Editor’s note: I thank my brother for providing content for my blog when I’m not able to sit still long enough to create my own blog content. The other guest blog articles he’s written in the Imminent Rebellion series are linked here, here, here, here, and here.
IMMINENT REBELLION: THE DEMISE OF THE DOLLAR AND ECONOMIC ARMAGEDDON
I’ve wanted to address the financial aspect of our current situation for quite some time but have not been able to articulate my thoughts sufficiently to make a coherent argument. I hope I am able to do so now. Fair warning though: I am about to contradict all of the conventional wisdom of modern economists. Here we go…
To begin with I am going to make a distinction between money and wealth. These are not dictionary definitions and certainly not endorsed by most economists or financial advisors. They are my definitions. Money is whatever is used as currency. At various times and places in the world it has generally been gold and/or silver but, in some areas of the world, even stones have served as currency. In our case it is the US dollar. Wealth is something of value that can be produced or consumed. Food, clothing, shelter are the most basic forms. Vehicles, electronics, furniture, weapons, boats, anything that is somewhat durable and useful would qualify under my definition. Generally goods would qualify as wealth but services would not since there is no durability. Land wouldn’t really qualify as wealth since it isn’t really something you produce or consume but it is the source of the raw materials that generate wealth. The closest term that we commonly use to my definition of wealth would be assets, but it’s not a perfect fit either since cash is considered an asset but I don’t really count it as a measure of wealth. It would be more of a potential for wealth. I certainly don’t count the book value of your portfolio as wealth.
Money is accepted by the general populous because it is a lot easier to make value judgments in terms of money than it is in goods and services. When the majority of the people in a society agree that the money is worth something it circulates and becomes currency. Currency is then used to exchange goods, services, real estate, etc.
Wealth on the other hand, is something that is of use or fulfills a need, the most basic of which are food, clothing, and shelter. Wealth (remember this is my definition) must be built up through utilization of resources to produce something that people need or want. By my definition you would need the same three essentials for creating wealth that you need for running a business: resources, labor, and capital.
They key word in all of this is produce. Wealth is created by production and destroyed by consumption. If I grow a bushel of apples I have created wealth. If I eat a bushel of apples I have consumed wealth. (I know this does not fit any definition you learned in economics class but I warned you of that at the beginning, didn’t I?) The relative value of that wealth is decided by the individuals in a market and is usually quantified in terms of money. The rules of supply and demand are probably familiar to you so I won’t go any further than to say supply and demand for money and wealth together determine the price or quantity of money required to purchase something of value which may or may contribute to your personal wealth.
Purchasing may increase your wealth (you buy land with a house on it) or decrease it (you throw a big party and purchase lots of food to be consumed). Merely conducting trade does not necessarily increase or decrease your wealth. You may be amassing wealth or depleting it depending on what you are spending your money on.
Until recently, money was nearly always something that had intrinsic value. The supply of money was limited by the amount of the substance that was available for use. If you wanted to increase the supply of money you had to expend time and resources to extract it (i.e. mine more gold). Societies were limited to the finite quantities of extracted material for their money supply.
This loosely tied money and wealth together. In order to increase the money supply you had to produce something that people needed or wanted (i.e. gold). This also creates a condition that allows for both inflation and deflation. When the money supply increases faster than wealth does, inflation occurs. When wealth increases faster than the money supply, then deflation occurs. The market always seeks equilibrium so that the value of money accurately reflects the amount of wealth in a market. (Many of you will argue with me but remember this is NOT Economics 101. This is economics according to James Williamson.)
Inflation is a condition where the money supply grows faster than wealth does. More money to purchase the same amount of wealth leads to higher prices. You could also say that less wealth purchased with the same quantity of money will lead to higher prices. (In the macro.) Dealing with inflation is much easier than dealing with deflation if you are wealthy or if you are in debt. If prices rise, you can sell your goods and services at ever higher prices and therefore increase your wealth or consumption (whichever you prefer) with relative ease. Since the goods you produced yesterday are worth more today it is rather simple to turn a profit on what you have either produced or traded for. If you have a debt to pay it will become easier and easier to pay the debt because (presumably) the money supply is increasing and therefore your income (in terms of money not necessarily wealth) is also increasing. To keep runaway inflation in check, society simply needs to produce enough to keep up with the money supply.
Deflation is a condition where the wealth supply grows faster than the money does or the money supply shrinks faster than wealth does. Less money to purchase the same amount of wealth leads to lower prices and the same amount of money to purchase more wealth will also lead to lower prices. Deflation is a generally a result of overproduction and much more difficult issue to deal with than inflation. If you have surplus wealth you will get ever lower prices for your goods and services which in turn makes it ever more difficult to profit from production or trade. This makes amassing wealth–or excessive consumption–ever more difficult. If you have money reserves (not wealth by my definition) you may benefit from the lower prices for a short while and temporarily increase your wealth or consumption but eventually your income will get caught up in the downward spiral as well. If you are in debt your situation is especially pernicious because, while your payment is fixed, your income is falling, making it ever more difficult to pay. The real difficulty of getting out of this cycle is that increasing production or wealth does not cure the problem. What you produced or traded for yesterday is worth less today than what you paid for it. The only thing you can do is reduce your consumption until either the money supply increases or the production of wealth slows sufficiently to restore the inflationary market.
