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Friedman Finds Few Defenders


We’re running the commentary below for a second consecutive day because it drew such a heavy and varied response in the Rick’s Picks forum.  Surprisingly, no one rose to Milton Friedman’s defense, although one reader traced the current state of the Dismal Science, such as it is, to economist Irving Fisher, who achieved notoriety for declaiming very publically just before the 1929 Crash that “stock prices have reached what looks like a permanently high plateau.” The professor subsequently went back to the drawing board for some serious reflection on deflation, so it’s possible he’ll return to vogue at some point, or at least have his probably undeserved reputation as a laughing stock mitigated by sure-to-be-growing legions of anti-Keynesians.

Tomorrow we’ll have more to say about a particularly interesting thread in the discussion that implicitly challenges the more or less universal notion that America’s standard of living has soared in the last fifty years. In fact, over the last two decades, it has become painfully obvious to most Baby Boomers that their single-income parents could afford quite a few things that dual-income households these days cannot afford without going seriously into hock.

Regarding the supposed debate between inflationists and deflationists, it seems, blissfully, to have petered out. We assume this is because evidence of serious inflation is almost nowhere to be glimpsed, even by those who are obsessed with Friedman’s evidently misleading explanation of  inflation – i.e., that it is purely a monetary phenomenon (see below).  We would nevertheless still welcome that wake-up call we’ve repeatedly asked inflationists to provide if there comes a day when we can sell our home for a zillion dollars.

No ‘Food Inflation’

Below is the commentary that ran on Monday. There are also dozens of gem-like responses in the forum that we would urge you to read before weighing in yourself:

Adding fuel to our recent discussion of deflation is the latest dispatch from Ambrose Evans-Pritchard, the only big-league journalist we know of who seems to have recognized all along that it is not inflation we should have feared, but deflation. “Don’t be fooled,” he wrote recently in the U.K. Telegraph. “A food and oil price spike is not and cannot be inflationary in those advanced industrial economies where the credit system remains broken, the broad money supply is contracting, and fiscal policy is tightening by design or default.”  Just so.  And yet, there are still those who choose not to see the obvious. We still turn up posts in the Rick’s Picks forum that would have us believe that supposed price increases in day-to-day necessities represent a significant offset to a global financial implosion that has sucked hundreds of trillions of dollars worth of valuation from a global portfolio of leveraged financial assets. 

This is hugely deflationary, as Evans-Pritchard notes, and in the case of higher grocery and energy costs, acts “as a transfer tax to petro-powers and the agro-bloc. It saps demand from the rest of the economy. If recovery is already losing steam in the US, Japan, Italy, and France as the OECD’s leading indicators suggest — or stalling altogether as some fear — the Eurasian wheat crisis will merely give them an extra shove over the edge.” This touches on a point we’ve made here before, and more than a few times – that price increases in necessities cannot create inflation if household incomes are stagnant. Think about it:  If the price of a gallon of gas were to rise to $10 a gallon tomorrow, we would simply have to cut back on the consumption of something less important. So where’s the inflation?  Why the answer to this question continues to elude so many is mystifying.  Perhaps those who remain skeptical of deflation’s power are renters who have not experienced the pain of having their mortgaged home decrease in value by 30 percent or more, as has occurred throughout the US. 

Whatever It Takes

Most persistent of the inflationists’ delusions is that the Federal Reserve can and will do “whatever it takes” to avoid deflation.  But to believe that easing has not worked so far because the Fed has not eased enough is to imply that some further quantity of easing will do the trick. This kind of thinking is beyond dumb, but when it infects those on the left side of the Congressional aisle, it can be downright dangerous. Tea Partiers to the rescue? They supposedly stand ready to put a lid on yet another round of stimulus, but at this point, probably, most Americans recognize that more stimulus, all of it with money to be borrowed by “the government” (i.e., by taxpayers) from future productivity, cannot achieve much of anything, save burying us even deeper in debt. It manifestly has not stimulated inflation, as Evans-Pritchard notes with this short list of current data: “Yields on two-year US Treasury debt fell last week to 0.50 percent, the lowest in history. Core US inflation is the lowest since the mid-1960s. US business inflation (pricing power) is at zero. Bank lending is flat and securitised consumer credit has collapsed from $900 billion to $240 billion in the last year. Hence the latest shock thriller — “Seven Faces of Peril” by James Bullard, ex-hawk from the St Louis Fed — who fears that the United States is now just one accident away from a Japanese liquidity trap.”

 Armchair Monetarists

Readers, what do you think?  We would be especially grateful to anyone who can drive a stake through the heart of the oft-repeated phrase “inflation is always and everywhere a monetary phenomenon.”  This phrase, demonstrated to have been worse than worthless for predictive purposes by actual monetary events of the last two decades, originated with economist Milton Friedman but has since been expropriated by armchair theoreticians, monetarists and others who have been more or less continuously –and wrongly — predicting a horrific outbreak of CPI inflation since around 1991. That is when the Fed eased massively (or so it seemed, for those times) to power us out of recession and the S&L crisis. Friedman, like virtually all of the monetarists his theories had empowered, might have been fooled the first time around, when the universally predicted inflationary spiral failed to materialize thereafter. But we wonder what he would think now, had he been able to witness how the cosmic-size stimulus of the last few years failed to produce any inflation whatsoever.

