"Nate begins the eighth installment in the series by getting some things factually incorrect. To begin with, Z1 did not begin to decline in July 2008, as it peaked at $52.9 trillion in Q1 2009, a figure it did not reach again until Q3 2011, when it hit $53.8 trillion. 2008 merely served as the warning sign, as total credit growth ceased to keep pace with its 60-year historical rate, thus triggering two quarters of 10 percent growth in the federal debt sector in the latter part of the year. Gold and silver prices certainly did rise during that time, as did the stock market, but this was the result of the near-unprecedented increase in federal spending which was taking place at that time; even as the Household and Financial sectors contracted, the Federal sector expanded by $3.3 trillion.Tax expense: 455.00 820.00"
Given that Vox acknowledges that there was a period of time when credit was contracting... and prices were going up, the actual timing of that period, be it July of 08 or Q1 09 is irrelevant. He acknowledges that it happened. The rest of this is elaborate hand waving. Vox here is suggesting that the fact that the federal government is spending the new money, and that it somehow doesn't count as inflation. I am beginning to see the problem here. Vox has literally just said, "Yeah but it doesn't matter because its government spending." If we were arguing about the health of an economy... yes... we could certainly point to the distinction and say, "Its not real growth." But we're not debating that. We're debating inflation vs deflation. Inflation is never real growth. That's the point. Of course its government spending. Unless Vox wants to claim that inflation isn't possible in a communist regime, then he must acknowledge for the purposes of this debate, the sector the increase is happening in doesn't matter. That just tells you who got to spend the money that was stolen from you.
Vox later reinforces this error.
"Nate is looking at Z1 - or to be more precise, L1 - as a whole rather than in its component parts. This is not unreasonable, but unless one looks at the component parts, one cannot understand the importance or the consequences of the shift in the nature of the credit market that has seen the federal element double from 10.3 percent of the entire credit market to the current 20.6 percent."
That's because for the purposes on inflation it doesn't matter who's spending the new money. Its new money. Government spending is merely the delivery method for injecting it into the economy. That method is neither limited, nor temporary. Nor is there a limit on how much money the Fed can "lend" the government to spend. Because when a federal reserve bank is lending money to its government it isn't lending. It is straight up counterfeiting.
Then... yet again... Vox reinforces his error... and even manages to compound it.
"What Nate sees as evidence of inflation, the modestly higher prices in the gold, silver, and equity markets, is largely limited to the areas of direct federal intervention. This is why health care and higher education prices are still rising to new heights, while real estate prices are struggling to get back to where they were. The areas that are reaching new heights are where the outstanding $11.6 trillion in government credit is flowing. That is where the malinvestment is still being directed."
No. It is not limited to any areas at all. It is literally visible across the board. It happened everywhere. It even happened in the housing market where it was detectable by the fact that the housing values didn't sink nearly as much as they should have. And again, Vox is suggesting that where the government spends the new money somehow matters. It does not. What matters is new money is being injected into the system.
All of this was bad enough but I nearly fell out of my chair when I read this:
"I note that each of these hyperinflationary scenarios were very short-lived and tended to be closely tied to serious political upheaval. The longest period is two years, which happened twice in China during the 1940s. Note, however, that these hyperinflations tended to take place AFTER the wars or major political upheavals; the frequency with which they take place after independence is gained by a nation is reminiscent of the high inflation that plagued the American colonial currencies and the Continental Dollar. If any hyperinflation were to take place, history suggests it would likely take place after the collapse and political chaos; it would be a result of it, not a cause."
Setting aside the fact that Vox just argued that hyper inflation isn't likely because it follows war and political upheaval, and everyone with a brain is predicting war and political upheaval... I cannot help but note that war and political upheaval are expensive. Particularly for the losers. The losers also suffer because their citizens lose faith in their governments. So you have a massive amount of debt you'll never be able to pay back, and you have citizens that don't have any faith in their government. What do we see in the United States right now? We see more debt than can ever be paid back. And at risk of sounding like a Cambridge economist it appears we've reached a point where America's faith in its government is at a perpetual all-time low. I will be explaining why that matters shortly.
"Remember, it's not enough to merely print the money. The amount printed and distributed has to be greater than the continuing contraction of private credit and the evaporation of bank deposits. And keep in mind that the combined $4.2 trillion decline in outstanding Household and Financial sector credit since 2009 alone exceeds, by a factor of nearly four, the ENTIRE AMOUNT of U.S. currency presently in circulation."
