Fractional reserve banking and central banking began their reign of destruction upon our financial world a few centuries ago.
Politician’s greed and need for control over people have been ever present.
Their mutual interests created an unholy union from which were born two progeny. Call them Fire and Ice. Call them Inflation and Deflation.
This is their story – simplified and sanitized.
FRACTIONAL reserve banking allowed banks to loan out considerably more currency than was received from depositors – this increased the supply of currency in circulation. If demand for currency did not increase proportionally, then each currency unit was devalued and prices increased. The first child born of the unholy union – Fire – destroyed the purchasing power of the currencies in the world financial systems. (Inflation was created via fractional reserve banking instead of the usual debasing coinage or printing paper.)
Do you remember gasoline selling for $0.15 per gallon? Why does it cost 20 times as much now? The fires of inflation have destroyed most of the value of the currency unit – each dollar in circulation.
Because of government greed, its need for power over people, and every politician’s desire to meddle and spend, government granted bankers the power to create and control currency, monetize debt, fix interest rates, and so much more. Central Banking was born. In return, government could spend in excess, borrow from bankers, members of the legislature collected handsomely from the banking community, national debts expanded, and interest expense paid on those debts grew to outrageous levels. Politicians, their friends, favored industries, and bankers won, while most others lost.
For a personal perspective, how much interest have you earned on your savings since 2008? Does it seem like you lost and bankers won? Have your after-tax wages increased proportionally with your expenses since 2008, since 2000, since 1971? Probably not!
But it gets worse. After Fire – Inflation – has burned through the purchasing power of the currency units, then Ice – Deflation – the second child, destroys most of the remaining debt-based assets. Ice is cold; he contracts monetary systems. Ice – deflation – creates central banker nightmares and becomes the second phase of financial destruction for the people.
If you loan me $1,000,000, then you believe you have an asset – my debt to you. But if I can’t or won’t pay, what is that asset worth? Probably close to zero. The monetary system and your assets have deflated by approximately $1,000,000. Bankers inflated the quantity of currency in the system while Fire consumed much of its value; but, when the reckoning occurs, most of the remaining debt-based assets must be revalued down. Ice finished the destruction.
Fire and Ice: Inflation and Deflation!
If a government owes $17 Trillion to various people, other governments, agencies, pension plans, and corporations, and that government must borrow merely to pay the interest on the $17 Trillion, some might call that government insolvent. Ponzi finance will not continue forever.
From a brilliant essay by Jeff Nielson, titled When Deflation Becomes Hyperinflation: “As the debts go higher and higher (which can only end in a deflationary crash); we see the money-printing accelerating at least as quickly, if not faster (which can only end in hyperinflation).”
If the $17 Trillion in debt grows to say $50 Trillion in debt, is it still “all good”? What about $170 Trillion in debt? And while the debt is growing, Fire is consuming much of the purchasing power of the currency. Inflation grows until the forces of Ice overwhelm the system and the $17 Trillion or $170 Trillion in debt is revalued. Perhaps the inevitable deflation pushed the value down to a much lower value or perhaps to zero. How much are $17 Trillion in bonds and notes worth if interest rates triple? How much is it worth in real purchasing power if it can’t be repaid without “printing” the dollars for repayment?
Eventually we arrive at economic depression – when the economic sins of the past are realized, when debts are paid or defaulted, when the reckoning occurs. Central bankers, politicians, and owners of debt-based assets hope the reckoning will be delayed a little longer. But the day of reckoning does come. Enron, MFGlobal, Zimbabwe, Weimar Germany, Argentina, and 100 other collapses and hyperinflations are not exceptions.
Fire and Ice. Inflation and Deflation. Inflationary depression, deflationary depression, one before the other, or simultaneously?
Will we burn in the Fire of inflation or freeze in an Icy deflationary depression? Or will our politicians make it “all good” forever?
The Case for Fire – Inflationary Depression:
• Inflation is built into our financial system.
• Gasoline no longer costs $0.15 per gallon. One million other examples are available.
• The Fed has expanded their balance sheet by $3 Trillion and counting. Japan is “printing” even more rapidly.
• The Fed has created an additional $16 Trillion or so (per audit) in extra “deflation fighting” loans, gifts, swaps, repurchases, etc.
• The U. S. national debt exceeds $17 Trillion and is increasing exponentially.
• Central banks create more Dollars, Euros, Yuan, and Yen to stimulate inflation and “fight deflation.” More QE, helicopter drops, and checks to everyone are always possible. Central banks even tell us they are “printing” to create inflation and avoid the nightmare of deflation.
• It will continue until a crisis forces change.
Jeff Nielson: “…we have the hyperinflationary spiral, as exponential money-printing inevitably leads to the only mathematically possible outcome. Any item produced in infinite quantities, and at zero cost must be worthless, as an elementary proposition of logic/arithmetic.”
The Case for Ice – Deflationary Depression:
• If the governments of the world can’t repay their debts, how much is their debt truly worth?
• If the debt isn’t marked down substantially, then the value of the currency (think currency war – a race to debase) used to pay the debt must be drastically reduced. Either way the purchasing power of the repaid debt is likely to evaporate.
• There is always a day of reckoning. How much of the debt will survive the reckoning?
Jeff Nielson: “…hyperinflationary money-printing cannot prevent a debt-default implosion. If this was true; then we would have never seen any sovereign nation go bankrupt. Deadbeat nations would simply keep printing, and printing, and printing their worthless paper until they became ‘solvent.’”
Our monetary systems and our personal assets are besieged by both Fire and Ice.
Jeff Nielson: “The hyperinflationary depression first predicted by John Williams is not merely a plausible scenario. It is an absolutely inevitable fate.”
OR, DON’T PLAY THE GAME IN A WORLD OF FIRE AND ICE!
You decide what your future will include. Gold and silver have been a store of value for 5,000 years. Call them real money, or a store of value, or monetary energy, or safety, or insurance.
The Chinese, Indians, Russians, and many others are choosing gold and silver instead of paper. They fear both Fire and Ice. The western world depends upon paper assets as we pretend Fire and Ice are under control, while we ship massive quantities of western gold to the east where it is better understood and appreciated.
Fire and Ice have little impact upon gold and silver. Gold and silver were money long before the unholy union of fractional reserve banking and government unleashed Fire and Ice upon our world through inflating paper currencies and deflating debt. It is time to protect our financial future with gold and silver – Fire and Ice resistant assets.
Jeff Nielson: When Deflation Becomes Hyperinflation
Gary North: Inflation: The Economics of Addiction
David Schectman: The Fed Has All the Markets in Lockdown
Darryl Robert Schoon: 2014 The End of the Beginning
The Deviant Investor: Created Currencies … Are NOT Gold!
About The Author: G.E. Christenson is the Editor of The Deviant Investor
JWR’s Comment: I’m still leaning toward what I posited back in February of 2008: Successive waves of deflation and inflation, and then simultaneous inflation and deflation.
It goes without saying that “Fire and Ice”, is a reference to the Robert Frost poem of the same name:
Fire and Ice
by Robert Frost
Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.