Indeed, recent events have demonstrated that all of the credit-money the Fed is capable of ginning up will not produce even an iota of inflation if borrowers and lenders do not take that money and run with it. Some might say the easing associated with the 1990-91 recession did in fact produce inflation, albeit of equity shares rather than consumer goods.  They would also note that subsequent periods of loose money caused massive inflation of financial assets and real estate.  This line of argument is disingenuous, however, since, even as these inflationary events were unfolding, low CPI inflation was explicitly cited by policymakers as justification for further easing.  Moreover, Alan Greenspan, to the eternal disgrace of an already Dismal Science, regarded all non-CPI inflation not only as benign but, in the case of home prices, as wealth-producing.

We doubt that Friedman would have made so egregious a mistake. Dare we imagine that if he were still alive, that, seeing the catastrophe that Fed manipulation of interest rates had wrought, he’d be more willing to let market forces alone, rather than the central bank, determine when the supply and demand for money were in equilibrium?

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  • BRUCE August 15, 2010, 10:34 pm

    Even bad debt has some value and when it is purchased with printed dollars the net result is inflationary. (the government owns an asset worth much less than they paid, and the bankers and investors are rolling in cash).
    However, if it were only the purchase of bad debt it would be bad enough, but when the money is used to purchase bonds, then it is even worse.

  • Todd August 14, 2010, 6:05 pm

    “Surprisingly, no one rose to Milton Friedman’s defense”
    I am not surprised. You unwavering in your deflationary view and are more than a little bit sarcastic to the inflationary camp, why would one want to subject themselves to your jeers. (Deflation must be true if no one is refuting it, hmm.)
    My only question is why is deflation bad? If I have $5 million, then I can purchase twice as much, exactly what the Bilderbergs are doing, buying up small companies etc.
    jj August 9, 2010 at 3:56 am nailed it!


    Why are collisions with giant asteroids bad? With everyone dead, everything will be all MINE! RA

  • BRUCE August 14, 2010, 4:54 pm

    Well, the inflation deflation battle rages on. Inflation is a monetary event. The moment you print dollars, you have devalued your currency. It is a simple law of supply and demand. If you double the world inventory of any commodity, its value will drop accordingly. This is a simple obvious truth, and yet people keep trying to dispute it. If this were not true, we could simply print our way to prosperity.
    QE never ended. Forget about QE1,2,3 etc. England bought 200 billion dollars of American debt last year. England is flat broke! England just introduced the most stringent austerity measures since the Second World War. How could England possibly have bought 200 billion dollars of American debt? Why aren’t the English people asking this question?
    That debt was most likely bought with printed American dollars, along with most of the debt sold last year. However, none of this money is making its way to Main Street. Ordinary Americans are suffering the symptoms of deflation while the bankers are rolling in newly printed dollars and declaring once again obscene profits (this explains references some make to simultaneous inflation and deflation). They sit on their reserves while the government pays them interest. If the government really wanted the banks to lend to Main Street, they would not pay interest on those bank reserves. Why should they make risky loans to the “poor” people? Everyone looks to history to explain the terms inflation and deflation, but there is no precedent for what is happening now. If you want to even try to understand this, you have to think outside of the box. All currencies on the dollar index are being devalued simultaneously. This is why the dollar index is a poor indicator of what is happening in the world. What is the end game? Are they just kicking the can down the road, or is there a plan? What happens if they keep printing dollars, but none of it makes to Main Street? Possibly a dollar worth 50 cents, but few of them for the average guy on the street while prices rise—the worst of all worlds. ———But why?


    The moment you print dollars and put them in assets worth nothing, you have stored up…deflation. RA

  • Steve August 10, 2010, 8:08 pm

    In real terms; you have your dialectic reality, and I have mine all based upon personal experience, cause and effect. Some study social history to understand how the Human Creature works as one hysterical mass, either in optimism, or in pessimism. Optimists appear to live in a future based upon feeling good. While it appears pessimism exists in the present, leading to a more radical view from deeper in past history. The reality of deflation will not hit the masses, who are looking to gov to save the day and give, give, give to them – ie; the government workers who are being bailed out today by congress, while congress does nothing to support productivity. The Fed and Congress are directly injecting money by supporting jobs in government that should have fallen in a free economy. The money is being taken from the ‘debt pocket’ of the debtors in possession and given to the union workers who will vote for Obama and crew.

    You and you, you are being compelling against your will to take on debt to support the worthless in government who teach democracy and debt is good – all to the children we abandon to public education.

    Is it any wonder that over 50% support democracy when WE HAVE GONE TO SLEEP AND ENTRUSTED OUR CHILDREN TO WOLVES !

