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Wonder why the FED wants a dollar collapse, read on......

The endgame is near, the FED knows it too.......a dollar collapse is THEIR ONLY WAY OUT............and will break middle America in half, but these bastards DO NOT CARE! RR is correct gold, or get your MONEY OUT OF THE US DOLLAR AND FAST! read on

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Inflation is good if you are the one creating it, manipulating it, telling the citizenry that it is under control and to beware the deflationary Bogeyman! It works for creating and waging wars.

Does inflation have some serious positive benefits?

The view of many economists that inflation can be a good thing is, from an economic point of view, unobjectionable. Indeed, it is hard to see why, from a theoretical standpoint, that it should be at all controversial. Inflation in the sense that it is most commonly understood is just a way of looking at changes in the prices of traded goods and services. Clearly, from the standpoint of those selling those goods and services, higher prices are welcome. And that is precisely the point. Whether or not it is “good” depends really on who is receiving and who is paying those higher prices.

There are nevertheless problems associated with this way of looking at things because changes in goods and services prices do not actually represent inflation or deflation. These are correctly understood to be states of change in the value of money, and this is a very different thing than changes in the prices of goods and services. All the consumer price index tells you is how profits are shifting in the markets for goods and services. Of itself, it tells you nothing about the value of the unit of account.

This point is far from academic. It has been correctly pointed out over the years by a number of observers that by arbitrarily excluding changes in the prices of certain assets that conventional inflation measures only capture part of the change in monetary value. In the modern American economy this can be readily seen in action. Money in its modern format can be exchanged for bananas or stocks, which is to say that stocks and bananas are substitutes for one another. Over the last ten years or so it has been fashionable on Wall Street to talk about deflation, as in “China is exporting deflation because of its low wages.” At the same time, the price we have had to pay for future earnings of the S&P 500 has soared. Do low or falling wages represent deflation? Not necessarily. They may be symptomatic of it, but they are not proof.

A more serious discussion of inflation requires that its legal, institutional, ethical and moral dimension be examined. It is not for nothing that in ancient times the priestly caste monopolised the business of money and the truth of the matter is that in some ways things have not changed much. Because money has varied functions as medium of exchange, unit of account, and store of value, it is important, indeed vital, that it be dependable. That is the reason, and in my opinion the only reason, why gold is attractive as money. Because of its unique characteristics, it is dependable.

That is why inflation is problematic, and why even those who argue that it can be positive base their conclusions conditionally on inflation being both moderate and predictable. This may well be so over the course of the ordinary business cycle, but it is far from obvious, at least to me, that it is so or even can be so over a longer credit cycle. The reason for this is that such cycles are long. To get a feel for this consider: the last time the US economy was in a similar position as it is in today was some thirty-five years ago. Does anyone seriously think that the Federal Reserve has a planning horizon that long? In the mid ‘80s Paul Volcker was asked why he had done such and so and he replied that in central banking one deals with yesterday’s problems today, not with tomorrow’s, or words to that effect. This was nothing more than an honest description of the realities of politics.

Indeed, the real problems with inflation do flow from politics, because there is no more political act that the granting of the right to issue money. Today we are living with the consequences of the Federal Reserve Act of 1912, which created the Federal Reserve System, a collection of private corporations owned by the very institutions that it supposedly regulates, and which profit from the money monopoly that Congress granted the Fed.

The creation of the Fed represented the triumph of expedience over principle and of partisan profit over national interest, so what else is new? The Trusts that the Fed’s creation was nominally meant to control were granted ownership of the Fed. The demand of some reformers of the day that the trusts should not be allowed to control the nation’s money but that the government should do so was met by Congress in the breech: Congress nominally accepted the responsibility and then delegated it back to the Trusts. And that is where matters still rest.

