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ASIAN FLU: World-Wide Deflation or Inflation?

by Tom Rose

 

(Editor's Note: Tom Rose uniquely combines a strong Christian ethic with Austrian School economic principles to produce one of the most forthright and penetrating analyses of the Asian contagion we have seen to date. Many mainstream commentators see the results of the Asian disaster as deflationary for the American economy. Mr. Rose sees it differently. Recently retired from the faculty of Grove City College -- its legendary economics department well known in conservative/libertarian circles, Mr. Rose is warmly welcomed to these pages.)


For well over a decade people all over the world watched the so-called "Asian Tiger" nations1 with amazement. The economies of these nations were expanding dynamically and were flooding the Western nations with an unending stream of low-price goods. Observers asked, "What is the secret of their success?"

Then, suddenly, something happened. One by one some of the "Asian Tigers" seemed to implode. Their currencies dropped precipiticiously in the foreign exchange market. Positive economic growth slipped into recession and then slumped into deep depression. The resulting "Asian flu" now threatens to infect the Western nations which had originally served as economic patterns for less-developed nations to follow.

In order to understand what stimulated such volatile economic growth and subsequent decline in the "Asian Tiger" nations, it will be helpful to remember some lessons from monetary history.

1913 & 1923

In the fateful year of 1913, these United States of America unwisely followed in the steps of England, Germany and other European nations by founding a central bank, the Federal Reserve System. This put potentially manipulative monetary power in the hands of an elite cabal of bankers and financiers at the national level. It was a key step towards the eventual development of national socialism in America. The economic system that developed from this fateful step is more accurately defined as fascism; though few leaders in America are astute enough to even recognize the existence of fascism in America or openly admit this truth.

The irresistible benefits of monetary collusion between government political leaders and private bankers and financiers greased the skids to draw these United States of America into World War I and its ensuing monetary inflation and growth of statism. By 1923 the Federal Reserve Board had discovered a new and powerful "tool" for implementing monetary policy, that is, with which to inflate and deflate the economy at will: as a result of buying and selling government bonds and notes in the open market, Federal Reserve officials discovered that they could stimulate (inflate) or dampen (deflate) short-term economic activity. This new tool to pump money into, or to withdraw money from, the economy is called "open market operations. It is a very powerful, but an insidiously quiet tool. And like little boys who joyously discover one day that they can make frogs jump by putting a finger on the frog's tail, and subsequently can't resist using their newly-found manipulative power, so too Federal Reserve officials found it impossible to resist using such heady power. The only difference is that grown men in positions of national influence manipulate people and have much different motivations and goals than little boys who only play with frogs. So, from 1923 to the present day the American people (and the citizens of every other nation that has a central bank) have been callously and insidiously manipulated and controlled by the central bankers and their cohorts whom lurk behind the scenes.2

1922--The Genoa Conference

In 1922 the world operated on the Gold Standard. During this year representatives of the major industrial nations met in Genoa, Italy, and compacted to institute the so-called Gold Exchange Standard. According to the agreement, the money supply in each country would no longer have to be based solely on the actual amount of gold held on reserve by each country's central bank. Instead, each central bank would be allowed to count its foreign currency holdings "as if" they were real gold, as long as the currencies were officially redeemable in gold. By this time the U.S. Dollar was widely held by other nations, so, in practice, the dollar holdings of nations were counted "good as gold." This, of course, allowed a double counting of paper dollars because the dollars held by foreign central banks were already supporting a certain amount of paper money in these United States. Thus, the result of the Genoa Conference was to open the door widely for world-wide monetary inflation.3

The 1924-1929 Boom and Bust

After World War I Britain was faced with a persistent outflow of gold to the United States of America because it had returned to the gold exchange standard by pegging the Pound at a price that was higher than the free market allowed. Thus, people in England were exchanging British Pounds for U.S. Dollars to purchase U.S. bonds, which paid higher interest than they could earn at home.

To solve this gold outflow problem, in 1924 Montague Norman, president of the Bank of England invited Benjamin Strong to England for a conference. Strong was the governor of the Federal Reserve Bank of NewYork, and unofficially he served as the spokesman for the entire Federal Reserve System. Norman asked Strong for help in stopping the outflow of gold from England to America. Strong agreed to lower interest rates in America and quipped, "We'll give a coup de whiskey to the stock market!"