    You simply cannot produce enough to overcome the forced loans ‘upon you and you’ of congress to worthless business that saddle at least 3-5 generations – all having no hope of ending Escheats and denial of inheritance in a ponzi scheme concocted by John Nash’s theory to force acceptance of that which you would not accept otherwise.
    One cannot stand alone in Right, when everyone else is doing wrong. You cannot engage in Moral Trade, when the only game is fiat. Being a debtor in possession is better than having no possession.

    It is a declining spiral that ends not well.

    Deflation always hits with a waterfall crash because the optimist refuses to see the river running downhill until they are falling vertically – screaming – HOW CAN THIS BE !

  • Arnold August 10, 2010, 7:39 pm

    A Gonzalo Lira writing in Zero Hedge speculates that Quantitative Easing Two by the Federal Reserve (buying $trillions of long term bonds) will force the Chinese to begin selling their U.S. Treasury holdings to the Federal Reserve. These actions will be the spark that will ignite deflation into hyperinflation? Investors will NOT want to hold U.S. dollars. However, Q.E. One has failed, what would make Q.E Two succeed?

  • F. Beard August 10, 2010, 11:52 am

    What gets me about Milton Friedman is he believed in freedom of choice (“Free to Choose”) but not with regard to money. If we had had competitive private moneys then we would not have suffered a single point failure as we did with Greenspan.

    • gary leibowitz August 10, 2010, 10:24 pm

      In regards to savings it is becoming more like Japan. We are now using debt cards to replace credit cards. We have had a huge contraction in personal borrowing. We are saving but not anywhere near Japan. It’s a relative reversal from anything we did ove the last 30 years.

      Municipalities, even with govenment help, will contract their services and increase taxes in order to balance their budget.

      Cash rich corporations are not spending, but are using their surpluss to by back shares. Productivity suddenly fell, even as costs went down.

      This all spells deflation.

  • Shane August 10, 2010, 3:11 am

    I am squarely on the side of deflation, and also a very rare creature in these debates as I actually have no vested interest either way. Most inflationists in these blogs are (if they admit it) secretly hoping for Zimbabwe because they are long Gold/Copper/Oil etc. I’m not an economics expert, I don’t own Gold, I don’t write a blog. I don’t really care about being right one way or another. But I HAVE lived in Japan for 20 years. I saw it happen here and I see exactly the same set of circumstances happening over there. If it walks like a duck etc…..

    So you can believe me or not, but this is the process I have seen with my own eyes. See if it rings true for you or not.

    The thing about deflation is that it’s a slow process. There is no one data release or Fed meeting or interview on Bloomberg where suddenly everyone throws up their hands and goes “Oh wow! Deflation!” It takes years and years.

    It’s a slow trickle of anemic job growth. Slowly eroding property values. Wage cuts. Steady underwhelming economic data points. THAT is how deflation occurs.

    You have a property bubble. It pops.

    People are still heavily in debt and want to get out. So they cut discretionary spending.So companies’ profits shrink. So they lay off staff. And they expect more work for less money from the workers they still have. So people’s wages shrink, yet they have to accept that because the job market is tight. So people are unsure about the future, so they are more fiscally prudent. Return to the beginning.

    What is so hard to grasp about that?

    Unless the Government mails everyone a cheque for a million bucks, a credit bubble bursting is very, very deflationary.

    The problem people have is the view that the government can “do something”. They take the macro view. Yet society is made of individuals all acting in their own best interests. If enough of them start to hunker down and pay off debt instead of taking on more, that’s where you end up. Japan.

    Think about it. $50 grand of student debt is fine if you think you can walk into a $120 grand job. A mortgage is easy if your house increases in value by 10% a year. $15 grand of credit card debt is nothing if you think a raise is coming and you are secure in your job.

    But if you are calling for hyperinflation, first take a look at your own personal finances and compare them to the situations above. Society is made of individuals. If you Mr Hyperinflationist, cannot see your own house going up by 10% this year, why would others? Do you expect a raise? Can you walk out of your current job and into a better paying one?

    Or, more realistically, what would you say if your boss came and said “Well, business is tight. But if you take a 10% pay cut we will GUARANTEE your job for a decade.”

    If your answer would be “Ok” (and that includes everyone who would say “Ok…for now…” with an eye to getting a better job when things improve) then you personally don’t believe in hyperinflation. And if you don’t, probably no one else does either.

    As I said, this is a moot argument for me. I can only tell you what I have seen. If I hadn’t lived through it I probably wouldn’t even HAVE an opinion. But I am one of the few people I ever see that can write from personal experience. I now work 25% more hours for 40% less pay than in the ‘bubble’. And I’m happy for my job. Coming soon to a town near you lol!

    p.s: The first symptom is when mainstream media start promoting the benefits of ‘downsizing your life’ and companies start outsourcing to ‘temp’ agencies (touted as letting people work more ‘flexibly’ and ‘being your own boss,’ etc., etc.)

    • Benjamin August 10, 2010, 4:41 pm

      It’s even worse because unlike the Japanese, there is far less savings here. If those savings really have been keeping Japan afloat all this time, yet with no meaningful recovery… Then when can we ever expect one? When things start looking up for Japan, I’ll put the U.S. recovery 30 or so years down the line, minimum.

