Inflation, deflation, gold and currencies

[xakzen]

[Using lots of large words struck together along with choice references to actual historical figures to give the appearance of intellectual rigger without actually saying anything meaningful.

I couldn't resist...

Have you fallen into your own trap?

LOL, I know I suffer from a lack of verbosity . I was more referring to sentences like this one from the article:

It was Kepler's cognitive insight into the incongruity of the visual and harmonic aspects of the self-same astral phenomena, which implicitly defined a relationship among the planets which corresponded to neither a visual, nor a merely harmonic formulation.

And esoteric historical references like this:

This principle was well known, as to fact, in ancient Classical Greek science, such as that of the Pythagoreans and Plato, and has been the characteristic of all competent modern European science since the work of Brunelleschi and Nicholas of Cusa, as the case is typified by such explicit followers of Cusa's founding of all competent modern physical science as Leonardo da Vinci and Kepler, and as Albert Einstein emphasized the unique importance of Kepler for all modern science (contrary to the degeneracy of the followers of the dogma of the pro-Satanic Bertrand Russell's anti-scientific Principia Mathematica ).

These remind me of literature I've read from various cults. Where you have to read the sentence several times to realize that nothing substantial has been said. Also the repetitive sprinkling of the word "fact" throughout to reinforce that the author is to be believed while the word soup assaults the mind. Eventually I suppose the reader is suppose to stop re-reading and simply accept whatever is said without question.

[xakzen]

...

If you want to delve more deeply into this subject, here are some of the references I have used:

The Venetian Money Market: Banks, Panics, and the Public Debt, 1200-1500 (Money and Banking in Medieval and Renaissance Venice, Vol 2)
Reinhold C. Mueller

The Medieval Super-Companies: A Study of the Peruzzi Company of Florence
Edwin S. Hunt

Piety and charity in late medieval Florence
John Henderson
...

Thanks for the references!

[vincecate]

One of my main ideas is that the speed at which such a process can occur today, by anyone's definition how ever they want to define it, can be orders of magnitude faster than it occurred historically. If a hyperinflationary process can occur with a speed on the order of, say, the flash crash that occurred on May 6, it really won't be measurable in historic terms. It might be more appropriate to call it a collapse or a blowup.

There were all sorts of "stop loss orders" where people put in orders to sell if a stock got down to a certain price. There were not as many people who had "buy if stock drops by 20%" as there were with "sell if stock drops by 20%" and the same was true for 21%, 22%, 23% etc. So each time the stock went down there were more new sell orders than new buy orders. With computers triggering the "stop loss" sell things can happen very fast and you get a "flash crash". But this is not really that different from the 1987 crash or many other stock market crashes. If you get more sellers than buyers prices can drop fast.

But hyperinflation is due to the government increasing the money supply. They may do this by 5% per month or something, but it does not seem to crash in an instant.

Now US bonds could get a flash crash type move. If suddenly there are more sellers than buyers they could drop like a stone.

Another thing that's been mentioned in previous threads is that, historically, the leading country in the world that has the world's reserve currency does not typically undergo a hyperinflation in similar circumstances. The exception would be Rome, which resulted in a worldwide collapse and Dark Age. The professor calls that a hyperinflation but I would tend to think of it primarily as a collapse.

What similar circumstances? In most of the days the British Pound was king it was tied to silver or gold, and people also used gold and silver as reserves. Also, I don't think British debt and deficit situations were close to that of the US now. Most of the time the British were the worlds largest creditor nation and the US is by far the worlds largest debtor nation. We have a pure fiat currency as the world reserve currency. I don't think we really have any similar historical circumstances to compare to when looking at the risk of hyperinflation in the world reserve fiat currency.

[Higgenbotham]

And esoteric historical references like this:

I can't speak to anything you quoted; however, I can't substantially disagree with any of the following statements by LaRouche:

Increasingly hyper-inflationary forms of this malpractice, were used by Greenspan and Bernanke up to, and beyond the point since late July 2007, when a presently ongoing, breakdown-crisis phase of the international financial-monetary system had clearly begun.

