide services) and earn money because I could just vote for a politician who could just print some money up and provide me with the goods and services I desire in exchange for my vote.  When there is no incentive to work, less goods get produced and fewer services are provided.  The prices of goods and services would continually rise due to this lower supply as well as the steady loss of the currency's purchasing power.  More money would have to be created to cover the higher prices and eventually the vicious cycle would spiral out of control, and would ultimately end in hyperinflation and a complete collapse of the purchasing power of the currency.

Personally, I don't want a monetary system that benefits me at someone else's expense.  I would rather have a system that is completely fair and impartial to both producers and consumers, both savers and spenders, and both lenders and borrowers.  The system that we currently have doesn't provide this, but neither does the system that Mr Still proposes.  He just wants to transfer the power to create money from the bankers to the politicians.  What we really need is a number of different monetary systems established and maintained by private entities that each of us is free to choose from.  We should be able to choose those monetary systems we want to participate in and should not be forced to participate in those that we don't.

So in answer to Mr Still's question, "Who controls the quantity of money?", I would say ideally it should be a private entity that I am free to associate or not associate with and one that ensures that the quantity of money does not increase or decrease, but remains fixed.  Until a monetary system like this has been established, I will have to settle for the next best thing and just convert my savings from dollars to precious metals.  Unfortunately, I believe we will end up getting a watered-down version of the monetary system that Mr Still desires, but in a roundabout way.  As the federal government's debt burden continues to rise, the central bank will probably end up forgiving a significant portion of the national debt resulting from the trillions of dollars that have been recently created and transferred to the government in the form of loans .  If so, this will undoubtedly expedite the imminent dollar collapse and will be immensely beneficial to those who have debts denominated in dollars and will be inconceivably destructive to those who have accumulated savings in the form of dollars.

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Kevin_CA

Welcome to CM.com.

Quote:
Money isn't really worth anything in and of itself.  It is the goods and services that can be bought with money that really matters

I would disagree with this part of your definition.  It certainly fits frn's and other fiats, but they have a very poor history of longevity.  In fact, it is their very lack of value that leads to massive printing which, in turn, leads to massive devaluation.  By contrast, gold and silver have value quite apart from their thousands of years of history as money.

You may want to review Chap. 6 of the Crash Course:  http://www.peakprosperity.com/forums/crash-course/chapter-6-what-money

From that chapter: 

Quote:
Money should possess three characteristics. The first is that it should be a store of value. Historically, gold and silver filled this role perfectly because they were rare, took a lot of human energy to mine, and did not corrode or rust. By contrast, the US dollar pretty much constantly loses value over time – a feature which punishes savers and enforces the need to speculate and/or invest. A second feature is that money needs to be accepted as a medium of exchange, meaning that it is widely accepted within a population as an intermediary within and across all economic transactions. And the third feature is that money needs to be a unit of account, meaning that the money must be divisible and each unit must be equivalent.

And, of course, frn's/fiat fail your own test:

Quote:
Aristotle is attributed with claiming that money must be durable, portable, divisible, and have intrinsic value.  I think he left out the most important attribute of money--scarcity.

As long as currency can be printed at will or created as digital entries, it will be.  There is no control as long as there are Greenspans and Bernankes who have the control.

Quote:
Personally, I find it easier to avoid the terms "inflation" and "deflation" in order to prevent confusion and just use the phrases "expansion of the money supply" or "contraction of the money supply"

or devaluation of the money supply.  Here we agree.  I long ago decided inflation and deflation have so many definitions that they lend more confusion to the conversation than enlightenment.

Quote:
Personally, I don't want a monetary system that benefits me at someone else's expense.  I would rather have a system that is completely fair and impartial to both producers and consumers, both savers and spenders, and both lenders and borrowers.

Very idealistic.  I'm afraid I'm cynical enough to believe that as long as there is money there will be people willing to lie, cheat and steal to relieve us of ours.

Again, welcome, plenty of Austrians around here to have some lively discussions.

Doug

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Kevin_CA wrote: ......... So

Kevin_CA wrote:

.........

So in answer to Mr Still's question, "Who controls the quantity of money?", I would say ideally it should be a private entity that I am free to associate or not associate with and one that ensures that the quantity of money does not increase or decrease, but remains fixed.  Until a monetary system like this has been established, I will have to settle for the next best thing and just convert my savings from dollars to precious metals.  Unfortunately, I believe we will end up getting a watered-down version of the monetary system that Mr Still desires, but in a roundabout way.  As the federal government's debt burden continues to rise, the central bank will probably end up forgiving a significant portion of the national debt resulting from the trillions of dollars that have been recently created and transferred to the government in the form of loans .  If so, this will undoubtedly expedite the imminent dollar collapse and will be immensely beneficial to those who have debts denominated in dollars and will be inconceivably destructive to those who have accumulated savings in the form of dollars.

