We dont have to hire historians to see where deficit spending will take us.  We have only to look around now.  Since the end of World War II, some of history's greatest national disasters have taken place right here in the Americas.  North Americans used to laugh or shake their heads at the economies of the south that seemed always on the brink of collapse.  Banana republics, we derisively called them.  We're not laughing now.

Here are some examples he provides of inflation lag time:

According to the October report from the U. S. Department of Labor, inflation remains essentially unchanged over the last twelve months. 

The real question is: Why not? Where is the inflation? Didn't the supply of money more than double over the same time period? What's going on? 

Voltaire said: "If you would converse with me, define your terms." And so let's start with inflation. 

In the current public discussion about inflation, there are essentially only two schools of thought. Gary North  put it succinctly:

Austrian School economists define inflation as an increase in the supply of money.  All other schools of thought define inflation as ìan increase in our favorite price index.

"In almost every Western country in the years following World War II," he continues, "prices have risen.  This is because the money supply has increased in these countries. A steady, long-term increase in the price level is always [emphasis added] the result of an expansion of the monetary base by the central bank. [This newly created money] is then spent into circulation [and is] multiplied through the fractional reserve banking system. On this, virtually all economists are agreed." 

And, according to the Federal Reserve Bank of St. Louis (the statistical reporting division of America's central bank, the monetary base has virtually exploded, from about $850 Billion to over $2,000 Billion, since September of 2008. 

But, from the Bureau of Labor Statistics comes this news release dated November 18th: "The Consumer Price Index [the favorite price index used by the government] has decreased 0.2 percent over the last 12 months."

How is that possible? What is really going on here? Believe this or not, but President Obama nailed it in this recent comment:  "If we keep adding to the deficit ... at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession." 

Meredith Whitney, CEO of Meredith Whitney Advisory Group, LLC, wrote recently in the Wall Street Journal:

I follow credit, and credit is contracting. Access to credit is being denied at an accelerating pace....
 
Since the onset of the credit crisis over two years ago, available credit to small businesses and consumers has contracted by trillions [emphasis added], and that phenomenon is reflected is dismal consumer spending trends.... 

In the past two years, credit-card lines have been cut by over $1.25 trillion. During the same time, 10% of all credit-card accounts have been cancelled.

Furthermore, Whitney says, "I believe that we are only in the early stages of the second half of this credit [contraction] cycle. I expect another $1.5 trillion of credit-card lines to be removed from the system." 

If Whitney is correct, the next question in all of this must be: "When can we expect price inflation to begin? The monetary inflation has already occurred — so when does it show up in the prices we pay at the store?"

Harry Figgie, in his book Bankruptcy 1995, provides us with some unsettling clues and a possible glimpse into our future:

     Bolivia

Inflation at the retail level (price inflation) was nearly zero in 1977 while the government increased the monetary base (monetary inflation) enormously.  However, by the beginning of 1981, price inflation soared to an amazing 11,749% per year!

     Argentina

Price inflation actually went negative (deflation) from 1977 — 1980 while the Argentine central bank greatly increased the monetary base.  That increased supply of money didnít "hit the streets," however, until 1982.  But by 1985 the annual price inflation rate was 672%.

     Brazil

While Brazil's central bank was expanding the monetary base in the late '70s, price inflation stayed relatively under control, but by 1985 Brazil's "street" inflation rate was 227%.

Can this happen here? 

Ludwig von Mises, the father of the Austrian School of economics, put it this way:

They [consumers] become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs.  The crack-up boom appears. Everybody is anxious [now] to swap his [paper] money against real goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as a media of exchange. They become scrap paper. 

History repeatedly shows that once paper money becomes worthless, gold and silver reassume their rightful place as the media of exchange. That is why the Founders wrote this into the Constitution (Article I, Section 10):  "No state shall ... make anything but gold and silver coin a tender in payment of debts..."

The ultimate question, however, remains: Will the United States have to live through this destruction of currency and economy before it is returned to righteous money? 