It is interesting to note the facile way in which two heads of central banks agreed to engage in what today is euphemistically called "international monetary cooperation," but what is really secret collusion to artificially rig interest rates for the benefit of hidden interests at the expense of unsuspecting citizens! Note also that this collusive agreement was arrived at with a clear understanding that the subsequent result would be a booming stock market! In short, a loose monetary policy to be followed by the U.S. Federal Reserve would lower interest rates by knowingly increasing the money supply, which was duly expected to force stock prices upwards.

The impact of injecting newly created money into the American economy was to create a spill-over effect that motivated people to speculate by investing much of the inflationary money in the stock market. At this point it is well to stress this fact: While the monetary authorities can create new money at will, they cannot control where the new money will be spent. In short, the 1924-1929 financial boom that occurred in America resulted from a government-central-bank induced inflation which culminated in the financial panic of 1929 and the ensuing depression. This, in turn, brought to power the socialist/fascist-oriented Roosevelt administration which changed the character of many of American citizens, making them to be dependent on the whims and demagoguery of statist political leaders. Giant steps towards fascism resulted, which again got the United States of America embroiled in a European war.

The 1985-1987 Boom and Stock Market Crash

In the fall of 1985 the "Group of Five" (U.S.A., Britain, France, W. Germany, and Japan) announced that they would engage in international "monetary cooperation" to lower interest rates in America.4 As in the 1920s, this financial collusion was once again accomplished through monetary inflation that caused a stock market boom and resulted in the shocking stock market crash of 1987. This time the Federal reserve quickly came to the "rescue" by even further stimulating the financial markets with additional injections of newly created money. The FRB sent word to banks to lend freely to brokers without fear, for the FRB would supply them with needed reserves. This was sufficient to turn the threat of further declines in the Dow Jones Industrial Average, which had declined 528 points in one day. And artificial support of the stock market of this type through monetary stimulation has continued into 1998, rather than allowing the market to seek its own level without outside influence. And all along Federal Reserve spokesman have mouthed the lie that they have been following a conservative monetary policy that is non-inflationary.

The same inflationary scenario has been followed again and again by the Federal Reserve in the late 1980s and the early 1990s to rescue large international banks which have been regarded as too big to allow for them to fail. This practice has saved big, but recklessly operated, banks from going under. The precedence set has encouraged bankers to continue making risky loans at high interest rates because they know that any threat of failure will induce the Federal Reserve to come to their rescue. Thus, help extended has worked to acerbate the problem rather than cure it, as would have quickly happened if free market forces were allowed to work. Mothers quickly learn that the best way for toddlers to learn how to walk is to let them fall and get up on their own; running to their rescue only prolongs the process. The same truth holds for banking. A strong banking system evolves when banks are forced to pay their own penalties rather than being encouraged to shift them onto others.

In 1988 Brazil defaulted in payments on high-interest loans and the Federal Reserve and other central banks and the International Monetary Fund (IMF) came running to the rescue. The objective was to save the large international banks that had unwisely extended loans at high interest rates to shaky borrowers for projects that were unsound economically. In 1992 Mexico defaulted for the same reason, and again the big international banks were rescued by the same process, that is, by throwing money -- newly created by the international banking community -- which was backed up by central banks and the IMF; in short, by the taxpayers of the countries who ultimately stand behind the government-created "protection" agencies. In each and every instance, it is the ordinary taxable citizen who bears the brunt of bailing out large international banks that make bad loans because they have been led to believe the lie that allowing large financial institutions to "go under" will "hurt the economy." And each time this process occurs, the bad loans are sopped up with newly created money, so the inflationary process continues on and on.

The "Asian Tiger" Boom and Bust

This brings us to the repeat scenario we are now experiencing in the "Asian Tiger" scenario. In short, what has developed over the last 15 or so years is this: Large international banks located all over the world have extended risky loans to less developed countries. Taken as a whole, these loans have provided new funds that flow into the international money market. Money can be created by private banks extending. Or money can be created through government deficit spending which is monetized by central banks in collusion with their respective governments. It can also be created and lent through the IMF. And the process can be aided and abetted with the help of government-created loan-guarantee agencies like the Export-Import Bank which uses taxpayers' money to allow the sale of goods and services to foreigners with poor credit. All of this occurs at the ultimate expense of taxpayers who are persuaded to "stand in the gap" just in case things go wrong, as they will ultimately when non-free market practices are engaged in.