What a great first post!

The underpinnings of these seemingly lucid suggestions for alternate and competing monetary systems comes from Austrian economic theory, which attempts to consider the supposed self regulating tendencies of an unregulated (by the State) free market economy. This in turn relies heavily on Say’s Law, which, unfortunately, can be seen to be invalid for production economies experiencing growth.

Further, Rothbardian evangelists purport that disequilibrium in modern economies are introduced by interventions in the money supply by the State, which is vigorously (and in my opinion, correctly) disputed by the post Keynesians. In the post Keynesian view, the tail wags the dog, e.g. the credit generating facilities and large banks in fact initiate the introduction of new currency into the economy. Not the other way around, a profoundly important distinction. This disturbs the theory that  State intervention is the responsible culprit and unleashes a torrent of ideological policies (Milton Freedman et. al.) that attempt to advance free market solutions as an alternative to what should be common sense regulation. Empirical review of the sequencing of new money supply and credit (Kydland and Prescott 1990) shows clearly that State money creation does not precede credit demand. Margaret Thatcher’s failed monetarist policies also support this conclusion as her following in Friedman’s footsteps in attempting (unsuccessfully) to manage the flailing economy by managing the money supply add contemporary evidence that the theory is not correct. Modulating money supply to manage a recession simply did not work, and the policy had to be abandoned.

It can be seen that the money supply is in fact endogenous, and not State dictated.

Beyond these points, competing currencies violate one of the fundamental requirements, that of universality. Note we all currently have access to competing currencies, we can use dollars, yen, francs, German marks etc. if we are so disenfranchised with any particular flavor of fiat. But then we face the onerous task of currency conversion, due to lack of universality. We must convert one currency to another, and suffer devaluation  risk as well as a arbitrage fee to operate between currencies. The notion of free market forces attempting to migrate patrons to a common system based on perceived stability or any other inherent advantages is not practical and subject to the same coercive laws of competition that any other unregulated commodity will preceed. This means regulation is needed, and we come full circle back to the eventuality of regulatory capture, centralization and consolidation, and ultimately fewer choices for the consumer and just another, slightly varied distribution of the same wealth.

Another complication of alterative currencies is price valuation at the fringes. Without prompt and homogenous  price discovery, difficulties arise with valuation. I seem to recall a rather famous example where a few beads that had high value in one monetary system was exchanged for a rather valuable and useful piece of real estate that had low value in another monetary system. If you are running a large and profitable corporation, and you discover the accounting department has been in cahoots with your supply chain and embezzled vast sums of money, you do not disavow the entire field of accounting.

You just get a new accountant.

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Kevin_CA wrote: Mark_BC, I

Kevin_CA wrote:

Mark_BC,

I just watched the video and I certainly agree with some of Mr Still's assertions.  However, switching to the type of monetary system that he proposes will create more and bigger problems than it solves.

The type of monetary system one favors is determined by how much one stands to benefit or suffer from it individually, and whether you are a net producer or consumer, whether you are a net lender or a borrower, whether you are a spender or a saver, and how one answers questions like "What is economics?", "What is money?",  "What is the purpose of money?", "What characteristics should money have?", "How much money should there be?", "What is inflation?", "Do I want a monetary system that benefits me at someone else's expense?" to name just a few. It's not until these questions have been answered that you can answer Mr Still's question--"Who controls the quantity of money?"

Let's start by going back to the very basics and defining "economics" and "money".  I would say that economics is simply "the exchange of goods and services".  I would define money as "a medium that allows for the efficient exchange of goods and services".  Money is the means to an end.  Money isn't really worth anything in and of itself.  It is the goods and services that can be bought with money that really matters.  Money is what one receives in exchange for goods produced or services provided.  Money is also what one gives in exchange for goods or services received.  In other words, money is what allows you to exchange goods and services that you provide for goods and services that are provided by someone else.

Hopefully, there is no disagreement or controversy in these two definitions.  I would like to think that these definitions are universally accepted.  If so, we can move on to "What is the purpose of money?".  First of all, money should be able to provide a "measure" of value.  Ideally, the amount of money someone is willing to give to you/accept from you in exchange for a particular good or service that you are selling/buying allows you to determine how valuable that good or service is in comparison to other goods and services in the market.  Many, including myself, also feel that money should also provide a "store" of value.  I should be able to save money that I earn today and spend it at a later date without having to worry about a loss of purchasing power due to a general increase in prices.  I should be able to save during my working years in order to eventually retire and live off of those savings.  I should be free to forego spending on goods and services today in order to spend on goods and services at a later date.

