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Monetary deflation is a contraction in the overall supply of money.

Price deflation is a fall in general prices…which happens either when the growth of the economy outpaces the growth of the money supply; or the drop in the money supply outpaces the contraction of the economy. It can also happen when people simply stop spending in anticipation of lower prices later.

When economic activity itself declines or contracts, we call that a recession. When it gets really bad (as determined by some fairly arbitrary macroeconomic numbers) we call that a depression.

What is the Paradox of Thrift and Why Does Government Hate Savings

The Paradox of Thrift essentially says that the savings that are good on an individual level is bad for the overall economy. What a paradox! The inmates are running the asylum!

Governments would like you to believe that recessions and depressions are destructive natural forces–rather like earthquakes or tornadoes–that are caused when people stop spending. Whether people stop their spending because of worry and fear about the future, or because savings are rewarded as prices drop, the government aims to get people spending again. The entire field of modern macroeconomics rests on the conceit that it is government’s sacred duty to fight recessions by inducing spending.

In a free market environment, minor recessions are a natural event, and would occur from time to time to clear out any excesses before they get TOO excessive. But in a fiat currency environment subject to government intervention, the excesses can become incredibly excessive. The only thing worse is the government’s attempt to prevent any corrections and keep consumption going.
In a free market system with sound money, banks that lend more than they have on deposit run the risk of failing when the depositors catch on to this kind of chicanery. In a fiat money system such as ours, lending far above reserves is allowable by law and at times actively encouraged.

The government can induce spending simply by printing more of this paper, and thereby decreasing its value, while they’re central bank buddies keep borrowing cheap by artificially lowering interest rates. The latter only works for so long before people simply can’t take on more debt to fuel consumption (and then the central bank is “pushing on a string”). The former provides disincentive to hold onto cash as it becomes worthless by just sitting under mattresses and in bank vaults. (Remember, when cash gains value, people have a strong incentive to save.) Modern macroeconomics says there can only be harmony when government actively fights savings, encourages consumption (by borrowing!) and slowly destroys the value of the currency it issues, and which it has the ability to print at will.

What is the Role of Credit Expansion
Actually printing money with some arbitrary monetary supply inflation number as the target (usually between 2 and 3 percent) is one way to get people to spend. Another is simply to make credit more available. While slow gradual inflation is a given with paper currencies, it is not the only way the money supply can expand. Paper and its equivalents in various accounts is just one part of it. There’s also the expansion of another money-like thing: credit.

Inflation is a given with paper money. But it comes in two forms. The first one is credit expansion in which–thanks to the fractional reserve lending laws–money is literally borrowed into existence. Banks allow people to borrow against more money than the banks have on deposit. When this credit is spent on goods and services, it transforms into actual reserves in an account somewhere. This sort of borrowing sends all sorts of false signals to markets. The most noticeable effect, however, is the price inflation for the goods and services where the credit is spent the most. In recent U.S. history this has been in the housing and electronic goods markets.

Good Deflation and Bad Deflation:
What is Good Deflation and what is Bad Deflation? (And guess which kind we’re in for!)

What is Good Deflation
Good deflation is the gentle, very gradual kind that occurs in a growing economy under an honest money system. When money is the honest kind, that markets decide on instead of governments (markets tend to pick gold and silver for money), then we can have good, benign deflation. This is not the kind of deflation that governments can scare you with.

Good deflation happens when incomes stay nominally the same as the general price level gradually decreases. This makes everybody effectively richer while rewarding those who save. This happens when an economy produces more and more goods and services, but the general money supply in the system stays the same. Technological advances and other increasing efficiencies in production really do lead to a higher quality of life for most under these circumstances.

Again, savers are rewarded. But the private virtue of saving is made a vice in modern economic theory (the so-called Paradox of Thrift). The supposed problem is that if savings are rewarded too much, then no one will ever spend! This, of course, is ridiculous. Anyone who believes this hasn’t encountered very many actual human beings. Delaying gratification takes effort and people save only when they reward is high. They tend to like spending again as soon as they can.