Take, for instance, the massive government deficits that the U.S. Congress has engaged in for years and years. The Congress authorizes the United States government to spend more than citizens pay in taxes. Passage of the bill (HR #-----) authorizes the U.S. Treasury to print enough bonds or treasury bills (IOUs) to cover the deficit. American citizens buy up some of these IOUs (non-inflationary), the Federal Reserve buys some ( inflationary, because it creates the dollars used to make the purchase), and, for example, Japanese citizens buy some (non-inflationary), and, finally, the Bank of Japan buys some (inflationary, because the Bank of Japan creates new yen with which to purchase the U.S. securities). What has also happened in some instances is that Japanese citizens borrow yen from their domestic banks (inflationary) at one-percent interest or so, and then purchase U.S. bonds or notes that pay 4- or 5-percent interest, thus gaining some extra interest. This process of borrowing local currency at low interest to purchase higher-paying foreign securities is what has induced Japanese citizens and other foreigners to purchase billions and billions of dollars of U.S. bonds and notes. Thus, American inflation has been exported overseas, and a vast overhang of dollar-denominated bonds and notes has been created. This vast overhang threatens to be repatriated when, not if, the value of the dollar slumps in the international market. When it comes roosting home, the value of the dollar will plummet, and the monetary inflation which has already been created over the years of deficit spending will be exposed through rapidly rising price levels in these United States of America. Up to now the inherent rise in price levels has been hidden by the inflow of vast amounts of low-priced imports from Red China, the "Asian Tiger" nations, and Mexico.

The manufacturing capacity to export the vast flood of cheap imports from these countries has been financed largely through the above-mentioned process of international bank lending, aided and abetted by the World Bank and the government-created loan-guarantee agencies like the Export-Import Bank. Whole factories have been shut down in America, then packed up and shipped to these foreign countries at the expense of laid-off American workers who are then forced to seek lower-paying jobs. Foreign competition is natural and healthy for all concerned if the competition stems from the unmanipulated market place. But what is occurring today is a vast flow of funds and transfer of capital that have been subsidized by collusion between government political leaders, large international banks and financiers, central banks, and large international corporations through such international agencies as the World Trade Organization (WTO) and The North American "Free Trade(??) Association (NAFTA). These organizations, of course, are not free trade oriented. They are deadly to free trade ideals. They are part of, and aid and abet, the fascistic approach of aligning big government with big business and big unions in a regimented society. This perversion of capitalism was popularized by Mussolini in Italy in the 1920s; it enamored Franklin D. Roosevelt in the 1930s; and it has enthralled the Clinton administration in the 1990s.

The whole process we are describing has led to a vast over-expansion of the productive capacity in many less-developed countries (LCDs) -- not relative to their labor pools, but relative to demand in the markets they serve -- especially in the "Asian Tiger" nations. Total world output (supply) has surged way ahead of the quantity demanded at current prices. LDCs are engaging in what anti-capitalists dub as "cut-throat competition." They are drastically cutting prices in an effort to keep their plants running, and their central banks and government leaders are in various stages of competitively devaluing their currencies to make their exports attractive in the international markets. As a result, of course, many international banks are discovering that the speculative loans they had extended (with eager assistance of their civil rulers and their central banks) are going sour. Plummeting prices are turning once-lucrative profits into tremendous losses. This kind of widespread economic calamity is not characteristic of uncontrolled free-market, competitive capitalism, but of gross government intervention in conjunction with the open-ended money creation power of central banks! And the very international banks who used the political power of civil governments and the money-creation power of central banks (and the IMF, a socialist/fascist institution) are now looking to the same quarters to be bailed out at taxpayers' expense. Recently, for instance, the U.S. Congress passed a "bail out" bill which gave the IMF $17.9 billion of taxpayers' money. Many Japanese banks are facing bankruptcy because of bad loans extended to LDCs; and German banks that made similar loans to Mafia-controlled businesses in Russia are facing huge losses. Is anyone so naive as to believe that the German bankers did not know whom they were doing business with? They well knew! They were just overwhelmed by the desire to make huge profits. The same goes for the international corporations and banks and government-lending institutions that helped finance the volatile economic growth of Red China.

Re-read the explanation of the collusive arrangements, which we explained earlier, that exist between big international banks, central banks, civil governments, and large international corporations and you will clearly see the pattern of growing fascism that has been developing all over the world. The so-called "free trade" organizations (NAFTA, WTO, etc.) are not truly free trade at all; they are statist evidences of fascism in practice. The public has once again been sold a bill of goods.

