Category Archives: Economics

Inflation, High Inflation, Hyperinflation, by Thorsten Polleit

Posted on October 10, 2022 | Leave a comment

A government will debase its fiat currency to its intrinsic value: zero. Whether that’s a product of inflation, high inflation, or hyperinflation is a function of how fast the government debases. From Thorsten Polleit at mises.org:

The word “inflation” is heard and read everywhere these days.

However, since different people sometimes have very different understandings of inflation, here is a definition:

Inflation is the sustained rise in the prices of goods across the board.

This definition conveys that inflation means that the increase in prices of goods is not just a one-off but permanently; and that not just some goods prices go up, but all.

How does inflation arise? The economists have two explanations ready. The first explanation is the “nonmonetary” explanation of inflation. According to this theory, sharply rising energy prices lead to inflation. This is referred to as cost-push inflation.

Or inflation is caused by excess demand: the demand for goods exceeds the supply, causing prices to rise.

The second explanation for inflation is monetary. “Inflation is always and everywhere a monetary phenomenon,” as US economist Milton Friedman put it.

And that’s right. Because in an economy without money, there is simply no inflation. So, you can see: Inflation has something to do with money.

It can be demonstrated theoretically that an increase in the money supply leads to an increase in goods prices—the prices of goods will be higher compared to a situation where the money supply has not been expanded.

There is quite some empirical evidence that increasing the amount of money over time is associated with rising goods prices—be it in the form of consumer goods prices and/or asset prices such as stocks and real estate.

With a view to current developments in the world, however, both explanations can be meaningfully connected.

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Posted in Banking, Business, Debt, Economics, Economy, Governments

Markets Are Expecting The Federal Reserve To Save Them – It’s Not Going To Happen, by Brandon Smith

Posted on October 9, 2022 | Leave a comment

It’s said that bull markets climb a wall of worry. Robert Prechter has observed that bear markets descend a slope of hope. Hopes for the Federal Reserve to save the current shaky market are liable to be misplaced. From Brandon Smith at alt-market.com:

This article was written by Brandon Smith and originally published at Birch Gold Group

I have said it many times in the past but I’ll say it here again: Stock markets are a trailing indicator of economic health, not a leading indicator. Rising stock prices are not a signal of future economic stability and when stocks fall it’s usually after years of declines in other sectors of the financial system. Collapsing stocks are not the “cause” of an economic crisis, they are just a delayed symptom of a crisis that was always there.

Anyone who started investing after the crash of 2008 probably has zero concept of how markets are supposed to behave and what they represent to the rest of the economy. They have never seen stocks move freely without central bank interference and they have only witnessed brief glimpses of true price discovery.

With each new leg down in markets one can now predict every couple of months or so with relative certainty that investor sentiment will turn to assumptions that the Federal Reserve is going to leap in with new stimulus measures. This is not supposed to be normal, but they can’t really help it, they were trained over the past 14 years to expect QE like clockwork whenever markets took a dip of 10% or more. The problem is that conditions have changed dramatically in terms of credit conditions and price environment and it was all those trillions of QE dollars that ultimately created this mess.

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Imploding credit — the consequences, by Alasdair Macleod

Posted on October 8, 2022 | Leave a comment

Keynesian economics says you can’t have inflation and recession (or depression) simultaneously. The real world says different. Alasdair Macleod explains. From Macleod at goldmoney.com:

There is a growing realisation that the world faces a combination of persistent inflation of prices and a recession at the same time. The factors driving both are visibly intensifying. Those of us versed in the cycle of bank credit are aware that it is the contraction of bank balance sheets which is driving the recession, while it is continuing currency debasement driving inflation.

Neo-Keynesians in the establishment think the current position is contradictory, that current rates of price inflation will decline back to their 2% target in a recession, and interest rates can then be reduced to stimulate economic activity. 

The key to understanding why prices can continue to rise in a recession requires a fuller understanding of the role of credit in an economy and what it represents. Its role is far greater than commonly thought, with considerably more than several quadrillions of dollar equivalents outstanding. All economic activity and wealth are credit. This article sketches out the various types of credit, and how credit equates to our collective wealth.

It also requires us to differentiate between a currency which is anchored to gold specie and one without a specie anchor. The former imposes a discipline on the state of non-intervention, while the latter encourages intervention. It is that intervention which leads to fiat currencies and all credit based upon it finally collapsing.