I'm sure there are some readers who have now started to disagree with me and will claim that saving money hurts the economy and spending money helps the economy as whole by creating jobs, etc.  Some feel it's important to erode money's purchasing power over time in order to discourage savings.  That's okay, we'll just have to agree to disagree for the time being.  Let's move on to "What characteristics should money have?'.

Aristotle is attributed with claiming that money must be durable, portable, divisible, and have intrinsic value.  I think he left out the most important attribute of money--scarcity.  In other words, the amount of money should be finite.  No one should be able to create money "out of thin air" as they see fit.  (Or dig more of it up out of the ground for that matter.)  No one should have the ability to expand or contract the money supply.  Which leads to my next question, "How much money should there be?".  In my opinion, a perfect monetary system would consist of a fixed number of units of currency that does not increase or decrease in number, but is infinitely divisible in powers of ten using the standard metric system prefixes.  Fortunately, this is possible in today's world thanks to computing and networking technology.  By being infinitely divisible, this unit of currency would have plenty of liquidity.  This would allow for expansion of the economy due to increases in population and growth in economic activity without transferring purchasing power from savers to those creating the money (the bankers) as we experience in our current monetary system.

Two other questions that stir up debate are "What is inflation?" and "What causes inflation?".  Depending on who you ask, some will say that inflation is "a general increase in prices".  Others, including myself and those that subscribe to the Austrian School of economic theory would define inflation as "an expansion of the money supply which causes a general increase in prices".  (Austrian economists feel it's important to distinguish between the cause and the effect.)  Others would also define deflation as "a general decrease in prices".  However, I would define deflation as "a contraction of the money supply which causes a general decrease in prices".  Personally, I find it easier to avoid the terms "inflation" and "deflation" in order to prevent confusion and just use the phrases "expansion of the money supply" or "contraction of the money supply" when referring to inflation and deflation and use the phrases "a general increase in prices" and "a general decrease in prices" when referring to the effects of inflation and deflation.

A monetary system where unlimited amounts of fiat money are just simply created by democratically elected politicians that promise to spend it on entitlements is not sustainable.  There will be no end to the demands of the electorate on the politicians.  The burden of a national debt would certainly be eliminated, but there would be no restraint on government spending/expansion of the money supply.  There would be no incentive to work (produce goods or provide services) and earn money because I could just vote for a politician who could just print some money up and provide me with the goods and services I desire in exchange for my vote.  When there is no incentive to work, less goods get produced and fewer services are provided.  The prices of goods and services would continually rise due to this lower supply as well as the steady loss of the currency's purchasing power.  More money would have to be created to cover the higher prices and eventually the vicious cycle would spiral out of control, and would ultimately end in hyperinflation and a complete collapse of the purchasing power of the currency.

Personally, I don't want a monetary system that benefits me at someone else's expense.  I would rather have a system that is completely fair and impartial to both producers and consumers, both savers and spenders, and both lenders and borrowers.  The system that we currently have doesn't provide this, but neither does the system that Mr Still proposes.  He just wants to transfer the power to create money from the bankers to the politicians.  What we really need is a number of different monetary systems established and maintained by private entities that each of us is free to choose from.  We should be able to choose those monetary systems we want to participate in and should not be forced to participate in those that we don't.

So in answer to Mr Still's question, "Who controls the quantity of money?", I would say ideally it should be a private entity that I am free to associate or not associate with and one that ensures that the quantity of money does not increase or decrease, but remains fixed.  Until a monetary system like this has been established, I will have to settle for the next best thing and just convert my savings from dollars to precious metals.  Unfortunately, I believe we will end up getting a watered-down version of the monetary system that Mr Still desires, but in a roundabout way.  As the federal government's debt burden continues to rise, the central bank will probably end up forgiving a significant portion of the national debt resulting from the trillions of dollars that have been recently created and transferred to the government in the form of loans .  If so, this will undoubtedly expedite the imminent dollar collapse and will be immensely beneficial to those who have debts denominated in dollars and will be inconceivably destructive to those who have accumulated savings in the form of dollars.

"It is who controls the quantity" to paraphrase Bill Still.