And by Vox's own metric, price, they have been and are doing, just that. Excepting of course that private credit has nothing to do with it. Deposits are all that matter. As we have seen proven by the fact that prices went up while credit was declining. Vox wraps it up with a bait and switch:
"Nate is correct to note that people are becoming increasingly drawn to holding cash in the hand, but he is forgetting that when cash becomes more valuable in this manner, it is strongly indicative of a deflationary environment, not an inflationary one. In an inflationary environment, one wants to take on more debt and hold less cash. In a deflationary environment, one wants to avoid debt and hold more cash. The intellectual gymnastics notwithstanding, one's true position on this matter can be ascertained by one's material preferences and actions."
I made no such claim about people in general. People in general are not drawn to cash at all. The point I made was that you, the newly enlightened reader, upon enlightenment were drawn to cash. Vox knows full well that I have been telling everyone to get out of cash likely as long as he has. This actually brings a question to mind. I am hording gold and silver and suggesting you should be doing the same. Does anyone here think Vox is hording cash?
Enough of this. Its abundantly clear that Vox simply doesn't understand how Hyperinflation is going to happen. He looks at all these big numbers and and throws up his hands and says literally... Deflation is inevitable! Come along folks. Its time we left the cave. Because right now you're still just like the people in the cave in that allegory of the people in the cave by that greek guy.
The first thing I want to make you understand is that hyper-inflation is not the same as inflation. Inflation is an increase in supply. Hyper inflation is a catastrophic event that happens in different ways in different economic systems. Its like death. There are really only a few ways humans die... but we can get to them in a near infinite number of ways. You can drown or you I can stick your head in a bag. Either way you die of a lack of oxygen to your brain. Even if I slit your throat and you bleed out, the mechanism for death is still a lack of oxygen to your brain. Drowning and having your throat slit appear very different but the mechanism of death is actually the same.
Hyper-inflation is like that. Its a mechanism for death. Currency death to be specific, and we can get there in a number of ways. These ways vary depending on circumstances like the superficial structures men have constructed on top of the actual economy.
For example in controlled economies like the USSR hyper inflation's delivery method is easy to spot. The government just keeps spending and spending and raising everyone's wages until things go boom. But what is the "boom" really? Is it really just an out of control train? Why can't they just stop printing new money?
Remember back when I explained what money is? Remember how I talked about how there is a constant commodity competition? it never stops. There is a constant struggle to decide what people will want. The commodity people want the most, is the commodity that will be the easiest to trade in the future... and therefore becomes the money.
Now... when a government intervenes and says, "You will use X as money." they they have short circuited this competition by giving an un-natural advantage to one commodity over the others. However that comes with a cost. People want something they would otherwise not want because the government says so. This works as long as people have faith in the government. They have faith in the government and that faith gets transferred to the paper slips or magic deposits. If they lose faith in that government.. like after losing a war... or after a big political change... they can also lose faith in their currency as well. By that I mean, they no longer have faith that they will be able to exchange their paper slips for the things they want and need.
Folks. Hyper-inflation is not an increase of the money supply.
The rapid catastrophic increase in the money supply is a symptom. It is not the cause.
Hyper-inflation is what happens when people decide that the fiat money they have in their pockets and in their accounts is no longer going to be honored in the future and start spending it as quickly as possible. That is the unstoppable train of inflation. The printing presses cannot be stopped because the people will not stop spending the money as soon as they get it. They don't want the money. There are other commodities that they have more faith in, but the government has interfered and forced them to use this crap that they don't want. This is evidenced by their behavior. The International Accounting Standards Board established this list of criteria to diagnose hyper inflation:
- The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power
- The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;
- Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;
- Interest rates, wages, and prices are linked to a price index; and
- The cumulative inflation rate over three years approaches, or exceeds, 100%
What we see here is a clear pattern of people rejecting the cash (I say cash but it works for whatever is represented in the deposits as well, though generally the deposits disappear as folks stop bothering with banks entirely) their government is telling them they have to use.
This is why I was amused when Vox suggested that I was forgetting that in a deflationary environment people want their cash. I am not forgetting it. That behavioral difference is key to my case.
During the american great depression people horded cash. They buried it in their backyard and hid it in mattresses. In Wiemar .. people wallpapered their houses with it. Literally. The key is, American's retained faith in their government and therefore the purchase power of their money. In Wiemar they had enormous debt, and had just lost a major war. They did not maintain a faith in their government and therefore lost faith in their fiat money.