One of the most conspicuous features of the process steered, largely, by Greenspan and his successor, had been the implicitly fraudulent looting of the Federally created agencies, Fannie Mae and Freddie Mac. This looting had been done to the effect of creating a present, hyper-inflationary, speculative bubble in questionable, inflated values of real-estate mortgages. In late July 2007, that real-estate-mortgage swindle which had been used to support cancerous bubbles in investment-banking speculation, reached a built-in, self-inflicted barrier. Since the close of July 2007, the entire international bubble created by these and kindred monetarist practices, practices which were launched during Greenspan's tenure, has been lurching toward the implicitly inevitable stage of a general, planet-wide, financial-monetary "breakdown-crisis," a crisis comparable, factually, to Europe's Fourteenth-Century "New Dark Age" crisis.

The assumption of a "cyclical," "mortgage crisis," has been premised, essentially, upon a lie, a lie used by the world's biggest bandits of these times, the investment bankers who had created themselves in the self-image of those predatory Lombard bankers, such as the houses of Bardi and Peruzzi, who created the general financial-economic breakdown-crisis known as the Fourteenth-Century "New Dark Age."

It is, as I must emphasize now, again, a crisis of the same essential cause and characteristics as that great breakdown-crisis, if in a different time, of the Fourteenth-Century European Lombard banking system, the system of investment banking houses of the type of the medieval Bardi and Peruzzi, which plunged all of Europe into a vastly genocidal "New Dark Age," then, as the present-day Bear Stearns, Lehman Brothers, Goldman Sachs, et al., now.

What is happening, not only inside the U.S.A. and western and central Europe, now, is global in its effects. The present, floating-exchange-rate, international monetary system, is doomed beyond reach of redemption. Corrective measures are available, if there were the wisdom and will to employ them.

[Higgenbotham]

Another thing that's been mentioned in previous threads is that, historically, the leading country in the world that has the world's reserve currency does not typically undergo a hyperinflation in similar circumstances. The exception would be Rome, which resulted in a worldwide collapse and Dark Age. The professor calls that a hyperinflation but I would tend to think of it primarily as a collapse.

What similar circumstances? In most of the days the British Pound was king it was tied to silver or gold, and people also used gold and silver as reserves. Also, I don't think British debt and deficit situations were close to that of the US now. Most of the time the British were the worlds largest creditor nation and the US is by far the worlds largest debtor nation. We have a pure fiat currency as the world reserve currency. I don't think we really have any similar historical circumstances to compare to when looking at the risk of hyperinflation in the world reserve fiat currency.

What I mean by similar circumstances is the contractionary environment that exists after a bubble bursts in the leading economy, as well as Central Bank attempts to reverse it. We've discussed the aftermath of the South Sea Bubble and the importance (or lack thereof) of the fact that the British were on a gold standard (some here thought it was important and others not). I can recall some references that had to do with the type of gold standard the British were on and the fact that it had changed. It also seems like the post 1825 contraction in Britain was discussed here. What I'd suggest you do is dig through the Financial Topics thread and quote anything you find incorrect, incomplete, etc., and post it here. Since I no longer consider those episodes as comparable to our present situation as the 14th century episode, I haven't studied them as much in the past few years. Also, there was a more recent discussion with another poster who thought hyperinflation was possible. I think his name was Indyboy. If you can go through those posts and my replies and post any comments here, I'd be particularly interested in that.

[Higgenbotham]

Hey Vince, here's your thread. Like they say, it's all been done before. Matt even mentioned the tally sticks.

http://generationaldynamics.com/forum/v ... 91&start=0


I posted the quote below near the end of this thread, which gives my opinion on how a gold standard makes things different. Many other opinions are given. I believe lack of a gold standard allows the authorities to grow a larger bubble than would otherwise be possible.

The only evolution in my thinking since I wrote this is that the time window that would have allowed this financial bomb to be safely defused has now passed and the financial system is going to blow sky high. In my opinion, this will be the worst collapse in over 7 centuries and it's time to get out of the population centers, figure out how you're going to feed your family, and all that really crazy stuff that only wackos like LaRouche believe!

Some writings indicate that the US inflated its currency in the late 1920s, as there were more gold redeemable currency notes outstanding than gold in storage to cover them. When the Europeans withdrew the gold in the early 1930s that would have exacerbated the situation. I believe the currency had already been inflated and FDR was acknowledging the reality that had existed for some time.

