Inflation, deflation, gold and currencies

[Higgenbotham]

> While the 1930s are still somewhat relevant in my opinion, the
> most relevant comparisons would be the time periods before Europe
> slid into the Dark Ages.

So, what happened during GENERATIONAL CRISIS ERAS in the time periods
before Europe slid into the dark ages? Do you have any historical data?

John

From Strauss and Howe, p. 91:

The Origin of the American Cycle

The self-sustaining cycle of archetypes originated at the very moment that the world made its enduring break with cyclical time and tradition. This happened in Western Europe during the last quarter of the fifteenth century."

If Western civilization is being destroyed, the cycle of archetypes will also be destroyed, though not all at once. That's why the crisis periods as a model should still be somewhat relevant for a period of time, but if the foundations of Western civilization are completely destroyed in the next few years, I would suppose the world will fall back into the "cycles of time".

[vincecate]

Systematically in the sense I am using it means that the responses are rote and predictable, as in "see signs of economy slowing" = "print money" or "see signs of default" = "print money", rather than "see signs of economy slowing" = "let the economy heal itself" or "see signs of default" = "use the bankruptcy procedures" that have been in place and served to build Western civilization for 5 centuries.

I agree in this meaning.

[John]

> From Strauss and Howe, p. 91:

>

The Origin of the American Cycle

> The self-sustaining cycle of archetypes originated at the very
> moment that the world made its enduring break with cyclical time
> and tradition. This happened in Western Europe during the last
> quarter of the fifteenth century."

> If Western civilization is being destroyed, the cycle of
> archetypes will also be destroyed, though not all at once. That's
> why the crisis periods as a model should still be somewhat
> relevant for a period of time, but if the foundations of Western
> civilization are completely destroyed in the next few years, I
> would suppose the world will fall back into the "cycles of
> time".

OK, I'll take that as "No, I don't have any data."

The work that Strauss and Howe did with the Anglo-American cycles
since the 1400s was absolutely brilliant, and what I've done would
have been absolutely impossible without their work as a basis.

But in the last ten years I've completely disproved that there's
anything special about the Anglo-American cycles since the 1400s, and
I've proved that generational theory applies to all places and times
throughout history.

John

[vincecate]

But in the last ten years I've completely disproved that there's
anything special about the Anglo-American cycles since the 1400s, and
I've proved that generational theory applies to all places and times
throughout history.

Do you see the 20% deflation in CPI that we had in the early 1930s throughout these other times and places during crisis?

[Higgenbotham]

But in the last ten years I've completely disproved that there's
anything special about the Anglo-American cycles since the 1400s, and
I've proved that generational theory applies to all places and times
throughout history.

If you've uniquely shown something, then by default you would be the only one able to uniquely prove or disprove the rhetorical question you are asking.

During the 14th Century collapse, due to the many small political units, there were some bond markets that held together through the entire collapse. Such would almost certainly be the case today if the US states were sovereign and independent - as stated previously, North Dakota and Texas would probably stay solvent. Norway and Singapore may remain solvent.

August 7, 2010

The token coinage, imperial or otherwise, didn't do so well in the late 3rd century. How accessible any alternative currency is and how well it can perform will be important to any thesis that alternative currencies will force the Feds to hold the value of the dollar. I think with the advent of the new technologies, the present holds better prospects for alternative currencies.

I don't know how any of this can be quantified, but if you want to start with some basis for doing so I'll try to understand how it's possible. Generally, it could be thought of semi-quantitatively as: When an empire expands its territory or sphere of influence, there tends to be inflation. To what extent is a stabilization or contraction of an empire's territory or sphere of influence the termination or exact reverse of an expansion and, if it is, for how long can the empire maintain this lack of expansion before there is a discontinuity of some kind?

As a recent example since these original posts were made, we can look at what Europe has been willing to do to keep their marginal members in the Euro and maybe austerity comes into the picture where it wouldn't have otherwise as the lesser of evils (versus contracting the sphere of influence of the Euro).

[John]

> If you've uniquely shown something, then by default you would be
> the only one able to uniquely prove or disprove the rhetorical
> question you are asking.

I have no idea what this means. The only response I can give is that
pretty much all the work that I've done has appeared in the 3 million+
words in thousands of articles that I've posted on this web site.
Furthermore, I've been given help, sometimes unwittingly, by a number
of people, including yourself, Matt Ignal, Vince Cate, Mike Alexander
and Sean Love. Some of the best help has come from people who have
tried to prove that I'm wrong.

> If a government or civilization is collapsing during a crisis
> period rather than regenerating, I don't know how that helps
> ensure a deflationary outcome. During the 14th Century collapse,
> due to the many small political units, there were some bond
> markets that held together through the entire collapse. Such would
> almost certainly be the case today if the US states were sovereign
> and independent - as stated previously, North Dakota and Texas
> would probably stay solvent. Norway and Singapore may remain
> solvent. I've previously mentioned that there were periods during
> the long decline of Rome where things turned around temporarily
> but those could not have been crisis periods.

I've actually never claimed that there's always deflation during all
generational crisis eras. I was genuinely wondering if you had data
that showed an example of inflation during a generational crisis era.
And in response to Vince's query, I don't have any historical data on
CPI other than Shiller's data for the last century in America.

However, I SUSPECT that there's always deflation during a crisis
period, unless the country's entire finance infrastructure is
destroyed -- and I've said that the same thing might happen in America
if China's war campaign is successful.