The importance of credit

That the monetary authorities do not understand credit might seem unbelievable. But evidenced by their actions, it is the only explanation for their mistakes. Clearly, as well as credit they don’t understand the importance of money, having banished gold from its role of anchoring the purchasing power of credit. The vested interest of replacing gold with currency, to obtain for governments the benefit of unfettered debasement, is ignored or forgotten by today’s state-educated economists and commentators. Disregarding what drove the dollar off the Bretton Woods standard in the first place, the establishment in the broadest sense can no longer distinguish between credit and legal money.

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Posted in Banking, Currencies, Debt, Economics, Economy, Financial markets, Governments, Investing, Money

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Michael Hudson: A Roadmap to Escape the West’s Stranglehold

Posted on October 8, 2022 | Leave a comment

Michael Hudson was one of the first to suggest that the U.S. proxy war against Russia was also a war on Europe, particularly Germany. From Hudson at unz.com:

It is impossible to track the geoeconomic turbulence inherent to the “birth pangs” of the multipolar world without the insights of Professor Michael Hudson at the University of Missouri, and author of the already seminal The Destiny of Civilization.

In his latest essay, Professor Hudson digs deeper into Germany’s suicidal economic/financial policies; their effect on the already falling euro – and hints at some possibilities for fast integrating Eurasia and the Global South as a whole to try to break the Hegemon’s stranglehold.

That led to a series of email exchanges, especially about the future role of the yuan, where Hudson remarked:

“The Chinese whom I’ve talked to for years and years did not expect the dollar to weaken. They’re not crying about its rise, but they are concerned about flight capital from China as I think after the Party Congress [starting on October 16] there will be a crackdown on the Shanghai free-market advocacy. Pressure for the coming changes has been long building up. The spirit of reform to rein in ‘free markets’ was spreading among students over a decade ago, and they have been rising in the Party hierarchy.”

On the key issue of Russia accepting payment for energy in rubles, Hudson touched upon a point rarely examined outside of Russia: “They don’t really want to be paid just in rubles. That’s the one thing Russia doesn’t need, because it can just print them. It only needs rubles to balance its international payments to stabilize the exchange rate – not to push it up.”

Which brings us to settlements in yuan: “Taking payment in yuan is like taking payment in gold – an international asset that every country desires as a non-fiat currency that has a value if one sells it (unlike the dollar now, which may simply be confiscated, or ultimately left abandoned). What Russia really needs are critical industrial inputs like computer chips. It could ask China to import these with the yuan Russia provides.”

Keynes is back

Following our email exchanges, Professor Hudson gracefully agreed to answer in detail a few questions about the extremely complex geoeconomic processes in play across Eurasia. Here we go.

The Cradle: The BRICS are studying the adoption of a common currency – including all of them and, we expect, the expanded BRICS+ as well. How could that be practically implemented? Hard to see the Brazilian Central Bank harmonizing with the Russians and the People’s Bank of China. Would that involve only investment – via the BRICS development bank? Would that be based on commodities + gold? How does the yuan fit in? Is the BRICS approach based on the current Eurasia Economic Union (EAEU) discussions with the Chinese, led by Sergey Glazyev? Did the Samarkand summit advance, practically, the interconnection of BRICS and the SCO?

Hudson: “Any idea of a common currency has to start with a currency-swap arrangement among existing member countries. Most trade will be in their own currencies. But to settle the inevitable imbalances (balance-of-payments surpluses and deficits), an artificial currency will be created by a new Central Bank.

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Posted in Currencies, Debt, Economics, Economy, Eurasian Axis, Financial markets, Geopolitics, Governments, Military, War

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OPEC’s Counterattack…, by Kuppy

Posted on October 5, 2022 | Leave a comment

Come hell or high water, OPEC is determined to maintain their oil revenues. From Kuppy at adventuresincapitalism.com:

The Federal Reserve has been attacking inflation. The problem is that after printing trillions of dollars, they’re ill-equipped to succeed at their task. Partly, this is because all that cash has to go somewhere and partly this is because their mandate does not extend into ensuring that global energy production expands. While Owners’ Equivalent Rent and wages have remained elevated, those are often seen as the “good” sort of inflation—or at least the benign sort. Meanwhile, all other forms of inflation tend to be characterized as “bad” and frequently the “bad” inflation is caused by elevated energy prices, which then increase the costs of producing and transporting everything else. Therefore, despite the Fed ignoring the inflation they caused for well over a year, when oil cleared $100 a barrel, the Fed finally felt that they had no choice but to do something.

The problem is that the only ways to reduce the price of oil are to produce more of it or consume less of it. It’s hard to produce more when the President and many of his powerful oligarch buddies are aggressively intervening to ensure that it’s difficult to expand or finance production. Meanwhile, no one wants to invest when there are constant threats of excess profits taxes, carbon taxes, expropriation and price caps. Since the obvious solution has been made so impossible, the Fed has been forced to embark on a plan to reduce global energy consumption.

