The End Of The Inflation Deflation Debate

By Silver Shield, on October 4th, 2011

Can't we all get along?

For years I have watched guys on both sides of this debate spend countless hours debating over the future of our money.  The latest is a long debate with Chris Martenson (Inflation) and Automatic Earth(Deflation).  I would like to throw my hat in the ring, but in a much different way than most are used to.

Most arguments are are controlled in a Hegelian Dialectic.  This controls debate between only two choices that two sides passionately debate about, never looking outside of the dialectic to another answer. This is most obvious with the Republican/Democrat debate in the US.  These Dialectics usually offer two false choices that keep you in stuck with the same fundamental paradigm/problem.  (This is why nothing changes in Washington.)  Another Hegelian Dialectic is brewing with this Occupy Wall St, that wants a stronger Washington to beat those “bad” bankers without addressing the fundamental problem of usury, fractional reserve banking, and the privately owned central banks.  This inflation/deflation debate is a little different, most Hegelian Dialectics argue two different outcomes and most offer two different solutions. I would like to end this debate once and for all by offering one solution for both.

Let us put this to bed once and for all by first stating my case for inflation.  Our paradigm is based off of a debt based currency that must create more debt every year in excess of the debt AND interest accrued the year before.  This is because every dollar that comes into existence is a debt with a certain amount of interest attached on to it.  When debt is created, money is created.  When debt is paid off, money is destroyed.  The real trick is that the money that is owed for the interest does not exist, since only the principle of the loan is put into the economy.  The ONLY way this interest can be paid is by more debt being created to pay the previous debt AND interest.  This is why we have an ever expanding debt that cannot stop.

“In the end we are all dead.”  John Maynard Keynes

The dollar collapse is a mathematically inevitable event.  It will also be the largest single event of human history.  At some point the debt incurred will be more than the economy can bear and there will be a default.  Or the other way out, is that we constantly print more money to keep the system going, that we eventually destroy the value of the currency and people lose faith in it, which leads to a rush out of it and a hyper inflationary depression.  Either way the debt, the dollar, the economy, the stocks, the real estate, the pensions, our entire way of life, ends.

“Things that cannot go on forever, won’t.”

We can at this late date have a deflationary crash or a hyper inflationary depression, nothing is written in stone.  We can have a deflationary depression if the politicians stop creating more debt or refuse to raise the debt ceiling.  With no more debt coming into the system, we would have the mother-of-all margin calls the world over almost immediately.  The highly leveraged world of banking would be forced to de-leverage to meet their debt obligations.  We could also have a deflationary depression if a nation like Greece goes bankrupt.   By defaulting on their debts the banking system would seize up as banks become blatantly insolvent, as the equity in their positions are destroyed. This again would force everyone to sell their assets in a cascading mess.  The deflation in the system is the most obvious and destructive choice.  It is easy to find who caused it and it is difficult for people’s confidence to return after it starts.

I believe that we will have a hyperinflation for simple 6 reasons.

1. The sick symbiotic relation between the bankers and the politicians guarantee it.  Bankers get profits from lending debt/money and politicians get power from spending money/debt.  The Fed is the lender of last resort and .gov is spender of last resort.  These two are all that is necessary for the system to inflate itself into oblivion.  When everyone is in debt (because our system is created that way) the only two left are the ones that started it.

2.  This is the first time in history that the entire world is unhinged from any monetary anchor.  There is no market mechanism to stop the Fed to throw another 20 trillion on to the fire.  There is no stopping the governments world wide to blow another 14 trillion in wasteful government spending.  These two have no limits.

3. Inflation benefits those that have power, that is why you can count on it.  Why would those that own our paradigm not print unlimited amounts of money or bailout their buddies, they are too big to fail.  Inflation disproportionately hurts the rest of Americans and disproportionately  benefits the Elite who own all of the assets.  Do you really think the Elite care if gas goes to $10 a barrel?  No, it just makes their assets worth more since they own it, transport it, sell it and tax it.

4.  History has shown that over and over again that whenever there is a whiff of deflation (a market crash) it is met with a tsunami of new money.  At what point do the deflationists think that this is going to stop?  The bankers want it.  The politicians want it.   The corporations want it.  Even the average American wants it.  No one wants to see the end of a paradigm, no one wants a hard new reality.  “Give us more monetary drugs so that we can keep on living the dream.”