    • Steve August 10, 2010, 7:48 pm

      Its far worse here because ‘social mood’ directed by illogical education, in blind rose colored glasses, does not believe anything can possibly go wrong.

    • Shane August 11, 2010, 3:13 am

      Good point Benjamin……what has actually been keeping Japan afloat is the pension program, a nationally mandated savings plan.

      People are forced to pay into this program through automatic paycheck deductions and this vast pool of money is recycled into Japanese Govt bonds (paying some God awful interest rate…less than 1% I believe) and the Govt uses the money on endless ‘pump priming’, stimulus etc etc. Corruption is endemic here. Pork barrel politics is the way the country is run. Young people simply don’t vote (they are pretty much encouraged not to) so old people keep sucking away at the teat voting themselves and their ilk all they desire.

      You may have heard of the ‘bridges to nowhere’? Its not just a saying. Its incredible. Going for a drive into the deep countryside is an eye opener. You drive around and literally DO see huge overpasses dangling in space that have been that way for a decade. Every riverbank is covered in cement from the sea to the mountain to stop ‘floods’. Mind blowing. And the stimulus, as has been commented on endlessly, has done nothing. Except use up the entire pension savings of two generations.

      We have reached the end game now however, as for the first time ever the pension program had a net OUTFLOW. In other words there are so many old people (one quarter over 65) that more money is going out than coming in. There is no more left.

      As John Mauldin says ‘Japan is a bug in search of a windshield’. We are about to see what happens when Japan must go into the open market to finance itself. Somehow I don’t think the 1% interest rates will be enough. Money printing? Massive inflation? Yeah….maybe.

      But they kept this game rolling for a couple of decades. The U.S will manage the same I am sure, especially considering they hold the reserve currency.

      Possibly Japan is a good lesson for the U.S, just 20 years along. The U.S has a chance to avoid the same situation. Will they take it? Or will they believe the laws of economics, which they have seen Japan try to avoid (for 20 freakin’ years!) and fail, can somehow be broken in their situation. Because the U.S is sooooo special. What arrogance. At least Japan HAD savings. And no external debt. And hadn’t had a 20 year object lesson in exactly the same thing playing right in front of their faces day in, day out.

      The irony is when the bubble first popped here, endless U.S ‘experts’ were telling Japan EXACTLY what to do. “Let the zombie banks fail!” they cried. “Take your medicine! Short term pain for long term gain!” they yelled. And now look at whats happening. Makes me laugh. The only way out is balanced budgets which means deflation and living within your means as a society now, before someone else makes that decision for you. But there are so many parasites on the carcass of America all bleating for their continued payouts that seems unlikely. And I don’t care how many burning buildings you put out, or maths classes you teach, or robbers you catch, the idea that anyone can retire in their 50’s, on 50 grand a year for life, paid for by the public, is insane.

      Alexis de Tocqueville: “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”

      Benjamin Franklin:”When the people find they can vote themselves money,that will herald the end of the republic.”

      Alexander Fraser Tyler: “(Democracy) can only exist until the voters discover that they can vote themselves money from the Public Treasury.”

      Final point: Deflation or hyperinflation CAN be a choice I believe. And for all you conspiracy theorists out there seeing shadowy hands pulling invisible levers…..deflation is EXCELLENT if you are not in debt! Its tax free gains as each monetary unit of your wealth gains in value. I’m pretty sure the Illuminati/Bilderbergers/(Insert fave ‘bad guys’ here) are personally NOT in debt. So if they DO control everything….well….deflation it is.

    • Benjamin August 11, 2010, 8:41 pm

      “Final point: Deflation or hyperinflation CAN be a choice I believe. And for all you conspiracy theorists out there seeing shadowy hands pulling invisible levers…..deflation is EXCELLENT if you are not in debt!”

      Hi Shane,

      This is the only point I don’t more or less agree with.
      Deflation can be a productive choice, provided that monetary policy was sound throughout. Another way to look at it is that a murder is solvable, provided not so many people had put their fingerprints on the murder weapon, and that so many murder weapons weren’t just tossed into the mix. I wouldn’t say it’s NOT conspiracy theory, as that’s how Ponzi schemes work. It confuses everything so that it’s creators get away.

      As I pointed out to gerold (sorry about the gerome, gerold!), if you ran the game, would you allow a correction that basically amounts to your exposure as the man behind the curtain? Call me cynical, but I think they’d much rather just escape through natural causes, and let some other sap fix the problems they’ve caused.

  • Chris T. August 9, 2010, 11:39 pm


    covered vs. naked shorting:

    intuitively you are correct, there really is no incentive to loan-to-cover.

    But it is wrong to distuinguish between covered vs naked, as one being somehow ok, the other not.
    Both are fraud, in naked shorting it is just compounded.

    The proof is not in any delivery defaults, but in the multiple documented cases of companies receiven substantially more proxy votes as than shares outstanding.

    How can that happen?
    Obviously the “initial” purchaser of stocks can vote and does so.
    However, does the buyer of a borrowed-and-shorted stock know that his aren’t real unencumbered shares? Of course not, and thus he also wants to use his ownership right, and votes the shares, and so on, and so on.