TrackBack URI for this entry

Comments (9)

Subscribe to this comment's feed

Bonnie said:

... The current increase in the M1 money supply (i.e., inflation) is the highest in American history. The ONLY thing keeping prices relatively stable at the moment is the very poor state of the economy. The dollar has already lost 96% of it value since 1913. That translates to (200$25 = (1913)$1. We are closing in on a 97% loss of value. This will mean (2009)$33 = (1913)$1. Things will start getting very scary after that: 98% loss brings the ration to 50:1. 99% loss gives a ration of 100:1. You don't want to know what 100% loss of value means - it means WORTHLESS! The paper would be worth more WITHOUT the ink!

report abuse vote down vote up

November 19, 2009
Votes: +2

Bonnie said:

	... Where did that stupid smiley face come from? That is supposed to be an '8' followed by a ')'.
	report abuse vote down vote up

November 19, 2009
Votes: +2

Thomas Paine said:

Where the dollar is hiding We don't have inflation yet as all the big printed money has gone to foreign banks and China. The Federal Reseve handout out trillions to foreign banks. Also the Fed has printed money for the US Gov to pay off foreign creditors on a continuous basis since the Fed is technically broke. When the NWO gives the OK for the foreign banks to start buying up US assets, inflation will take off.

report abuse vote down vote up

November 19, 2009
Votes: +1

Troy said:

Right on the money? One only need to look at the gold market to see this article already in action. India swapped their dollars for gold weeks ago and that was only the start, they sold short. What is it now $1140 or so? I expect $2500 by Easter. At least one day a week it jumps $20-25 an oz. In June it traded for $925 or less some days. Thats 23% in six months. The big money is battening down the hatches. We live in very interesting times. But, then again. I'd imagine everyone has thought that. Troy

report abuse vote down vote up

November 19, 2009
Votes: +0

Don Folkers said:

	THE CAUSE OF ALL THIS None of these things happened as a result of "The Accidental Theory Of History". Read G. Edward Griffin's book about the Federal Reserve -- "The Creature From Jekyll Island".
	report abuse vote down vote up

November 22, 2009
Votes: +1

Somchay Chong said:

	Should I stock up? You all are scaring me. If I don't have enough to buy gold or precious metal, will be it a good idea to stock on some essentials. I have been thinking to stock up with some grains and perhaps some can meat that will last a year or two. Is that smart to do for the common folks without big money to hedge the market?
	report abuse vote down vote up

November 23, 2009
Votes: +1

John Barleycorn said:

You should stock up. The flight to tangibles cannot start soon enough. Get what you can now. Start with food, fuel, etc. Get yourself as extricated as possible from the traps and trappings of modern society. Do not become a slave to your dependencies. Life is going to become fluid. You can't eat gold. Buy precious metals after the necessities of life are covered. They are a means to transfer your wealth from the economy we have now to the new one once the collapse is over.

report abuse vote down vote up

November 23, 2009
Votes: +1

Fr33dom said:

	Stocking up Yes Somchay, It is necessary that you stock up and as you do, you do NOT tell anyone, and it's best to use cash when you purchase the grocery's. I go one step further than that and I take time to remove the puc or upc scan number. We never know what to expect with the rfid chip, or the gps grid, etc..
	report abuse vote down vote up

November 24, 2009
Votes: +0

George Haws said:

WRONG on all counts. Here's why: Bob: You've got only half the story here. While you are correct in stating that the monetary base has been vastly expanded due to the Fed's programs (which were aimed at keeping the financial system from collapsing and, as such, were largely successful), you seem to forget that the Fed can (and will, one must presume) drain those reserves out of the system once this deleveraging cycle comes to an end (knock wood). They've been testing reverse repo transactions with the major prime brokerage houses that are aimed at exactly this. So, indeed, much of that M-3 is unlikely to "hit the street" (turn into M-2, 1, 0 -- this is the problem with Austrian Economics, IMHO -- there's very little empirical research to back it up, just lawyerly logic that doesn't take into account the way the world actually works.) So, why aren't we seeing inflation right now? As Meredith Whitney so astutely pointed out, banks aren't lending; they're rebuilding their capital. Until those bases are shored up, the Fed is going to keep the market for reserves (i.e. rates) as rock bottom, and rightly so. The bigger risk, in my opinion, is that we'll see further big credit events like Dubai, FHA, and Greece lead to declines in asset prices (such as commercial real estate, which is a bubble that hasn't imploded yet). All of this is more likely to lead to deflation, not inflation, and against this threat there is no medicine (i.e. we've long ago reached the "liquidity trap"). I'm not a trader, but I think we're in for another big market correction in certain asset classes (commodities, equities, real estate) before all's said and done. Valuations don't make any sense. The US economy depends 70% on consumer spending, and U-6 (the broadest measure of unemployment) is something like 17.5%. I hate to break it to you, but, a priori, the fractional reserve money multiplier depends on banks lending their reserves!!

report abuse vote down vote up

December 14, 2009
Votes: +2