The theoretical reason why there's always deflation is because debt
becomes worthless, which reduces the money supply, and because no one
wants to buy anything but bare necessities and things needed for
survival - like food. So the only money available is the cash you
have, or perhaps only gold if that's the only thing that can be
trusted. Prices spike for necessities like food, but prices collapse
for most other things because they aren't needed for survival. The
net effect is that only "trusted money" can be used for transactions,
which makes trusted money extremely valuable (deflationary), and the
"net CPI" of survival and non-survival items collapses (deflationary).

But I'll give you an example of a crisis era where I've wondered
whether there might have been inflation -- the War of the Spanish
Succession. And the reason that I've wondered is that the war
climaxed with the Battle of Malplaquet in 1709, but the financial
crisis didn't climax until 1721. I know that you've studied this
period in depth, and perhaps you could comment on what happened.

Also what happened with the first portion of the Hundred Years
War, which climaxed with the Battle of Poitiers in 1356? You've
studied the banking collapse that preceded. Wasn't that a
deflationary period?

If there ARE examples of hyperinflation during crisis eras, then it
would be very interesting to study them and try to figure out what
makes them different from other examples.

John

[Higgenbotham]

Also what happened with the first portion of the Hundred Years
War, which climaxed with the Battle of Poitiers in 1356? You've
studied the banking collapse that preceded. Wasn't that a
deflationary period?

What it means is, if I don't believe there were crisis periods prior to 5 centures ago as defined by Strauss and Howe, then how can I give you data on crisis periods that I don't know exist? If you can give me sets of dates that correspond to your definition of crisis periods as Rome collapsed, then I can attempt to answer the question. If you are dating the years from about 1336 to 1356 as a crisis, which seems reasonable, there is data available, at least on a qualitative basis. There is also data available from the late Roman period and I've previously gone through some of that. As mentioned above, based on the Roman period, there were two ways I could see as late as 2010 that the US could move toward deflation even if Bernanke wasn't reined in - neither has happened to sufficient extent. Today, our token currency is the dollar and it is based on the value of the debt. The US Central Bank is a bank that issues Federal Reserve notes as liabilities against the assets on its balance sheet. Vince and I have discussed this problem, its systematic worsening, and the need for its timely resolution extensively. If the assets are losing value, the liabilities are losing value too.

[vincecate]

If there ARE examples of hyperinflation during crisis eras, then it
would be very interesting to study them and try to figure out what
makes them different from other examples.

There is at least hyperinflation in two of America's crisis periods, the Revolutionary War and the Civil War.

I have a book on hyperinflations and web links to several lists of hyperinflations and volunteer to check through to see how things match up with generational crisis periods. What is the best list you have of country crisis periods? Is the list of crisis wars in your new book (URL below) what I should use?

http://www.generationaldynamics.com/cgi ... #lab102096

[vincecate]

The theoretical reason why there's always deflation is because debt
becomes worthless, which reduces the money supply, and because no one
wants to buy anything but bare necessities and things needed for
survival - like food.

Today, our token currency is the dollar and it is based on the value of the debt. The US Central Bank is a bank that issues Federal Reserve notes as liabilities against the assets on its balance sheet. Vince and I have discussed this problem, its systematic worsening, and the need for its timely resolution extensively. If the assets are losing value, the liabilities are losing value too.

John, the ability of the central bank to keep the currency valuable depends on the value of the assets they could sell to withdraw the currency. So if the central bank moves all its reserve assets into 30 year bonds and then interest rates go up so that 30 year bonds are worth 1/4th as much, they can no longer withdraw all the currency they put out. If they sold all their bonds and the value of the dollar was still going down there would be nothing more they could do to withdraw dollars or support the value. Common wisdom is that central banks should only invest in very short term and very safe assets or they risk devaluing their currency. So if the debt the Fed is holding becomes worthless then probably the currency will become worthless too. The only other way to support the value of the currency is with taxes. But taxes are far below spending so there is no ability to use taxes to support the currency. What the Fed is trying has been known for over 100 years to be very dangerous.

Anyway, you should not just look at the debt that people hold that becomes worth less but also the debt in the reserves backing the currency that is becoming worth less.

[Higgenbotham]

If the Fed has better asset quality on its balance sheet than the average asset quality in the marketplace, then as asset values deteriorate or assets are defaulted on, the value of the dollar can rise or, in other words, there can be deflation. Exchanging short dated bonds for long dated bonds and talking about buying half a trillion in mortgage backed securities are steps that worsen asset quality on the Fed balance sheet. But the most incredible thing is that nobody steps up to say, hey, Fed, you can't do that. And, literally, as I read the Federal Reserve Act, they are not allowed to. If, like Rick Perry, somebody has the sense to do so, it is ignored. I don't know what's wrong with people that they aren't concerned about this. Vince, you may be right when you say that not one person in a thousand can understand this but to me it's as simple as two plus two equals four. In looking at this, we also have to be cognizant of the fact that not all liabilities on the Fed balance sheet are any longer Federal Reserve notes and it's not possible to know which assets are collateralizing the notes. But we did see where MBS are collateralizing the notes, and you may remember I was shocked to read this. When this does not cause a reaction there is a problem with the populace and its ability to discern.

I'd also add that if you bail everyone out and don't allow any defaults and prop up all the junk asset markets, then asset quality outside the Fed balance sheet cannot deteriorate relative to the Fed balance sheet and there can't be any deflation.