Let me summarize: The economies of the "Asian Tiger" nations (and other LDCs) have been artificially "boomed" through the combined collusion of international bankers, central bank controllers, large multi-national corporations, and government leaders. What started out long ago as secret monetary collusion between domestic bankers and the governing officials of their own country has gradually evolved into a massive scheme of "international monetary cooperation," which is really nothing less than international monetary collusion. In this scheme the international bankers, the central bankers, the behind-the-scenes high-placed financiers and industrialists, and the political rulers of the countries involved all collude with each other against the unsuspecting, hard-working citizens of their own nations who are always the ones who are ultimately called upon to pay the costs of such irresponsible actions when things go awry.

What Can We Expect?

Right now the monetary, political, and financial and industrial leaders of the Western and Eastern nations are continuing their "cooperative" efforts to stave off the spread of the "Asian flu" to other nations. But their efforts are designed to renew the very monetary inflation that occurred in these United States of America right after the 1987 stock market crash. In that instance, the FRB quickly issued word to bankers that they should readily lend to brokers in order to stop the down sliding of stock prices. The FRB promised that it would extend any amount of needed credit to the banks to get the job done. In short, the credit bubble that was created by the "cooperative" attempt to hold interest rates down in these USA was to be continued and intensified even more to save banking and financial interests from paying for their previous collusive folly.

Let us review some data published by the Federal Reserve itself as a means of putting the inflationary scenario in perspective: Beginning in January, 1985, Federal Reserve officials colluded with the Group of Five to bring interest rates down in these USA. In October, 1987, the stock market crashed (the DJIA sank by 528 points in one day), and the FRB rushed to the rescue, as already mentioned. And in 1992 the FRB embarked on yet another inflationary task to rescue U.S. banks from bad loans they had made in previous years. During this 8-year period (1985-1992) the narrow money supply was boomed by 65.9%, and the broad money supply was increased by 44.2%. That's an average of 8.2% annually for the narrow money supply and 5.5% for the broad money supply.5

During this period the official "spin" from the chairman of the Federal Reserve Board was that the FRB was following a conservative monetary policy. Nothing could be further from the truth! The way of "pulling the wool over the public's eyes" was to point to the Consumer Price Index (CPI) which purportedly rose only 30.6% during the same 8-year period, or only 3.8% per year.

The CPI has been used as a political tool to disguise what is really happening to prices the public really pays when they shop. On one hand, the CPI doesn't include increases in taxes, nor does it include some items that go up in price but which are not included in the CPI "basket of goods." Most homemakers are well aware that the prices they pay when doing the family shopping rise much more rapidly than the official CPI reports. Also, much of the domestic monetary inflation engineered by the FRB has spilled over into the stock market and into the international money markets (as previously explained), which, in turn, has generated additional monetary inflation in foreign countries.

Let us bring our monetary data up to date: From January, 1993, to July, 1998 (a 5-year period), the monetary base expanded by 33%, M2 (a broader view of money) expanded by 22%, M3 (a still broader vie of money) expanded by 34%, and bank credit shot up by 41%.6 These rates of money and credit increase are highly inflationary. It is only a matter of time until they are reflected in the market place by rising prices and rising interest rates. The Federal Reserve will then, once again, attempt to bring interest rates down by creating new money to pump into the economy. ( Just recently the Federal Reserve has acted to cut the "federal funds rate" twice within a couple of weeks.) And when this is done, the price of gold and gold stocks are likely to spike upwards.7

Gold: God's Provision to Preserve Man's Freedom

During the last decade the central banks of the world have engaged in a secret scheme to obscure the price-effect of sustained, world-wide monetary inflation. They have done so by periodically selling off their long-time holdings of gold reserves. The price of gold tends to be very sensitive to monetary inflation. Thus, it has served historically as a timely bellwether (or indicator) to warn knowledgeable observers that monetary authorities are abusing their ----?--- trust. If too much money is pumped into the economy by either 1) government deficit spending and the monetizing of that debt by central banks, or 2) excessive bank lending (money is actually created when banks extend loans to customers); the price of gold floats higher as prudent people seek to purchase gold as a haven of safety for their hard-earned savings. ( This is why inflationary-minded political rulers often choose to restrict the public's right to own gold.) But recently, whenever the price of gold has started to creep upwards, the central banks have been quietly selling gold from their reserve holdings to disguise the monetary inflation that has been taking place.

Readers should be aware of this official duplicity and act accordingly, that is, to accumulate gold and silver as a means of protecting their savings from being debauched by the official money manipulators. This is a prudent precautionary measure to take because it is very likely that the combined collusive efforts of the central banks and involved governments to stop the "Asian flu" from impacting Western economies will fail. If so, green cash will be king; but gold and silver bullion will even overrule "king cash" as a haven of safety.