    What happens when the initial purchaser, whose stocks were loaned, wants to sell?
    is he told, oh you can not sell, they are on loan to someone else? Of couse not, he sells. What then happens to the buyer of these loaned stocks if he wants to sell? Is he told they no longer exist because the intial purchaser took the loan back when he sold the shares? Of couse not.
    The whole system is an analog to fiat banking and demand deposits, and just another fraud.

    • F. Beard August 9, 2010, 11:49 pm

      @Chris T,

      Well, I figure if a free market can limit FRL then it can limit short sales too. The key would be competing exchanges and clearing houses, I imagine.

    • Rick Ackerman August 10, 2010, 2:14 am

      The fraud is that many certificates on loan are in “street name,” loaned out for interest by brokerage firms without the actual shareholder’s knowledge.

  • F. Beard August 9, 2010, 11:34 pm

    Had people accepted the notion that borrowing and spending does not prosperity make, then we would have had the same environment that Rick’s post today is about: Chris T

    The system requires ever increasing debt to avoid collapse. In fact, without new debt, we would eventually have NO money supply except for coins and perhaps some debt free money created by loan default.

    • Steve August 10, 2010, 7:44 pm


  • Chris T. August 9, 2010, 11:26 pm

    “What illusion? The houses are built; they are no illusion. The illusion was credit money”

    The tangibles built are part of an illusion. Not that these tangibles did not get created, they are obviously here, and destroying them (like cash for clunkers) is just so much more of Bastiat’s broken window fallacy.

    The illusion I refer to is way beyond a house or a car: it is the illusion that you were able to better yourself in this fraudulent money environment, that your lifestyle had an upslope, rather than a down one.
    Credit was the blue pill, the way the system prevented people from seeing this illusory reality,

    Had people accepted the notion that borrowing and spending does not prosperity make, then we would have had the same environment that Rick’s post today is about:
    No way to inflate (in whatever sphere you care to mention) because the money/credit would not have been tapped to yield the rise in prices.
    Peter Schiff has made this argument with respect to higher ed: Without the system continually facilitating borrowing-to-educate (with the “making it affordable for little people” argument), colleges would not have been able to inflate their prices by 8% p.a. for 20+ years, the jacuzzi-and-spa dorms would not have been built, and prices of higher ed would not be where they are now (except for maybe the Ivies and a few others).

    So again, the illusion was that things were not declining for the majority for decades.

  • Chris T. August 9, 2010, 11:17 pm

    BTW, I forgot, I fully agree with you here:
    “impose a 100% reserve requirement on the banks …”

    That is the same thing as what I cited above with respect to Dr. Fekete:
    making them obey the laws of contract.
    Fiat banking gives a full and separate ownership claim to more than one party over the same asset (as distinct from joint ownership).
    In ANY other sphere that is fraud– imagine giving full and several ownership rights to two or more people to one car’s title: you would be in jail fairly quickly.

    This is exactly true also of covered shorting BTW, it is just as fraudulent, and should thus also not be possible.

    In both situations, the lender (of the bank deposit or the stocks), would have to surrender some ownership rights for the time of the loan (such as with a CD).
    Try to find someone owning equities, and asking them to loan (for free) their shares and thereby foregoing the right to sell during the loan period, or the right to vote those stocks during that time — never happen.

    • F. Beard August 9, 2010, 11:27 pm

      With regard to covered shorting, the owner of a share of stock should be able to loan it but why on earth would he if the purpose is to drive it’s price down? I would insist on a high interest rate PLUS collateral if I would even agree to loan it.

      Of course naked short selling is counterfeiting. I suspect a truly free market would strictly limit it just as it would severely limit fractional reserve lending.

    • Steve August 10, 2010, 7:43 pm

      How do you own anything in Fee, when under Contract Endorsement the Fee Simple Absolute Deed admits no Right of Inheritance of Freedom ?

      ie; Debtor in possession, even if you have no ‘loan’ from a bank.

  • F. Beard August 9, 2010, 11:11 pm

    … you did not have to borrow, you only “had” to borrow to maintain an illusion. Chris T

    What illusion? The houses are built; they are no illusion. The illusion was credit money that was created as it was lent causing an unsustainable boom. Shall the houses be destroyed now because the money illusion has collapsed?

    What I propose is replacing the money illusion with real legal tender fiat while at the same time destroying the ability of the banks to create further money illusions.

    BTW, there is a rumor that Fannie and Freddy will soon forgive the amount of their home loans that are underwater. Too bad for the savers since they won’t be bailed out.

  • Chris T. August 9, 2010, 10:58 pm

    “Borrowers were of course cheated since the alternative to borrowing from the counterfeiting cartel was to be priced out of the housing market.”

    The basis for you argument, I alluded to above, in my: borrowed-when-the-spouse-working-didn’t-suffice argument.
    BUT these are TWO different things:
    a) having a declining standard of living, as shown by no longer being able to buy a home you spent your childhood in, but something much less
    b) and borrowing to counteract that declining standard of living.