How do you reduce oil consumption?? Well, it seems that their plan is to create a global depression. So, after a decade of paying lip-service to “inclusive economics” and “closing the wealth gap,” the Fed has been forced to pivot and destroy the finances of the world’s poor, in the hopes that they’ll consume less oil. For the past half-year, this plan has unfolded with the usual crescendo of mini-temblors as global growth screeches to a halt and over-leveraged institutions find themselves on the wrong side of asset depreciation. The Fed is now well on its way towards creating an economic crisis that will reduce global energy consumption—consequences be damned.

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Prepare for capital controls – the third horseman of the Unholy Trinity’s apocalypse, by Nick Hubble

Posted on October 4, 2022 | Leave a comment

Government interference in the economy produces what a systems analyst would call an unstable state. From Nick Hubble at fortuneandfreedom.com:

capital-currency-interest

According to an economic theory called the Unholy Trinity, governments can only ever have two of the following three things: pegged exchange rates, independent monetary policy and free capital flows.

The reason why this is so is quite complicated. But the point is that they must choose two of the three, making the third a pressure valve for the problems created by their attempts to control the other two.

Of course, governments occasionally try to have all three. But it always ends in humiliation. It’s only a question of when.

In this context, humiliation may mean the breaking of the (managed) currency peg. Think of what happened to sterling on Black Wednesday, 16 September 1992, when the currency was forced out of the Exchange Rate Mechanism (ERM) and subsequently plunged.

Alternatively, humiliation may mean the loss of control of monetary policy, and rampant inflation.  There are plenty of contemporary examples.

Finally, humiliation may involve massive capital flight from the country in question, which results in the imposition of capital controls. Apartheid-era South Africa provides a good example.

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A Banking Crisis Looms, by Tuomas Malinen

Posted on October 4, 2022 | Leave a comment

The banks are being hit by a one-two punch of declining loan quality and higher interest rates. From Tuomas Malinen at The Epoch Times via zerohedge.com:

My columns have turned rather apocalyptic of late, but for a valid reason. Just this week, we got confirmation that our financial system is, again, on the brink of collapse, when the Bank of England (BOE) was forced to enact, de facto, a bailout of the pension funds of the United Kingdom.

On Sept. 28, around noon, the Bank of England stepped (back) into the gilt markets and started buying government bonds with longer maturities to stop the collapse in their value, which could have caused the financial system to become unhinged. Pension funds were faced with major margin calls, which threatened to cause a rapidly cascading run on their liabilities, as trust in their liquidity and solvency would have become questioned by a widening circle of investors and customers.

Effectively, the BOE stepped in to limit the vicious circle of margin calls faced by pension funds because of the crashing values of the gilts.

Without the BOE intervention, mass insolvencies of pension funds, with about $3 trillion worth of assets—and thus most likely other financial institutions—could have commenced on that afternoon. It’s obvious that if one of the major financial hubs of the world, the City of London, would face a financial panic, it would spread to the rest of the world in an instant.

It looks as though the global financial system was pulled from the brink of collapse, once again, by central bankers. However, this was only a temporary fix.

It’s now clear that an outright financial collapse threatens all Western economies, because if pension funds, often considered very dull investors because of their risk-averse investing profile, face a threat to their insolvency, it can happen to any other financial institution. I consider that the banking sector will be the next in line.

Banking is a business of trust. If the trust in a bank or in the unlimited support of authorities for the bank, disappears, a bank run commences.

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Kwarteng – a job half done, by Alasdair Macleod

Posted on October 1, 2022 | Leave a comment

Kwasi Kwarteng is Britain’s new Chancellor of the Exchequer. He has stepped out of the Keynesian mold, much to the dismay of the Keynesian dominated establishment and media. From Alasdair Macleod at goldmoney.com:

Following the new Kwarteng/Truss economic policies revealed in last week’s mini budget, the widespread condemnation is a reflex Keynesian response from a world which has become hostage to erroneous economic and monetary groupthink in its major institutions.

Kwarteng has jogged the global statist establishment out of its complacent drift into totalitarianism. His is a wake-up call to markets everywhere, a catalyst for the unwinding of accumulated market distortions. Mounting criticism from all quarters is shooting the messenger, but the message has been delivered.

In one important respect, the criticism is valid. Kwarteng must address the budget deficit urgently by taking steps to reduce the size of the state as a proportion of the total economy. Only then, can inflation be conquered, and the pound stabilise. In another respect, the new policy is sensible: by plotting its own free market/Hayekian course, Britain can emerge out of the crisis sooner than other nations stuck in the current democratic-socialist paradigm.