Well how do you do this?   What will be the signaling?  If you are Static Man, then you will never explore the potential by possibly creating a little too much money that in one instance may not create inflation as productivity increases and in another case creates inflation too much so the signal will then be to decrease the money supply to lower the inflation rate.   Bill Still not only does not answer this question, he didn't even think to ask it.

Any robust system operates on all levels the same.   If an individual can borrow, why should not a nation?   Clearly under certain circumstances a nation should borrow money.  And always repay the loan.

If nation cannot control its sovereignty (i.e. its money), then it should not exist.

The film had great history and images so kudos on that.   And truth be told we are not that far apart.   It just comes down to not being a deadbeat, Indiviual or Nation.

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Quote:I would disagree with

Quote:

I would disagree with this part of your definition.  It certainly fits frn's and other fiats, but they have a very poor history of longevity.  In fact, it is their very lack of value that leads to massive printing which, in turn, leads to massive devaluation.  By contrast, gold and silver have value quite apart from their thousands of years of history as money.

Why does gold have intrinsic value?  Because it shines?   Did you know that before gold, stones were used as money?  Since we have defined money as that which stores value and measures value (and is tradable), then we have to ask what this "value" is: the goods and servies produced by the nation with said money and its good standing.  What is also called Sovereignty.

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KugsCheese wrote: Quote: I

KugsCheese wrote:

Quote:

I would disagree with this part of your definition.  It certainly fits frn's and other fiats, but they have a very poor history of longevity.  In fact, it is their very lack of value that leads to massive printing which, in turn, leads to massive devaluation.  By contrast, gold and silver have value quite apart from their thousands of years of history as money.

Why does gold have intrinsic value?  Because it shines?   Did you know that before gold, stones were used as money?  Since we have defined money as that which stores value and measures value (and is tradable), then we have to ask what this "value" is: the goods and servies produced by the nation with said money and its good standing.  What is also called Sovereignty.

How do you define intrinsic value?  Why does a Porsche have value?  Because it looks pretty sitting in a driveway?  Your example of using stones for money fails unless you happen to be on an island with few stones.  The fact is that anything that has value has it because we agree it does.  In that sense, everything is fiat.  But, we have agreed for thousands of years that gold and silver have value.  That cannot be said for pieces of paper.

Doug

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A Thread is Like an Airplane

Once it has been hijacked it never returns to it's original course.

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Alternative simile

SingleSpeak wrote:

Once it has been hijacked it never returns to it's original course.

A thread is like an airplane: it has to keep moving forward or it stalls, then crashes.

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Great discussion, John and

Great discussion, John and Chris!  Thanks for taking the time to do it.  There's something about an interactiv conversation that illicits a whole different flavor of information than a more formal article.  I really appreciate the peeks into personal opinions and perspectives, I guess!  Anyhow, I value that, and am glad for the venue!

Adam, thanks for helping to elevate the quality of material on the site with all that you do.

Also, thanks to Adam or whoever takes the lead on providing transcripts for the poscasts.  Those are great for me; i can print them off and read them whenever I get a chance.  I like hearing the actual converations, but being able to print them out and read them here and there when I get time is a great option.

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Thanks for the kind words, Carrie

Glad to hear the newer content like the podcasts (and accompanying transcripts) is valuable to you. Our dancecard for future interviews is already getting quite long, so there are many more to come.

A reminder to all that it's always useful to hear specific names from you of thinkers you'd like to hear us interview. You can PM me anytime with your preferences. I'll do my best to arrange them, though note that some popular requests (like Bernanke) take longer to land than others Smile

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suggestions

Rob Hopkins, Stoneleigh, Karl Denninger, James Turk, Jeff Rubin, Gail the actuary (I forget her real name!).

Strategic suggestions - the obvious thing is to question the guest in his/her area of expertise, but it's sometimes interesting to

ask a few questions that take the guest away from their speciality.. but towards the connected 3E understanding.

If they tend to think globally, ask them about individual responses, if they focus on economics, ask about energy.. etc..

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Doug

Hi Doug, thanks for responding.

Quote:
Money isn't really worth anything in and of itself.  It is the goods and services that can be bought with money that really matters

I would disagree with this part of your definition.  It certainly fits frn's and other fiats, but they have a very poor history of longevity.  In fact, it is their very lack of value that leads to massive printing which, in turn, leads to massive devaluation.  By contrast, gold and silver have value quite apart from their thousands of years of history as money.