A Multi-Faceted Evaluation

The picture we have been painting in this essay is one of long-continued monetary manipulation by official money managers. One maxim I have always taught my students in Economics, and especially in Money and Banking, goes like this: "Civil rulers can't be trusted because they lie! Civil rulers especially can't be trusted when it comes to money because they are the greatest debauchers of money throughout history!" Historically, there is not one nation in the world that has not robbed its citizens of their accumulated wealth by debauching the currency! Why would things be any different today?

Government leaders have long been in collusion with their central bank managers and high-placed financial and industrial moguls to manipulate the domestic economies of every nation in the world to achieve "national economic goals" (fascism). Now, this collusion in high places (Ephesians 6:12) has expanded to the world-wide economy, not for the benefit of the populace, but for the benefit of the high-placed colluders.8 Citizens are regarded as clay to be molded as the elite cabal deems fit. (This is the same claim that Frederic Bastiat made against the French socialists in 1849,9 and it has come to full fruition today.

An insensible populace has been conditioned spiritually, psychologically, and emotionally to accept a brutal form of national and international fascism in the place of free-market capitalism, which they have been taught to fear. Freedom-loving libertarians easily recognize what is going on and strongly oppose the duplicity and the hidden agenda involved. The few people who know and understand the principles of constitutional government, and the difference between rule by law versus rule by the fiat of man, also recognize the inherent tyranny that such deception involves. "Where is this condoned by the Constitution," they ask. The answer is that this kind of manipulative monetary power, and the resulting fascistic economic system that results, is nowhere authorized by the Constitution, but exactly the reverse!

This leaves the Christian community to evaluate what is going on, and has been progressing for years, in high places of government, finance, and industry. Bible-believing Christians are challenged to take the Bible in hand and search diligently (Acts 17:11), to discover where God gives authority for such awesome powers to be wielded by mere mortal men who are likely, because of their sinful hearts, to take unfair advantage of their fellow men. They will search in vain because the Bible teaches that mortal man is not to be trusted in positions of power (Genesis 6:5). As Thomas Jefferson pointed out, civil rulers must be bound by the chains of the Constitution. Man is mandated by God to live every aspect of his earthly life (family, business, civil government) according to the principles found in God's word, the Bible. Following God's plan will automatically produce, in spite of man's fallen nature, what we call the competitive free market coupled with a non-inflationary monetary and banking system. It is time that libertarians, constitutionalists, and Bible-believing Christians recognize the common ground they hold and work together to reverse the fascistic tyranny that is developing so rapidly, and to replace it with a truly competitive market system that accords with God's higher law, the Constitution, and the god-given nature of man. Only this will serve the needs of man without infringing on his individual freedom and self-responsibility before God.

_____________________________

1. The "Asian Tiger" nations are located along the eastern Pacific rim: Taiwan, Japan, Hong Kong, Indonesia, Thailand, Malaysia, and more recently, mainland China.

2 . It is up to a toss of a coin to determine who influences whom in modern central bank monetary manipulation. Some critics of central banking claim that high-placed private bankers and financiers influence civil rulers. Other critics claim the process works in reverse. In truth, the collusive influence works in both directions. Government and private manipulators collude with each other to achieve mutually acceptable goals (some want power, some want money, some want both money and power).

3. An awareness of this point is crucial to understanding what is happening on the world financial scene today .

4. The term "monetary cooperation" is an erudite euphemism for what is really monetary collusion of governments and central banks against their own citizens. It stems from the illusion that ordinary citizens are incompetent when it comes to watching out for their own interests and supposes that there exists in "higher society" a well-intentioned elite that will oversee matters for the benefit of the public. Nothing could be further from the truth! History is replete with instances where the welfare of the masses has been readily sacrificed for the benefit of the controlling few. (Jeremiah 17:90 )

5. Source: Federal Reserve Bank of St. Louis, International Economic Trends, July, 1998, p. 3,4, & 7.

6. Source: Federal Reserve Bank of St. Louis, Monetary Trends, September, 1998, p.16.

7. As I was writing this essay, I took time out to check the price of gold and some gold stocks. Sure enough, they have gone up.

8. Just two days ago I saw an unthinking young lady in a department store who was wearing a T-shirt emblazoned with the slogan "The New World Order." If she were aware that she is regarded by the controllers as nothing more than a pawn to be manipulated, she would burn it!

9. See: Frederic Bastiat, The Law.


by Tom Rose
December 30, 1998

 

Copyright © 1998 by Tom Rose. All Rights Reserved.

Reprinted by USAGOLD with permission of Mr. Rose. No further reproduction without permission.

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