The reason hyper-inflation often follows war and political upheaval is because those are two excellent reasons for folks to lose faith in their governments. As further evidence of this I point once again to Weimar. Note that after the hyper-inflation a new leader emerged and restored faith in the government and the next decade was referred to as "The Golden Age of Wiemar". This should also bring to mind FDR and the fact that in spite of his rampant stupid... people had faith that he was going to save them. Thus they never rejected their fiat money.
That is why the broad definition of fiat is more important than the specific credit nature. Because once people lose faith in the money... its not money anymore. Once it stops behaving as money, what it represents or how it is created or how it gets delivered into the system doesn't matter. Because no one wants it. Forced to take it, they will get rid of it as soon as possible.
So... Hyper-inflation starts with people rejecting their fiat money. Practically that means they stop saving and start spending. They spend as soon as they possibly can. This drives up prices and creates the unstoppable demand cycle that forces the government involved to simple change the rules and crank up the printing presses.
Did you catch that? The important phrase there is "change the rules".
Vox and other deflationists are deflationists because at heart they are system guys. They understand the system and how it works. What they ignore, is that the system can be changed and will be changed. They will have no choice in the matter. Hyper inflation isn't a decision that is made by governments or central banks. Its made by people. Now in some cases governments can take actions deliberately to cause hyper inflation to happen but ultimately the mechanism is the same. The people reject the fiat money that they are legally being forced to use.
That is one way we get to Hyper-inflation. But there is another way as well.
Right now the dollar is the world's foremost reserve currency. I say foremost because its not the only reserve currency out there. Its just the one folks have the most of. That creates and sustains enormous demand for US dollars. If one looks at international activity during the financial crisis of 2008 we see that folks actually scrambled to get dollars. Demand for US dollars world wide went up. That in and of itself helped to disguise the inflation within the US internally. This is because generally speaking folks internationally figured if anyone was going to make it through the collapse it would be the US. I am trying not to laugh as I type that. Its like saying, if anyone is going to make it through this nuclear blast it will be that guy standing at ground zero shouting about the bomb not really being a bomb at all. Never the less...
Right now there is an unknown amount of dollars deposited in bank accounts and held by governments around the world. The interesting bit? The Fed has no idea how much. I am going to repeat that. The US Federal Reserve has no idea how many US dollars are floating around outside our borders. Right now that money is mostly not doing anything. Its just sitting in accounts. It has no "velocity" as we call it in economic terms.
Any ideas what happens when those folks decide they don't want US dollars anymore? They spend it. Ya know what happens when they all start spending it?
Right. Kaboom. Think back to what happened to the price of platinum when the USSR up and dumped tons of it on the market. Now imagine if everyone else dumped their platinum too... and in response the USSR just kept dumping more and more platinum. There is a finite supply of platinum in the world. Dollars? Not so much.
As the money that was just sitting around gets re-injected into the system the price of US dollars goes way down. As that price goes down... people lose purchase power. As people lose purchase power... they spend more to get out while the getting is good.
And thus the cycle is born.
Again.. the credit nature of the money is irrelevant. The money is rejected and new rules will be written.
That is why I rejected Mises' definitions and instead focused on what makes the money the dominant commodity in one going commodity competition. Because if you have an artificial advantage like fiat... then once that advantage is taken away... you get a disturbance. The people reject the former money and pick a new money. This happens in different ways. It can be relatively smooth in the case of a conquered nation switching to new money issued by the invader... or it can be ugly... as in hyper-inflation when the government tries to keep the dead currency alive via printing and spending.
So not only do we now see that deflation is not only not inevitable... its incredibly unlikely.
We are seeing signs already. The dollar is being rejected. Right now china is negotiating a deal to trade directly with Australia without dollars. This is a big deal.
Iran is no longer pricing its oil in dollars. This is also a big deal.
We have people rejecting the dollar here at home as they spend and spend. We have celebrities who have suggested their contracts should be negotiated in Euros. And think about it.. that was before the printing got good and started. We now have several states considering passing laws making Gold and Silver legal tender. These are behaviors associated with hyper-inflation people. It is not only going to happen... it is going to happen sooner than you think.
So right now we have two separate mechanisms... an internal... and external.. pointing to the rejection of the US dollar. Both lead to the same place.
We are entering what historians call.... interesting times. In the immortal words of Admiral Josh Painter...
This business will get out of control. It will get out of control and we'll be lucky to live through it.
ok well... you'll be lucky to live through it.
I'll be fine.
As for the debate... I suspect Vox now finally realizes how thoroughly the rug has been pulled out from under him. We were never debating what he thought we were debating. My case was never what he thought it was.
How does thy medicine taste?