If we assume that Kwarteng does address the size of the state and eliminate budget deficits as early as practically possible, he will have a practical plan for a post-crisis Britain. Economic recovery can than happen sooner rather than later, a major consideration given that the next general election is in a little over two years’ time.

It is too late to avoid the gathering global crisis, the financial consequences of which are bound to devolve in large measure on London’s financial centre. Indeed, Kwarteng’s wake-up call may be the trigger for a financial avalanche. But what he is unlikely to realise is that the gathering crisis is so severe that even the continued existence of fiat currencies will be threatened, with the euro and sterling being particularly vulnerable.

In this article, I also comment on the Bank of England’s failure as an institution, whose future role in monetary affairs should be strictly curtailed. And I advocate the abandonment of all trade tariffs, with the possible exception of agriculture for political reasons. These are fundamental reforms which must accompany free market policies.

We must proceed with our commentary ignoring the existential threat to currencies if it is to be relevant to the government’s economic policies and their global impact.

The Keynesians don’t like it…

The timing of Kwarteng’s mini budget was calamitous, in that it happened while currency chaos was already roiling markets, not just for sterling, but the euro, yen, yuan, and a host of others which are all suffering from a mounting flight into the dollar. And it wasn’t just currencies. The increasing realisation that interest rates globally will continue to rise has driven a flight out of anything deemed riskier than short-term US Government debt.

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The Cockeyed Crusade…, by Patrick Foy

Posted on September 30, 2022 | Leave a comment

The projection—a psychological term for imputing your own motivations and psychoses to someone else—of Europe and the U.S. towards Russia is off the charts. From Patrick Foy at lewrockwell.com:

By what deranged thinking did meddling in a civil war over territories that have been Russian for more than 300 years merit bringing the world economy to its knees and putting the living standards of publics throughout the West in greater peril than at any time since the 1930s?—David Stockman

I confess to being at wits’ end over the monstrous Ukraine affair and its ever-expanding dangerous ramifications. The war was concocted and contrived in Washington. This is Biden’s, Blinken’s and Nuland’s war—a cockeyed crusade to destabilize Russia.

German Chancellor Olaf Scholz was quoted in FT’s Weekend Edition of September 17th as stating, “We have known for a long time [my emphasis] that Russia is no longer a reliable energy supplier. That’s why it’s important to do everything we can now to safeguard Germany’s energy supply.” See Germany seizes Rosneft oil refineries. This claptrap sounds like something written for Biden’s teleprompter.

Would it not be more accurate and honest to say that Germany was no longer a reliable customer of Russian energy? Under Scholz, the German government, taking its marching orders from Washington,  has decided not to purchase Russian oil.  Ditto for Russian natural gas.

Russia has the goods; Berlin declines to purchase them. Fine. All right. Russia can sell elsewhere. Status quo ante. Start over.

Subsequently, this self-destructive and yet “unavoidable” decision—unavoidable according to Scholz—has been routinely gaslighted to Europe and America as a prime example of President Putin’s “weaponizing of energy”—when the exact opposite is true.

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The Disease Or Cure? Take Your Pick! by Dennis Miller

Posted on September 29, 2022 | Leave a comment

Most of the economic problems the U.S. faces can be traced back to the Federal Reserve. From Dennis Miller at theburningplatform.com:

Since I began my cancer treatment in 2019, my outside travel has been curtailed. Doctors, restaurants, and an occasional trip to visit family have been about it.

The good news is now I have more energy and feel like getting out and doing fun stuff. I recently made a trip to our local Factory Outlet Mall. I used to enjoy window shopping and eating in the food court. I was shocked, and unhappy with what I found.

The mall used to be full of cool stores, bustling with traffic. The photo is disheartening. I’d guess 40% of the stores are vacant. Stores closing, people losing jobs, landlords hurting, mortgage and bonds defaults are happening for the wrong reasons. It’s upsetting, but I realize there is not a damn thing we can do about it. We are on our own….

The Disease

Former congressman Ron Paul believes the cause of our economic problems is central banking:

“It is amazing that more individuals do not question the idea that inflation, recessions, unemployment, and booms and busts are necessary features of a sound monetary system. Even many otherwise staunch defenders of free markets maintain a child-like faith in central banking. …. These conservatives do not understand that the problem is the existence of a central bank with the power to manipulate the currency.”

Irresponsible politicians, coupled with central banking, is a cauldron for the economic problems we face today.

Academics believe in Keynesian economics. Keynes believed government spending should help thwart a bad economy and get it turned around. He also felt during good times, government revenue should exceed expenses and the surplus should be used to pay down debt.

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