    There is no right to keep ones lifestyle, or to have the one (and more) that your parents had.
    THAT is indeed part of the American dream, and born precisely in the environment and times I reference above.

    People COULD have adjusted their lifestyle downward rather than borrowing, and that is where my gun argument comes in: you did not have to borrow, you only “had” to borrow to maintain an illusion.

    Thus calling people victims AS BORROWERS is incorrect, calling them victims of currency depreciation in general (due to declining real wages, real interest rates, etc) that is correct.

    • Steve August 10, 2010, 7:40 pm

      Stated again – breathing clean air under the Clean Air Acts makes you a borrower – in debt to corporate U.S. 28 U.S.C. 3002(15).

      You have a choice sir – quit breathing. Res Judicata, stare Decisis.

  • john brefeld August 9, 2010, 10:54 pm

    Let us not forget time. It is the missteps of the Reagan administration that we are paying for now. Just imagine what is yet to come from the folly of Clinton, Bush and Obama terms! Yikes! In other words, it takes years and sometimes decades for monitary policy to work its way through an economy.


    You’re right, it might be another decade before Supply Side Economics is exposed for the fraud it was — the springboard for what, twenty years later, would become a parabolic rise in deficit spending. RA

  • F. Beard August 9, 2010, 10:22 pm

    The same system can NOT cheat both debtors AND savers, it is the latter (and those wishing to be) that have been cheated since 1913, not the former. Chris T

    Indeed it does cheat both and at the same time. Borrowers were of course cheated since the alternative to borrowing from the counterfeiting cartel was to be priced out of the housing market. Since 25% of mortgaged homes are underwater that is evidence enough that a vast injustice has occurred. Savers are pitted against savers when both are victims and could both be bailed out at the expense of the villains, the banks. How? First impose a 100% reserve requirement on the banks to put them out of the counterfeiting business. Then have the US Treasury distribute a sufficient amount of new legal tender fiat (United States Notes) to every US adult. This would compensate the savers for suppressed interest rates on their savings and allow borrowers to pay down their mortgages to current market prices. The banks would be fixed in nominal terms too but would lose in real terms. Poetic justice since they are the villains.

  • Chris T. August 9, 2010, 10:06 pm

    “… were driven into unserviceable debt and cheated of free market interest rates respectively by the current system.”

    No one was driven to load up on debt, a gun was not held to people’s head to borrow. That said, you certainly can argue that the long-term money-depreciating environment left people no choice other than to borrow, after putting the spouse to work could no longer meet the need.

    But how ARTIFICIALLY LOW rates (they are virutally never artificially HIGJ) cheated people that wished to borrow, I fail to see.
    The same system can NOT cheat both debtors AND savers, it is the latter (and those wishing to be) that have been cheated since 1913, not the former.

    ” Their solution is liquidation only of the victims since the villains, the banks, have already been bailed”

    True, but they most certainly DID NOT advocate for those bail-outs, they were opposed quite severely. So that argument does not work.

    Should they now change their tune, that the bail-out part has become a fait-*accompli? It would not make sense to do so, and if the liquidation is the correct thing in a no-bail-out environment, then it does not become a wrong thing even when bail-outs have been done.
    Unfair, yes, but not wrong.

    Besides, for much of these people that would be liquidated, they would not be worse off materially after they lose a home which they NEVER could have afforded in the first place (psychologically is a different story. When one discovers that things were a mirage it is indeed a bitter moment…).

    The prudent ones (those that did not leverage the fake-value-increase for pure consumption) ended up having more house than they could have afforded otherwise, those less prudent also got a few years of a lifestyle they couldn’t otherwise have afforded: the Bimmer, the marble-tile everything, the outdoor kitchen, etc.
    The to-be liquidated do NOT even need to be vicitims if they act smart:
    With the forclosure timeline now stretched so long, nothing happens for about 9months after one stops paying. Then after court proceedings start, it is another 6+ months.
    If they are smart, they can live payment free (other than property taxes) for all that time, and stretch it out even more if a payment resumption after say, 6 months, is made for a month. Starts the clock all over.
    And, in most states, parts of the house can be sold in pieces without committing ANY offence, so the piping, hardwood flooring, fixtures, etc can all be sold for extra cash.
    None of that is against the law, if one has any moral quibbles, that is one’s own fault. None of it is more dishonest than the system you criticize.

    • Steve August 10, 2010, 7:36 pm

      One can say what one wants to say – so far that is semi-free.

      If one does not understand Nash’s Non Co-Operative Game Theory, and the punishment that is levied by the masses for not taking on debt, then one does not have the facts to understand.

      Missing the base truth, makes the truth of the deliverer the Fruit of the Poison Tree.

      Try living FREE without taking on debt – I’d give odds, major odds, that joe sixpac is incapable of understanding that just living in a democracy, ignoring the causa bella of the congress, is debt.

      You see; the government says you are a slave because you take the benefit of the clean air acts of congress. According to congress – your breathe – you in debt to congress.