All credit is built off of the money base and the more the money base is inflated, the greater the bubble that can be generated. The distinction in my mind is one of speed and scale. By speed, I mean the speed of response to any systemic crisis to feed liquidity in and continue to grow the bubble. By scale, I mean the fact that speed of response allows a bubble to grow larger. A fiat money system allows for greater speed and scale, meaning the Central Bank can extend the bubble longer and grow the bubble larger than can be done on a gold standard. There are a number of factors besides whether the money base is gold or fiat that are greater determining factors. The most important in my mind is the leverage employed. The leverage employed by hedge funds, for example, was more than 100 to 1 in some instances. Banks employ leverage of about 10 to 1; therefore, it can be seen that the introduction of hedge funds and the failure to regulate them was a bigger contributor to the bubble than whether the base money was gold or fiat.

A relevant note on this--a headline from yesterday said something to the effect that Geithner is saying speed of response is critical at this juncture. There are limits and the bigger the bubble gets, the faster it leaks when it does start leaking, and the faster the authorities have to move to grow it bigger until finally there comes a time when they cannot move fast enough.

[vincecate]

Hey Vince, here's your thread. Like they say, it's all been done before. Matt even mentioned the tally sticks.

http://generationaldynamics.com/forum/v ... 91&start=0

Thanks! Wow. I had started reading all the financial topics, but to get back to my old position I had to move ahead 3 pages at a time for a long long time and just could not. Now I found how to put in a page number!

Deflation in a "paper dollar has 40% gold backing but we pay 100%", like we had from 1914 to 1933, is very understandable. In a pure fiat currency it is hard to imagine serious deflation. As Bernanke says, they could always drop money from helicopters.

Yes, I think there is no longer a gentle way out. This could well be the worst collapse in over 700 years.

I was raised Mormon but left at a young age. I never went for the year supply of food stuff, till the last 2 years. Now I think it is a very reasonable precaution.

In one of the old posts you say, "The monetary base consists of currency and bank reserves. Reserves have been pushed into the banking system and they aren't going anywhere because the banks aren't confident in lending."

The Fed and government have pulled a cool trick on people. The Fed now pays interest on reserves which they did not used to do. This has confused people's analysis of what is going on. But now when banks have "excess reserves" they are really loaning money to the Fed. This has the same impact on the economy/inflation/etc as banks loaning money to the Treasury. But people don't realize it yet.

Tally sticks are great because they were impossible to counterfeit. I am trying to make some nearly impossible to counterfeit gold coins. Don't have it all done yet, but the basic idea is to have some randomness that can't be reproduced exactly in the coin and a high res image online with URL on the coin. So things like bubbles in the gold, hand engraved numbers with vibrating engraver, impurities in the gold, etc. See http://gold.ai for images of what die will produce. But don't have any real coins yet. But the plan is you put the coin under an digital microscope, compare it to the online image, and know it is the real deal. For sure I will be confident they are real when I am buying back my coins from others. So it will be easier to "make a market" in my coins. Not the usual overhead of testing to be sure they are real.

[vincecate]

Hey Vince, here's your thread. Like they say, it's all been done before. Matt even mentioned the tally sticks.

http://generationaldynamics.com/forum/v ... 91&start=0

Another comment on that thread relevant to this thread. John says that it does not matter if people are on a gold standard or fiat currency as far as the deflation vs inflation debate. Then talks about paper money pegged to gold having the peg adjusted.

However, a real gold standard is gold coins not paper money with someone controlling how much gold that paper is converted to.

If people have gold coins under their mattress and use gold coins for trade then you don't get 70s style inflation. And the 1914 to 1933 Fed having 40% backing in gold but paying out 100% if you took out gold was bound to cause deflation when people took out their gold (factor of 2.5 reduction in the money supply).

But with pure fiat money you don't get 30s style deflation. As Bernanke says, he has a printing press and could drop any amount of money from helicopters if he needs to. You can not do that when money is gold coins.

So a real gold standard is different.