5. No nation prints that their own fiat debt ever takes the hard road down to deflation.  While nations like Greece may default on a foreign debt and return tot the Drachma, the US is never going to give up their privilege of printing the world’s reserve currency.  They will simply print and bailout anyone, anywhere until the dollar has no value what-so-ever.

6. Nations that see that we are intent on destroying the dollar, will dump the dollar internationally.  These dollars will eventually go to the only economy that must us the dollar, the USA.  Dollars will flood in and buy anything of real tangible value.  The their will be currency controls and the dollars will flood the commodities markets internationally driving up the value of REAL assets as people the world over dump the dollar.

I strongly believe that we will have a hyper inflationary depression, but if we do have a deflationary depression, the cure is still the same, gold and silver.  In either case the unsustainable stops and the entire complex, debt based, system collapses.  There will be no functioning currency, no functioning economy, no trade, no earnings to value stocks, no rents to value properties.  Then there are the very real and very dangerous social consequences of this collapse, riots, starvation, disease and war.  The entire paper wealth of the world will implode in either case.  The only choice they have is to how long and how much energy are the Elite going to put into sustaining the unsustainable?

The only thing that will be left standing is stuff that has REAL tangible, intrinsic value.  Things that people need to live like food, water, and guns.  Commodities will have value, but most will get destroyed since so much of their wealth is determined by credit and trade.  Without a functioning economy, what is corn in Iowa worth if there is no market that will buy it, or worse how do they plant the corn if they cannot buy the seed from Monsanto or get the fertilizer?

Gold and silver need nothing to show their value.  They are worth something simply because they are rare and have uses.  Actually a collapsing credit market may actually catapult gold and silver by eliminating the major players that have held gold and silver down through paper manipulation schemes.  It may also help the gold and silver market as people lose faith in all other paper assets and rush into the very small precious metal market.

Say we do have a grinding deflation, and the nominal price of gold and silver goes down. The REAL purchasing power of the metal can actually go up in value as all other credit/debt based assets collapse. For example if we get a market that has no credit available or mortgage rates are 24% and only for 10 years, what do you think the value of your house will be relative to silver.  What would the economy and the job market be like if someone could afford that property?  What do you think that would do to the thousands of other properties that are going to be flooding the market?  What do you think of all of that debt tied to it?  What do you think that is going to do to the property taxes as towns become desperate to find money?  I could see a house that was once sold for $300,000 only sell for $30,000.  Silver on the other hand might go up, because of the rush into real tangible value, but let us say it does go down in price from $30 by 70% to $9.  The ratio to buy that house went from 10,000 ounces of silver to buy that house to 3,333.  A huge increase in REAL purchasing power during a deflation.  I believe that we will see more significant increases in REAL purchasing power in the more predictable hyper inflationary depression.

Can we finally more on from this inflation/deflation debate and just say that either way, the paper debt paradigm is done?  Bonds, will not save you as more money is thrown on to the fire to keep the economy going, destroying the real returns of the bond.  Bonds will not be paid if nations default and we have seen even the highest rated bonds are junk in reality.  This is not a shift from equity to debt markets, it is a shift from paper wealth to real wealth.  Nothing will stop this train and only those that can see it coming will be able to prepare for it.

“If you can describe the problem better than your audience, they will assume you know the answer.  Once you have that, they will follow you anywhere.”  Master Media Manipulator

I have constantly encouraged people to break free from their 2 step slave thought and embrace the logical thought of the Trivium.  When people are able to think using this 3 step process they become immune to pied piper manipulators who seek to lead them down the wrong path that usually benefits them.  The combination of the Hegelian Dialectic and not logically thinking leads people to slavery.  Be very careful listening to all of these “experts” out there who tell a good story about the end of the dollar but only lead you into paper assets.

Case in point:

The NIA National Inflation Association has recently taken it on the chin on one of their hot stock picks.

“NIA already owns a large position in its new stock suggestion. We normally don’t publicly suggest a stock that we already own a large position in, but this stock is currently trading for well below our purchase price and we consider it to be one of the biggest steals in the market today. Please see our disclaimer at the bottom of this email for information on the amount of shares we own, our purchase price, and when we intend to sell our shares.”

You can read about Peter Schiff tearing these guys apart about their business model here.

“Listen to all, follow none, walk your own path the best that you can.”  -Silver Shield