There is a line of argument which says
that because money will be literally disappearing
as loans default and new loans are not taken out,
inflation in the money supply will fall, which
means that prices will fall, and thus this proves
that we are going to suffer a deflationary
collapse instead of an inflationary collapse,
where prices go up and up.
You gotta
admit, it seems to be a compelling argument; the
money supply will fall as loans go bad, which
means consumer
prices will fall. And with
loans going bad, nobody is going to either make a
loan or take one, and so the money supply will not
grow.
This presents a real difficulty for
me, as it means that when people demand that I
defend my thesis that we will, instead, see an
inflationary collapse, I can't. The fall in the
money supply seems so compelling!
So I
nervously hem and haw, desperately looking for
some plausible reason, and I can't think of one,
and pretty soon I am resorting to personal attacks
against the person questioning me ("Did your
stupid kids dream up that question, or is that
your own stupid question?) and all-in-all I get to
feeling like a cornered rat, which usually leads
to the Attack Without Mercy (AWM), which is
actually a "surprise attack" even if the enemy
knows right where you are, is looking at you, and
is actually lying in ambush for you! I get this
little-known tactical nugget from General
Armstrong Custer himself in the movie Little
Big Man, where he said, in this same "they
know we're here!" circumstance, "Nothing is more
surprising than the attack without mercy!"
So imagine my great relief to have an ally
in Peter Schiff of Euro Pacific Capital, who
writes, "Many mistakenly believe that when the US
economy falls into recession, reduced domestic
demand will lead to falling consumer prices.
However, what is often overlooked is the fact that
as the dollar loses value, the rising relative
values of foreign currencies will increase
consumer demand abroad. As fewer foreign-made
products are imported and more domestic-made
products are exported, the result will be far
fewer products available for Americans to consume.
So even if the domestic money supply were to
contract, the supply of goods for sale would
contract even faster. Shrinking supply will be a
major factor in pushing consumer prices higher in
America."
Hey! I love it when math works
in my favor for a change, instead of the bank
showing me the math of where I had screwed up my
checking account, and the math about how I owe
them money for overdrafts and bounced checks. Now
it would be the other way around, for a welcome
and long overdue change! Now I would get right in
THEIR stupid little faces and demand that THEY
come up with some cash, you deadbeat losers, and
right now, or I'm calling the cops! Oooh! I tingle
with anticipation!
I was enjoying this
little tingle and almost missed the whole point,
which is that, "The big problem politically is
that hyper-inflation may superficially appear to
be the lesser evil. If asset prices are allowed to
collapse, ownership of those assets will pass to
our creditors. If instead we repay our debts with
debased currency, we retain ownership of our
assets and shift the losses to our creditors."
That's the way it shapes up, and the
deciding factor is, so he says, "Since American
debtors can vote in US elections and foreign
creditors cannot, the choice seems obvious. Of
course there are some American creditors as well,
but since they comprise such a small percentage of
the electorate, my guess is that their losses will
be seen as acceptable collateral damage."
Exactly so! That is the depth to which the
American government has sunk; the "good of the
majority" is paramount over the desires of the
minority, which is proved when something like the
bottom half of taxpayers ranked by income pay no
income tax at all, while the top 1% pays more than
half of all income taxes, and the fact that almost
half of the people in the USA receive money
directly, or indirectly, from the federal
government each and every month! Hahaha! What a
system! The "good of the majority" run amok! Ugh.
Richard Daughty is general
partner and COO for Smith Consultant Group,
serving the financial and medical communities, and
the editor of The Mogambo Guru economic newsletter
- an avocational exercise to heap disrespect on
those who desperately deserve
it.
Republished with permission from The Daily Reckoning.
Copyright 2007, The Daily
Reckoning.
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Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
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