I agree that fiat money has a very poor track record, but I don't think it's a lack of intrinsic value that leads to the massive printing, but a lack of discipline.  It's easier and cheaper for bankers and politicians to print,, quantitatively ease, stimulate, and borrow new money into existence than it is to tax or borrow the money that already exists.  Because some don't understand or just prefer to deny the consequences of expanding the money supply, and the temptation to simply print paper money is so hard for some to resist, I would agree that gold and silver are a much more reliable form of money.  I just don't think that gold and/or silver serve as a perfect form of money because more gold and silver can be mined and introduced into the money supply--fortunately not at the same rate that paper money can be printed.

Money should possess three characteristics. The first is that it should be a store of value. Historically, gold and silver filled this role perfectly because they were rare, took a lot of human energy to mine, and did not corrode or rust. By contrast, the US dollar pretty much constantly loses value over time – a feature which punishes savers and enforces the need to speculate and/or invest. A second feature is that money needs to be accepted as a medium of exchange, meaning that it is widely accepted within a population as an intermediary within and across all economic transactions. And the third feature is that money needs to be a unit of account, meaning that the money must be divisible and each unit must be equivalent.

I concur.  The reason "the US dollar pretty much constantly loses value over time" isn't because they're made of paper, but because new dollars have consistently been added to the money supply.  On the other hand, if dollars were to be removed from circulation and destroyed then the remaining dollars would gain in value (purchasing power).

And, of course, frn's/fiat fail your own test:

Quote:
Aristotle is attributed with claiming that money must be durable, portable, divisible, and have intrinsic value.  I think he left out the most important attribute of money--scarcity.

As long as currency can be printed at will or created as digital entries, it will be.  There is no control as long as there are Greenspans and Bernankes who have the control.

I don't agree with Aristotle's belief that money must have intrinsic value.  I think money should be able to measure value.  It's the goods and services that have value, not the gold or paper or whatever it is that's being used as money.  Gold and silver have historically been able to more accurately measure the value of goods and services because of their relative scarcity compared to other forms of money.

It's not just that what passes as money today can be easily created, but it's also legal tender laws that prevent us as citizens from abandoning the frn's.  If each of us were free to choose individually what we are willing to accept as money, then those that control its supply would be less inclined to debase it.

Quote:
Personally, I don't want a monetary system that benefits me at someone else's expense.  I would rather have a system that is completely fair and impartial to both producers and consumers, both savers and spenders, and both lenders and borrowers.

Very idealistic.  I'm afraid I'm cynical enough to believe that as long as there is money there will be people willing to lie, cheat and steal to relieve us of ours.

Yes, admittedly so.  Don't get me wrong.  I prefer gold and silver over all of the other currently existing options.  It's just that they have their drawbacks as well.  One being that the supply of gold and silver can be expanded.  This issue was brought up earlier today by Kevin Brekke:

http://www.caseyresearch.com/cdd/reality-bites-crude-oil?active-tab=archives

Other drawbacks to using gold and/or silver as money are the security and storage requirements/costs.  As far as I'm concerned gold and silver are and have been the best forms of money currently and historically available, I'm just hoping that we will be able to come up with something even better in my lifetime.

Thanks again for welcoming me and I look forward to participating in future discussions.

Kevin

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no place like home

 . " If each of us were free to choose individually what we are willing to accept as money, then those that control its supply would be less inclined to debase it."

You already are. You can tender anything you wish, you can accept anything you wish.

Legal tender simply means you must accept FRN's as repayment for any DEBT. They are debt cancellation notes..... 

If your friend owes you $50, you *must* accept FRN's as repayment of that debt. You don't have to accept them as value for value.. you don't have to accept them for your apples, you can demand silver, or cheese or anything you wish.

The FRN is an antiparticle... it cancels out the positive debts incurred in it's creation, but not the interest.

To do that, the FED would have to issue new FRN's to buy zero interest debt, which it's showing a remarkable talent for.

The government on the other hand, can create debt ex-nihilo, they can arbitrarily demand a certain number of FRN's in property taxes, without creating the means to pay.. in doing so they increase the demand for FRN's, without increasing supply.

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Excellent interview and

Excellent interview and podcast! I finally got around to listening to it, and immediately forwarded it to others. Thank you for keeping up the great work, Chris, Adam, et al!

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Thanks, Chris

Great to see you back here.

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US is at fault for exporting inflation

I read through this thinking that the argument presented actually showed that the US is exporting inflation. So what is the disagreement? Then I realized this is about who's fault is it.  Is it the US or the other countries that don't adjust their own currencies appropriately. Well, it still seems the US triggers the inflation. Without this, the other countries would not be put in this predicament. This has got to tick off each other country. From their perspective, its the loose US policy that is the problem.

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