  • F. Beard August 9, 2010, 9:21 pm

    @Chris T,
    Liberty can accommodate ANY form of private money so there is no need to argue PM’s vs paper. Let the free market decide, eh? As for the Austrians, they refuse to consider a bailout of the debtors and savers who were driven into unserviceable debt and cheated of free market interest rates respectively by the current system. Their solution is liquidation only of the victims since the villains, the banks, have already been bailed out. They prefer Mises over Moses who commanded debt forgiveness (Deuteronomy 15, Leviticus 25) long before fractional reserve lending was invented. So while once I thought the Austrians held the moral high ground, now I doubt it.

    • Steve August 9, 2010, 11:42 pm

      Money is horse [manure] in a field under private agreement endorsing contract. Money is anything two or more agree it is privately. The same is true of FRN which is private money of the territory of the congress Article 1, sec. 8, cls. 17, Article IV, sec. 3, cls. 2 – exclusive legislative power to do anything.

      Specie Money – in the case of the united States, or several States, is the Dollar, 371 4/16ths grains of fine silver ‘Struck Coin’ by the Mint for the several States. Eagles ‘gold Coin’ is valued in silver specie Coin legislatively named “Dollar”. This is Public Money designed to extinguish all Debts.

      Remember this; there is a MAXIM saying that the Fruit of the Poison Tree is always Poison. Fact: The People by their quiet assent allow the lawlessness to continue, s.C.u.S.A.

      No matter who says what; fiat is just unpunished Treason, The Trial of Thomas Earl of Strafford.

      The last line is “Who assents to Lawlessness – deserves what is coming.” YOU may assent to Lawlessness, but; one cannot consent to Alienate the Blind Covenant – only engage in rebellion and terror. We are guilty, all of us for allowing the poison to corrupt the people, the elected, and the government. I am more guilty than YOU because I know the reality of facts created upon history.

  • Chris T. August 9, 2010, 9:09 pm

    “Let’s be careful the Austrians do not crucify US on a cross of gold to the benefit of the bankers.”

    It is not correct to apply WJBryan catchphrase in the .context of the/a gold-standard FAVORING the bankers.
    These latter were always and everywhere (to paraphrase MF) OPPOSED to a free hard-money standard, they always favored anything diluting that.

    Bryan was a populist, and thus, whether wittingly or not, an ENEMY of the little guy, and FRIEND of the money aristocracy. It was his opponents up to Cleveland, that were a friend of the little guy, precisely BECAUSE they favored a hard-money standard.
    The proof can be seen in the well being of the US under the extant standard fought so hard by WFB:
    From about 18651870 to about 1895, we had the greatest spurt of prosperity ever seen stateside or anywhere in the world.
    It was a DEFLATIONARY environment, making most better of, but not the bankers or the paper-money aristocracy. That period proves that deflation is nothign to be feared (given the right system), but something to be welcomed.
    It is the natural outcome in a system with a (of necessity) stable money supply and increasing productivity=declining prices.
    What goes nowhere, are paper assets, such as equities, as proven by long term extrapolations of the DJIA, and its RR-precursors. This index meandered back and forth between 50 and 100 for decades, no gains where had from the speculative reason for buying equities, which is their rise in price.
    One bought equities for their greater INVESTMENT return = dividends, the spread over bonds being the greater risk inherent in equities (about a 3% differential then).

    The progressive movement is at the root-cause of most of what ails us today, and its real backers are the elite ruining this country for generations now. Not only are they not our friends, they are arrogant to boot, as one can read up on in the recent article by A. Coevilla about the Ruling Class-Country class.
    (google that if interested, a worthwhile read. There are also good comments on the article by Robert Higgs and Gary North (Rick’s bete-noir!))

    • Rick Ackerman August 9, 2010, 10:03 pm

      Speaking of Gary North, I lost track of him a couple of years ago, when he was already several years into a get-down-into-your-bomb-shelters-to prepare for-inflation mode. What’s he been saying lately?

      North of all people should have seen deflation coming, since he seemed to know more about money and the Fed than anyone else writing on those topics. Right or wrong, he’ll always be one of the world’s great polemicists and a fascinating read.

    • Steve August 10, 2010, 7:30 pm

      Gary North knows very little about specie money, or the history of money in all I read of his writing up to about year ago when I gave up on his “High Lord, High Education, High Degree” better than anyone else attitude disrupted logic.

  • F. Beard August 9, 2010, 8:42 pm

    @Chris T,

    The Austrians seem stuck on precious metals when common stock, for instance, would be a superior form of money. Also, tally sticks worked quite well for government debts, so legal tender fiat for government debts only should work well too. Let’s be careful the Austrians do not crucify US on a cross of gold to the benefit of the bankers. The opposite of our current system is not PMs but LIBERTY.

  • Chris T. August 9, 2010, 7:02 pm

    F. Beard, because you are referencing Fisher’s MV=PT, though using Y instead of T above, I have to (re)post this link to Henry Hazlitt’s refutation of Fisher’s V again.
    See here:
    The equation is really meaningless as the variable is not independent, but see the article.

    There is also a link in that article Benjamin Anderson’s great refutation of Fisher’s Quantity Theory of Money.

