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THE
ROCKET SCHOOL OF ECONOMICS


Unintended Consequences! Part 2
by Professor von Braun

July 7th, 2005

Inflate or die!

So says Richard Russell (www.dowtheoryletter.com) in a recent commentary when describing his view of the financial situation the US currently finds itself in. Stop inflating (read creating more debt) and the fiat currency game ends, as in goodbye to the US banking system as we know it.

Obviously 'inflate or die' is not an option that is sustainable and one (inflation) must lead to the other (cessation) at some point in time. Another issue that Mr. Russell correctly keeps reminding people about is income, as in where is your income going to come from? The traditional sources of income, such as interest from T-bills or dividends from utility companies, are now at very low rates. As a result of the 'policy of inflate' at all costs these instruments are now well and truly overbought and income from interest or dividends is minimal.

Meanwhile the Fed continues to increase the supply of 'money' - inflating asset prices, by assisting in the creation of more debt, debt that can never be repaid, only replaced. Now there is nothing other than the creation of more debt backing the currency up since, having gone off the gold standard long ago, the currency is not redeemable. Central banks that hold US T-bills as 'reserves' have a substantial problem, since they must continue to accumulate more and more 'instruments' for these to appear to maintain their value.

Within the US, house prices have to continue to rise so as to allow more debt to be created, and to allow the consumer to consume even more, utilizing the 'surplus' cash contained within their home equity, available through a new even lower interest rate mortgage. Mortgages themselves are now being extended from 15 years to 30 year, 40 year and in some cases 60 year. All these machinations are designed to keep the game of asset inflation going. The internal economies of China, Japan and to a lesser degree India are very dependant on the US economy ticking over, to the degree that China and Japan are lending the money (call that holding notes that can't be repaid) to the US consumer so that they can continue to buy their respective products and keep their respective economies also ticking over. Quite a neat trick actually since all three, China, Japan and the US, are playing the same game, the fiat currency game, which is dependant upon taxes to generate income which is used to pay interest on debt that can never be repaid.

It's a very large con game, with no thought as to the outcome by the main participants, central banks and certainly no back up plan. How can there be when the original fraud, fiat currency, has been adopted by all of them? Nowhere is there a Central bank that is not involved in this massive fraud, nor is there any outcry from the citizens of these countries.

Now how will this all end? A quote from Mark Twain may assist: "A thing long expected takes the form of the unexpected when at last it comes." What is the 'thing' long expected? Obviously it's the collapse of the US dollar, a collapse expected to bring about a severe depression, not dissimilar to the 1930's. Many is the pundit who has been calling for this to happen but as yet the game goes on.

For this to happen the US dollar would have to become 'unloved' and as long as China and Japan continue to support it via their willingness (in reality they have no choice) to buy more and more of these instruments, that is not a likely occurrence just yet. Should the US consumer begin to become maxed out when it comes to buying gadgets and widgets and goodness knows what else that has a 'for sale' tag on it, then that could signal a slowdown, but as long as China and Japan continue to lend money to the US consumer that won't happen either. The mechanism for this is the mortgage market and as long as house prices increase, spending will go on. When the Economist has a cover devoted to the potential housing boom 'crash' one knows that the boom is not over. When has a widely circulated magazine ever called a market top correctly?

Will Japan and China allow their own internal economies to collapse when they have the means to supply purchasing power to their significant trading partner? Who would replace the US as a buyer for their products and how would they recycle the US dollar-denominated 'assets' they currently hold?

They are all caught in the same dilemma, being that of the fiat currency game and neither can walk away without destroying their own fiat game, which will destroy itself anyway, since it is unsustainable. Europe is in a not dissimilar situation, although their problems are more regional and perhaps easier to resolve, they too have been playing the same game.