[xakzen]

...
Tally sticks are great because they were impossible to counterfeit. I am trying to make some nearly impossible to counterfeit gold coins. Don't have it all done yet, but the basic idea is to have some randomness that can't be reproduced exactly in the coin and a high res image online with URL on the coin. So things like bubbles in the gold, hand engraved numbers with vibrating engraver, impurities in the gold, etc. See http://gold.ai for images of what die will produce. But don't have any real coins yet. But the plan is you put the coin under an digital microscope, compare it to the online image, and know it is the real deal. For sure I will be confident they are real when I am buying back my coins from others. So it will be easier to "make a market" in my coins. Not the usual overhead of testing to be sure they are real.

Vince, I'm not 100% positive, but I'm pretty sure it's illegal to mint your own coins. That's why many of the commemorative coins you see advertised are produced in Liberia. Correct me if you've researched it, but I'd hate to see you in trouble for doing the prudent thing.

[John]

The following is from my 2003 book, Generational Dynamics
Forecasting America's Destiny:

.
German Civil War begins, 1618

The Thirty Years' War first began as a civil war in the Habsburg
Empire (Germany and Austria), following the unraveling of the 1555
Peace at Augsburg.

We can identify a big financial crisis component to the Thirty
Years' War, caused by the debasing of coins, and leading to
the great "Tulipomania" bubble, as we'll see.

The financial crisis had, at its base, the price inflation caused
by the precious metals that Spain imported from the New World
during the Golden Age of Spain in the 1500s. After the disastrous
destruction of the Invincible Armada by England, Spain rebuilt its
Armada, but was forced to pull back many of its military
adventures, especially as sources of precious metals in the New
World began to peter out.

This led to financial hardship, but it doesn't take long for
clever people to devise sneaky new methods for making money.

The habit of debasing coins had begun around 1600. The value of a
coin was determined by the value of the precious metal in
it. Princes and clergymen started to debase the coins by
substituting cheap metal for good metal, or by reducing their
weight. Trading in these coins became increasingly speculative
during the "unraveling" period, since one could never be sure
whether a coin was debased, or how much it was worth. By
1618, debasement was widespread throughout the Habsburg
Empire, causing widespread financial hardship.

So by 1618, we had the two factors needed to forecast a new crisis
war -- a financial crisis and a generational change, the latter
coming from the death or retirement of people who were around
during the Peace at Augsburg.

The German civil war began.

The war expands


Rough map of Europe showing main participants in last decade of
the Thirty Years' War

The reason that the Thirty Years' War lasted 30 years is that it
comprised several different wars, because of the merger of
timelines. It's as if we described World War I and World War II
as a single war running from 1914 to 1945.

The Thirty Years' War was extremely destructive. It laid waste
large parts of central Europe. Population declined from 21
million in 1618 to 18 million in 1648. It started in Eastern
Europe in the early 1620s; then it spread to the north and
enveloped Denmark and Sweden in the late 1620s and 1630s.

Recall that France's timeline was about 20 years behind Germany's
timeline in the religious wars of the 1500s, and so it's not
surprising that France entered the Thirty Years' War 20 years
later than Germany did.

By the 1630s, Spain and Germany were closely linked by religion
and marriage. A Habsburg cousin was ruling Spain through
marriage.

More important, the two empires shared a common religious vision
of serving God by spreading Catholicism and defeating the
Protestants.

Furthermore, the Netherlands was also controlled by the Habsburg
Empire.

So, if you take a look at the above map, you can see that France
was pretty nervous, being surrounded on all sides by the
Habsburgs.

Furthermore, the financial health of Europe continued to decline.
Spain was becoming increasingly in debt, as the supply of precious
metals from the New World continued to decline, and the
debasement of coinage around Europe was unabated.


Tulips

This was the time of one of the most remarkable financial crises
in recorded history, the "Tulipomania" bubble. Tulips were the
"high tech" products of the day, and people were buying and
selling tulips at increasingly high prices, just as people bought
and sold high tech stocks at increasingly high prices in the
1990s. The Tulip Mania bubble is described in detail in chapter
6.

France's religious wars occurred in the 1550s-60s, with the brutal
St. Bartholomew's Massacre occurring in 1572, and so the
generational change in France occurred in the 1530s.

France declared war on Spain in 1634 and on Germany in 1635. This
extremely brutal war, which also involved Denmark and Sweden as
allies of France, lasted until 1648.

** Chapter 8 -- History of Western Europe
** http://www.generationaldynamics.com/cgi ... westeurope

John