The significance of this to the question before us here is that this laid the groundwork for a changed attitude toward debt and inflation both amongst the captains of industry and in society generally, and the Fed’s primary role during the 30s became that of debt accommodation. To be sure, this was at first exercised with circumspection but after America emerged unchallenged for all intents and purposes from the Second World War, circumspection crumbled. The result was Nixon’s expedient abrogation of America’s international treaty obligation, and expedience has governed national monetary and fiscal policy since, as it has for a century at least.

That expedience has led to the progressive consolidation of monopoly control over industry after industry, and the wholesale looting of public assets on a scale not seen since the land grabs in the early days of the Republic. Monopoly control over the monetary system has made easy the financing of all this with debt ultimately backed by the obligation of citizens to pay taxes, which is to say with other people’s money. Another way of putting this is that in monetary terms this has been financed by inflationary debt accommodation by the Fed.

The Fed’s ability to do this rests on the degree of prevailing popular belief in the legal fiction that it is independent of political control, and that it will perform its duties in a proper fiduciary manner. This is the most transparent fiction, and has resulted in laughable expedients over the years by both the Fed and the government to maintain its “credibility.” So, for instance, in the early ‘80s when house price inflation was soaring, it was dropped from the inflation indices in favour of “imputed rents” that were not soaring. Hedonic pricing was another wheeze that has allowed the harnessing of Moore’s Law in computer performance to the price indices. The Treasury together with the Fed seeks to control the prices of gold, exchange rates and so on, but piously intone that targeting asset prices (i.e. stocks) when they are going up is improper, but supporting them when they go down is responsible behaviour. The Fed has “granted” to its owners the right to self-regulate their market derivatives



businesses, which is to say to value their own balance sheets, in flagrant disregard of its Congressional charter, and promoted the extension of this right to include credit derivatives under the terms of the new Basel II Accord.

I doubt that even JP Morgan, who reportedly once told a friend that he lost sleep at nights worrying about an antitrust suit being brought against him, would have in his wildest dreams imagined that he and his kind could, never mind would, get away with this. That the Bushes and the Rubins of our world are not only getting away with this but with much else besides says volumes.

It is no accident of course that as the Fed has pushed interest rates toward zero and the administration has opened the bond floodgates that corporate profits have soared. Workers have not participated in this, and wages are stagnant. Jobs are being created, but in other countries, such that the Fed’s inflationary debt accommodation flows straight through to the bottom line. The Wall Street euphemism for this is that this is higher “productivity” but this is nonsense in any economically meaningful sense of the term. When one looks at personal debt statistics in the United States it is not “productivity” that comes to mind but “predatory lending.” This is a straightforward inflationary siphoning of money from one end of the economic spectrum into the pockets of the other end.

So, gentlemen, in answer to the question at hand I can only answer: it depends on which end of that spectrum you are.

Inflation: It’s Not Just a Good Idea, It’s the Law.

The law in question is the Federal Reserve Act of 1913. By giving a small cartel of bankers the exclusive right to create unlimited money and credit, the Act virtually guaranteed long term price inflation. Since 1913, the US dollar has lost almost 95% of its purchasing power. This loss in purchasing power is a direct result of a massive increase in the supply of money that has occurred since the founding of the Fed.

Historically, spokespeople for the Federal Reserve always maintained an illusion that the Fed was dedicated to fighting the forces of inflation using its power to set short-term interest rates. Nowadays, there is not even a pretense of fighting inflation. Fed governors have now declared deflation, a fall in the money supply and general price levels, to be public enemy number one. Recently, Fed governor Bernanke stunned the world by admitting that the central bank could and would use the power of the mythical money printing press to create inflation if necessary. Fed Chairman Greenspan publicly lamented that “an unwelcome fall in inflation” would be disastrous to the economy. What is an “unwelcome fall in inflation” anyways? Heck, I would gladly welcome some deflationary relief against sharply rising energy, food, insurance, housing, and medical costs. Why is to my advantage to pay more for everything that I buy?