The economy will not grind to a halt as a result of people saving. Savings are the very source of future economic growth. The government and modern macroeconomic theories like to pretend that debt and inflation are what fuel growth, but this just isn’t the case, and has consistently been proven a failure time and time again.

What is Bad Deflation
Bad Deflation is the kind that governments and modern economists like to keep us scared of. The irony is that the bad kind of deflation governments try to get us scared about only happens with a paper currency. The government sows the seeds of the problem–in this case bad deflation–it’s purporting to prevent, or solve.

Inflation slowly destroys all currencies. That’s why there are currencies in the first place, so governments can inflate them, instead of being tied down by nuisances like curtailing spending and backing them with gold and silver. Sometimes, as we’ve mentioned elsewhere, inflation mutates into a much more powerful and obviously destructive version of itself called hyperinflation. 

Price deflation is touted as a Big Bad Thing that must be avoided at all costs. The myth goes that since falling prices rewards savers, people will start saving so much in expectation of falling prices that they would stop spending entirely. The economy would grind to a halt and we’d all end up farming or foraging for food and living in mud huts, or some other such nonsense. Government argues that growing the money supply spurs spending because it punishes savers by eroding the value of their saved paper money. Mild inflation is made to look like a benefit, necessary to spur the growth of the economy.

But deflation can happen here and there, too. In fact, when prices in certain sectors of the economy are driven up by things bought with newly created credit, it’s guaranteed that there will be price deflation in those areas. Prices affected the most by inflation in the supply of credit will also be affected the most when that credit ultimately dries up. The clearest and most recent evidence of this is in the recent housing bubble and bust. But it can happen in any segment of the economy where artificial low interest rates are provided to encourage purchases of a certain goods or services.

Fighting Deflation…Even If It Kills Us

The central bank is ultimately behind the credit that caused the price inflation that became most obvious in the housing sector. The economy that grew based on easy credit is collapsing as is the general price level as jobs disappear, people default on their loans and banks avoid lending. The government is going to do everything in its power to prevent this from taking place, but they really only have one arrow in their quiver. All they can do is become the borrower and spender of last resort, just like Keynes said they should.

But government has no real money of its own. All it can do is steal money from the private sector in the form of taxes, borrow money from citizens, or governments, or the central bank. And borrowing from the central bank, essentially means ordering it to print up more currency, so they can then borrow it.

The government and central bank will only ramp up their inflationary practices in order to fight the bad deflation, which itself is here because of credit expansion caused by central bank practices in the first place. This is like fighting the fire you started with more gasoline. Expect inflation really to get going eventually. We may even see the hyper version. But first, expect the bad deflation to continue slashing prices that were built upon credit, pulling the plug on businesses and reducing incomes and the family budget.


Deflation / Hyperinflation
Deflation / Hyperinflation

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First, what is deflation? The word itself means something is diminishing. But as with inflation, people often conflate the change in the money supply with the change in prices. And they also often don’t consider how the economy itself is growing or shrinking. But it’s the change in the supply of money (including credit) against the change in the size of the economy (total of goods and services produced) that causes changes in general prices.

You have to keep these in mind: change in volume of goods and services compared against the change in the overall supply of money yields change in general prices.

What the Government REALLY doesn’t want you to understand...

Hyperinflation: What is hyperinflation?

Hyperinflation isn’t just an increase in the money supply; after all the (illegal and unconstitutional) central bank (Federal Reserve) increases the money supply all the time, a phenomenon we know as simple inflation, and which we come to expect as a constant. Hyperinflation, however, happens when uncertainty in the future worth of the currency causes people to start trading it for things of actual utility and more reliable stores of value as soon as they can. The velocity of paper money through the system increases as people seek to get rid of it.

So hyperinflation isn’t just the expansion of the monetary base, though said expansion is at the root. The expansion is fuel, but the conflagration doesn’t start till the herd finally wakes up and panics.