In the past (before 1900) periods of inflation were always followed by brief periods of deflation. The markets would seek equilibrium and those who were prepared would weather the deflation storms (or even amass wealth at discounted prices) and those who were not would suffer. After the correction, inflation would then provide market conditions for those who were not prepared to get ready for the next correction.
All of this changed with the introduction of fiat money. Fiat money is money produced by governments with no intrinsic value. It only has value because everyone agrees that it does. It is created and destroyed at will by the government that issues it. There is no limit to how much can be produced. It doesn’t matter how much gold is in circulation any more. Nor does it matter how much gold could potentially be extracted. Since money is no longer produced (the treasury doesn’t even bother to print all the money that is available in financial markets, they just produce enough for circulation), the ties that connected money and wealth have now been completely severed and each one grows and shrinks independently of each other. When the government wants less money in the market, they remove it. When they want more money in the market, they insert it.
Why would governments do such a thing? The answer is simple: They don’t like deflation. Or, stated another way, they hate, loathe, and despise deflation. In fact, I would go so far as to say that most governments would rather deal with foreign invasion than deflation. Deflation is the four letter word of the financial sector. Why? Because governments and many of the businesses that support the government financially all benefit from inflation but are hurt by deflation. As long as there is steady inflation it will become easier as time goes on to pay old debts. Prices rise, incomes rise, tax revenue increases, debt remains the same. Fabulous, right? Well, with deflation prices fall, incomes fall, tax revenues fall, debt remains the same. So if you like to live beyond your means, then you want continual inflation. You don’t ever want to experience deflation because that would decrease your wealth in a real way. As long as you have continued inflation, you can always sell higher than you bought, which, if you borrowed money to buy in the first place, is very, very important. That means you never have to give up real wealth even if you are living on other people’s money.
With fiat money you can create a virtual inflation machine. You can artificially create inflation even when the market would normally deflate simply by issuing more money. More wealth + even more money = inflation. Leveraged businesses and traders are benefited by perpetual inflation just as much as governments, so they support the practice. Businesses never get punished for overproducing and governments never get punished for overspending. Perfect isn’t it? Now government can spend without any restraint and the bill never really comes due because when it does, there is always plenty of (albeit fake) money to pay.
This is the real reason we have fiat money and the real reason the Federal Reserve exists. Don’t let them kid you about the mission to maintain full employment. That’s just so the electorate will keep voting in incumbents. But given the choice, maintaining positive inflation always takes precedence over full employment.
So now we are in a market that really wants to deflate. It hasn’t deflated in over a hundred years. We overproduced homes and instead of treating them like wealth (something useful, i.e. a place to live) we treated them as a source of money. Now the market pressures are so great that notwithstanding the injection of over $3 trillion in cash over the last three years, home prices are still declining. Wages are following. Well, private sector wages are falling. Public sector wages continue to rise. I’m not sure what is keeping inflation positive. Are rising food and oil prices enough to counteract the deflation of wages and real estate? Is public sector wage inflation enough to negate the private sector wage deflation? What happens if oil & food prices begin to decline? Is that the reason the White House doesn’t want to increase oil production? For fear falling oil prices will cause everything to deflate? The disconnect between wealth and money serves as a giant smoke screen that hides the true market behavior, but eventually the truth comes out.
What we are witnessing here is the fleecing of the American populace by the political and business elites. This is why the gap between the rich and the poor has become so great. The rich have cheated the system with the help of the government. Don’t let Obama fool you into thinking the rich will pay. They may write checks but they don’t ever pay. The government only consumes wealth and produces only money. The consumption, like it or not, comes at the expense of the producers. Who are the producers? You and I.
Many speculate that our currency will become worthless. Generally they argue that hyperinflation a la Weimar Republic will destroy faith in it. While I agree that when the faith in the currency is destroyed, the currency will be worthless. I disagree that hyperinflation will be the real culprit. The Fed is ready to combat hyperinflation. When it starts, they will do everything they can to fight it. Since they can destroy money at will, they will probably succeed. No, hyperinflation will not be the real culprit if our currency becomes worthless.
What will destroy our currency is the market itself. The Fed has pitted its will against the market. The market wants to deflate and the Fed wants to inflate. Eventually the market will win. When it does, the eulogy for the dollar has already been written… by John the Revelator! (See Revelation 18:11-15)