To be fair, Messrs. Greenspan and Bernanke actually have something to worry about. The massive increase in “money” that I mentioned at the beginning of this essay was a little misleading. The Fed actually creates relatively little money in the sense of the dollar bills that you hold in your wallet. That is true fiat currency. Created from a printing press and backed by nothing, these bills at least have some tangible reality and carry no hidden obligations or interest liabilities. Most of what we call money that is carried in bank accounts, money market funds, brokerage accounts, etc. are actually just credits. There are few, if any, actual bills backing any if this “money.” Money today is almost entirely a balance sheet entry. The money that you and I hold in our various accounts is actually just somebody else’s debt. These debts are packaged as securities and traded as money. They come in the form of Treasury bills, commercial paper, repurchase agreements, and a menagerie of other exotic debt securitie



s that people and institutions accept as payment in lieu of actual cash. Since these are all just debts, they posess the two fundamental characteristics of debt: interest payments and maturity. All issuers of these securities are obligated to pay interest and to reimburse the creditor full face value at maturity. So what happens if some of the issuers of these debt securities default on their obligations? Big Trouble.

The quirky design of the Federal Reserve System makes it rather inefficient at creating and distributing cash-type money, but in coordination with member banks it is fabulously efficient at creating debt. This is called “fractional reserve banking” and it allows your local bank to create gobs of new money via lending, all mediated and facilitated by the Fed. Fractional reserve banking is something like a pyramid scheme (remember Mr. Ponzi?). As long as only a few people try to cash in, the system works fine. But like all pyramid schemes, it needs a constant flow of new funds to keep the game going. Since almost all of the money in existence carries a compound interest rate, the supply of new money or debt must increase by at least as much as the interest expense to support the system. This is where the inflation comes from. Don’t believe me? Look at the chart of M3 broad money supply.

Since 1960, there has hardly been a single year when this broad measure of money materially declined. This is a good thing because it allowed the money game to continue and the country to prosper and grow. Should the money supply start to decline, there would not be enough money to pay interest expense so debts would start to default at an increasing rate. Since debt is also money, disappearing debt will further shrink the money supply in a vicious circle. This is what Greenspan and Bernanke are so worried about. They MUST keep inflation above a minimum level to ensure the proper functioning of the monetary system. It’s not their fault; they did not design the system.

Eagle eyes looking at the above money supply chart may see a little “hook” at the end of the graph. Is that a downturn in the most recent money supply data? Let’s zoom in and see.

Yes, it’s true. M3 money supply has been contracting since Sept 2003. All of the other money measures M1, MZM, and M2 are also contracting. What’s worse is that money velocity is falling also, making the existing money stock less potent. If this trend continues there will almost certainly be trouble in the US economy. This is because the US is incredibly indebted at all levels. Personal, corporate, municipal, state, and federal debt are at record levels and growing at an increasing rate. Increasing debt requires increasing money to service the debt. If insufficient money is available for debt service, much debt will default and the economy will spiral downward.

Why is the money supply falling? It seems that nobody really knows for sure but there are probably a number of causes relating to overcapacity, global competition, trade deficits, bubbles bursting, etc. Maybe the country just can’t take on any more debt.

What is the Fed to do? Unfortunately, they have already exhausted almost all of the tools at their disposal to “reinflate” the system. They have reduced interest rates to near record low levels in an effort to entice even more borrowing. But as we have seen, more borrowing only increases the strain on the system and the Fed is near the end of its effectiveness using its conventional policy tools. They have threatened to go “unconventional” using untried and aggressive tactics but this will only further weaken an already battered US dollar and may destabilize financial markets. The Fed is in a box and there is little left for them to do except to jawbone the economy into recovery.

It seems that we are near an endgame of some sort. There are people who think that it will end in hyperinflation and those who argue for deflation. It’s possible that we may experience both simultaneously in different markets. The debt situation can only be resolved by either depreciating the currency (inflation) or liquidating the debt (deflation). Investors must prepare for either scenario. This is why many thoughtful advisors are stressing the need for some precious metals and hard assets as part of a sound portfolio. These are the few asset classes that will weather this storm.