Citizens generally know that the paper currencies they are forced by law to use, aren’t quite as good as gold or silver, or anything else with tangible and intrinsic value. There is an oily, slippery quality to the paper. That its value will go down gradually over time is a given, but most folks deluded themselves into believing it’s for the best and that the government has it all in hand. But eventually a nation has to face the inevitable outcome of government trying to manage an economy; centralized planning leads to miscalculations on a colossal—even global—scale. These are paid for by the stealthy tax of inflation (and inflation IS a hidden tax on us all, imposed by an out of control government being run by people who are clueless)… And eventually the whole thing collapses.

Hyperinflation: How does it happen?

The government borrows money into existence (from the central bank) and then spends it into the economy. Governments and central banks technically are separate entities, but they collude with each other like this all the time. When citizens and foreigners won’t lend (buy bonds) and raising taxes isn’t enough, the central bank is always there and  willing to play ball with paper and ink.

The (illegal and unconstitutional Federal Reserve) central bank can increase the monetary base as much as it wants… because it’s the entity that issues the currency, just producing it from thin air with paper and ink. It then uses that unlawful and worthless currency to buy bonds from the government, which is just a convoluted way of saying it loans this money to the government so that the government can continue to spend money that isn’t theirs to spend. Of course if anyone else tries this sort of legerdemain, it would be called counterfeiting. When the government and central bank does it, it’s considered economic stimulus. Then the government can spend this new money into the economy by its usual favorite venues: wars, welfare and—in times when stimulus is called for—an alphabet soup of make-work programs, and idiocy like Solyndra, heavily subsidized electric cars, and such other balderdash as the powers that be deem worthy, or own stock in, or owe a favor to.

Hyperinflation takes off when the entire population gets wise (although given the current resident of the White House, placed there by the “electorate,” the collective wisdom the populace is questionable at best). The money supply might have been growing in fits and spurts for decades, but the hyperinflationary storm happens when that money really starts to move around as people try to get rid of it. The prices of useful goods get bid up to embarrassing levels. The process accelerates when governments try to stabilize markets…often by adding more paper…because honestly, what else can a government do? They had sold, stolen, and squandered the nation’s true, tangible wealth and have nothing left but paper and ink. Mismanagement and fraud are the only things governments really get right consistently. So for the government, a problem that’s caused by the theft of inflation can only be solved by… You guessed it, more mismanagement and fraud. The entire process is self-reinforcing and results in the hyperinflationary death spiral to which all fiat currency is heir.

Hyperinflation: A brief history

Before paper money, rulers would just debase the coins—that is remove the quantity of precious metals in each and increase the number in circulation. Each coin had less gold or silver in it, though the rulers who issued the currency would insist—on pain of death—that everyone pretend that the coins were worth just as much. This sort thing led to Sir Thomas Gresham’s pithy maxim: “bad money drives good money out of circulation.” That is to say that people generally aren’t fooled by a debased currency and will hold on to the unadulterated forms of real money (gold and silver) while they use the debased stuff for their transactions. They use the debased stuff for day-to-day transactions, but put the good stuff under their mattresses.

Inflation and declining value have been features of fiat currencies since their inception in China about a millennium ago. Hyperinflation is a newly mutated version of this ancient terror, born in the 20th Century. The most famous example worked its horrors during the Weimar Republic period in Germany. In 1921 a dollar was worth about 50 German Marks; by the end of 1923 the exchange rate was 4.2 trillion Marks for a dollar. Onerous demands by the British for war reparations forced the German government essentially to pay with the future of its citizens, and led to the rise of Adolph Hitler who promised to (and did) fix it.

Hyperinflation: Why does this matter now?

This matters now because the current obama administration is going to “monetize the debt.” They are going to create (print) new money in order to bail out various banks and businesses and even mortgage debtors. But again, governments may be able to create money, but they cannot create purchasing power. It’s a swindle. The money they create dilutes the value of that already in existence. It is a way to siphon purchasing power from those trusting souls who have saved in the currency. It’s an indirect and subtle tax which they have been levying on us since 1914. This is wrong in principle and disastrous in practice.