What could be the unexpected? Obviously the real estate market is key but at present there is no end insight, some warning signs perhaps but no shortage of mortgages, which means no shortage of greater fools to buy them. Meanwhile Greenspan continues to take potshots at Freddie Mac and Fannie Mae, the issuer of over half of US home mortgages, but is this credible? What's the chairman really on about?

There is a great line from the original Star Wars movie which is: "Who is more the fool, the fool or the fool who follows the fool?" Which central bank is more the fool, or do we have a trio of fools? Without the US market, China and Japan have a problem, without China and Japan holding US securities, the US has a problem. At what point are these problems recognized by the participants and what do they do about it? Is there a solution?

Once again what could be the unexpected, as in what has not appeared on a magazine cover? A trade war bought on by anti-China policies originating in the US? Devaluation, maybe, but in the 1930's it was several years after the peak in stocks that Roosevelt devalued the dollar by increasing the 'official' gold price. Deflation is mentioned but that would require a shortage of liquidity. Hyperinflation is not likely either as long as Japan and China have a vested interest in the US dollar. Perhaps rising commodity prices may be the straw that breaks the already weakened camel's back.

The idea of the bond vigilantes expressing their annoyance with US financial policy by selling bonds now must take a back seat to Japan and China, by virtue of the significant holdings of T-bills by both countries, along with an ever increasing record trade deficit, which has to result in both countries holding more and more T-bills. So who is in charge of the bond market?

While there is no simple answer to the dilemma now appearing if you remain a participant and continue to hold paper assets, including real estate with a mortgage attached, you stand a good chance of suffering financial loss as a result of out of control banking policies administered by central banks that have a vested interest in their own survival and little else. You, the participant, have on the most part, been an unwitting party to this game of asset inflation, having had dangled before you the carrot of illisionary wealth represented by the cyclically increasing dollar value of hard and soft assets which, in fact, is merely the mirror image of a dollar devalued by the Fed's hyper-active printing press. For example, what the Fed gives at the mortgage banker, it takes back many times over through the convolutions of a central banking system based on a congressionally mandated monopoly right to issue fiat currency, an elitist racket which is further sustained through the boon of legal tender laws.

Now the benchmark for this debt/credit game, the US T-bill, and consequently US monetary policy, is controlled by other countries elitist central banking systems, an unheard of situation and one that would horrify the writers of the US constitution.

A quote from Alan Greenspan in Capitalism: The Unknown Ideal:

"In the absence of a gold standard, there is no way to protect savings from confiscation through inflation. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding that statists' antagonism toward the gold standard.

Many decades later in an exchange between Rep. Ron Paul and Greenspan the following was conveyed:

AG: The problem that we have is not that money is unimportant, but how we define it.

R.RP: So it's hard to manage something you can't define?

AG: It is not possible to manage something you can't define.

Humphrey-Hawkins testimony to Congress, Jan 2000.

Now one would have to ask who is the 'we' that is having the problem of how to define what money is?

Obviously, as evidenced by his writings in Capitalism: The Unknown Ideal., Mr. Greenspan already was aware of the most likely outcome, what was the undefined addition to the thought process that, by January 2000 became the 'we'.

Perhaps the best financial strategy may well be to take Mr. Greenspan's warning about the absence of a gold standard seriously and get one's self on an individual or private gold standard and away from bogus paper assets denominated in something that can't be defined.


The Prof can be contacted by email at profvonb2@aol.com

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

Return to the The Gilded Opinion Index Page

The Rocket School of Economics -- The Lecture Series Index

  • 22 May 2009 -- An Often Overlooked Issue!
  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
  • 01 Jul 2001 -- ...Said the Fly to the Spider.
  • 14 Jun 2001 -- Upward and Downward!
  • 28 May 2001 -- Volatility Time, Again!
  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
  • 29 Oct 2000 -- Oh The Tangled Web We Weave ...When We Set Out to Deceive
  • 24 Oct 2000 -- A Mystery!
  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
  • 25 Sep 2000 -- Buy Gold Now!!
  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs


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