This sort of thing can’t happen when the money is just a stand-in for gold and silver. Then the money supply is fairly fixed. But that sort of thing ties government’s hands. When you want a strictly limited constitutional government, that’s a good thing. Of course, if you want centralized planning, market interventions and wars, gold and silver standards are horribly restricting on a government who wishes to spend more of the people’s money than it can steal. That’s why governments get rid of them as quickly as they can. Then there is absolutely no need to be fiscally responsible. Then governments can use all the usual means to grow in scope and reach: the wars, welfare and market intervention previously mentioned.

Hyperinflation: Myths?

When speaking of the collapse of a currency, people often trot out the adage “you can’t eat gold.” By this they mean that in a true currency crisis and attendant collapse, only fuel and food, and the arms to protect them will have any value. Gold and silver, despite being branded a barbarous relics by Keynes, are actually a symbol of civilization and trade. Therefore they won’t perform their monetary function when civilization and trade break down.

In a true collapse, there may be no trade at all, or what little trade there is could be limited to barter. As long as there is any exchange being done, people will find something to use as money; the guy with the cows and the milk you want is not always going to want the furs you have to trade. If trade goes on at all, even if barter is a large part of it, precious metals will have a place. They’ve been used as money for thousands of years because they perform the function of money so well.

On the other hand, a common assumption is that gold is absolutely the best thing to hold during hyperinflation. Not necessarily true. It will do a lot better than the failing currency…but a hyperinflationary scenario means that just about everything is doing better than the failing currency…the currency is the one thing that no one wants to hold. Depending on where things are at the start, however, it may not do the best.

Real estate is traditionally a good hedge against currency failure, but in recent history real estate prices were extremely overblown all over the western world by access to credit in the form of the leveraging instrument known as the 30-year mortgage (100-years in Japan during its bubble) and exotic permutations thereof. So gold and silver in this particular situation have a bit of head start on real estate which itself has further to fall. And speaking of real estate and other falling asset prices…

Hyperinflation: What about deflation? Isn’t that what we’re experiencing now?

Don’t count on deflation in any real sense. Under a fiat currency, deflation can only ever be a short-term phenomena, and it generally only occurs when available credit contracts. Also keep in mind that credit is something that banks can over-issue far above actual reserves thanks to those pernicious fractional lending laws. Credit is like an appendix to the actual supply of money; some folks count it in the measure of the overall monetary base, while some don’t. It’s a fact that it can deflate and the effect on the economy is indeed very deflationary as prices bid up by credit collapse (housing is a very obvious example, but luxury items and even needed commodities are affected by availability of credit) and activity dependent on credit ceases, and the jobs attached to those activities disappear.

Credit distorts prices. It’s how the banks—under direction from the central bank (the “Banksters”) gets the disaster rolling. Fractional reserve lending laws allow banks to make loans far beyond what they actually have on reserve (a fraction of those reserves, hence the name). Assets get bid up with credit and bad business ideas get funded. People get all sorts of false signals because of the availability of credit and bad decisions get made. Debts grow on all sorts of unproductive purchases and ventures.

This can’t go on forever—borrowing from the future and on reserves that aren’t really there. When it stops working, and it will soon, those debts have to be worked out somehow. The temptingly easy way to do this is to devalue the debts and make them easier to pay. A little inflationary easing thus seems like a really good idea. That’s how governments make inflation palatable to their subjects. It makes the weight of bad financial decisions easier to bear.

The government labels this sort of thing as “economic stimulus” or “quantitative easing”, though a more honest description would be “defrauding the minority of savers” and “prolonging the inevitable painful outcome of propping up incredibly bad decisions.”

Bearing in mind that we have a president (lord and master of all 57 States according to him), and his group of advisors who have never run so much as a lemonade stand in their entire collective lives, one must reasonably conclude that not a one of them could find their own ass with both hands. 

Not good for what’s left of America.