    It really is time, that the the spiritual forebear of both Keynes AND Friedman, Irving Fisher is finally laid to rest as the damaging charlatan he was. His mental-ghost has been haunting, to sad effect, economic though for a century now, when can we finally be rid of him? Another example of a proselytizing disciple is Samuelson, whith his sadly SO influention textbooks and offspring such as Krugman.

    EVEN von Mises couldn’t avoid the one error of not discarding the QToM.

    • F. Beard August 9, 2010, 7:28 pm

      @Chris T,

      I advocate total liberty in money creation, usage and acceptance. Though I reject the Keynesians, I don’t trust the Austrians either to the extent they advocate any government enforced standard for PRIVATE money. My point? Disagreements about money would be irrelevant in a truly free market since we would be “Free to Choose” to borrow a phrase from Milty ( even though he apparently did not think we should have a choice in money).

      Thanks for the links on MV = PT.

    • Chris T. August 9, 2010, 8:31 pm

      to F. Beard:
      “I don’t trust the Austrians either to the extent they advocate any government enforced standard for PRIVATE money. ”

      You are right on that point, it is part of the QToM acceptance by the “mainstream” of the Austrians.
      This part of their thought is also what has led them to reject the idea of bringing back a gold standard that includes its necessary clearing mechanism, bills of exchange.
      They see these bills as being “inflationary”, when they are not, as repeatedly pointed out by A. Fekete.
      He, like you, advocates a free money system (oprn the mint to gold and silver), but unlinke you, he does see a limited role for government in that.
      I agree with Fekete:
      a) he demands that the law of contract be strictily enforced on banks, the bill market, etc.
      b) the mint is FUNDED by the government from its general account, so the production is free of seignorage when in kind-PM is delivered, and to ensure the constant quality of the coin produced.
      There is no exclusivity on the mints production, which will keep a debasement by it in check.

      Interesting to point b), in the UK the Brittania standard was introduced in hopes of obtaining non-monetary silver in a form different form monetized silver (sterling) precisely of preventing the back and forth of non-monetary silver to the coin kind, and vice versa. Didn’t work too well but that was the intention.
      In the US, for many years coin silver was used directly in silverware/table ware production, hence the descriptive coin-silver teaspoons.
      This is the system THEY don’t want, to prevent the free-market regulation of the money supply.
      Thus a limited role for the gov, in an otherwise free market as you prefer.

    • Benjamin August 10, 2010, 5:21 pm

      “They see these bills as being “inflationary”, when they are not, as repeatedly pointed out by A. Fekete.”

      As well as history. No one is really sure when or from where real bills came. Adam Smith simply wrote about them, as they were already in use long before. If I recall, real bills, or something like them, had been in use even as far back as ancient Greece and/or ancient Rome!

      Anyway, Fekete’s naysayers bemoan the fact that the bill market _can_ be cheated. When real bills can be drawn up on other bills which didn’t clear or, worse, on bills which were drawn up on other bills on bills which didn’t clear. ie, No better than what he have today, so they stick to the idea of gold, gold, gold, and only gold. Of course, do it that way and we could wind up paying 3/10th grams or more of gold for daily sustinance, as production would become so scarce and erratic. Bills of exchange not only allow for production/consumption without the invasion upon savings, but also help markets find themselves. Gold in commerce without them would be a disaster.

  • Chris T. August 9, 2010, 6:51 pm

    Other Paul writes:
    “In the fall of 2008, we saw a flight to the dollar, and, in some cases, individuals and businesses converting digital cash to “hardcopy” cash”

    Did that really happen, or was it rather only being “bought” as a middleman in the process of buying government (US) bills/bonds?
    I would think the latter.

    Of course why back then anyone was willing to load up on virtually no-return (negative after infl. adjustment) bonds/bills vs. just holding the paper “cash” as you mention is beyond me.

    Why risk the — albeit slight at this point– inability to “redeem” these papers in the irredemable FRNs. when the latter could just be held at virtually no-cost?

    • Other Paul August 9, 2010, 11:14 pm

      Chris T.,

      …and you are going to redeem “these papers” into what, FRNs?

      …and during “stall time” you are going to pull Ticket #001 (ala the bakery shop) at your local bank to redeem your Treasuries?

      …and in a deflationary environment, with virtually zero interest rates, the interest payments (after fed and state taxes) on “these papers” are soooo much more valuable than cash?

      I will be much more sympathetic with your logic if and when Treasuries are only redeemable into newly created Treasury Department dollar bills, not FRNs. Until then, mattress cash or “PVC pipe” cash sounds more user-friendly, especially with the baker, than you giving him an IOU collateralized with your Treasury Direct statement.

  • Oliver August 9, 2010, 6:49 pm

    Rich: I don´t understand “Magic Negro”, but, IF there were a hyperinflation in the US, a store is something no one will have to worry about anymore (except for state sponsored emergency outlets).
    Let alone “currency stores”, banks and insurances and the like.
    Hyperinflation was hell in Germany. It made Hitler possible in a way, or prepared his ascent.
    It will be armageddon in the US. Black markets and bartering would reign.
    Let´s just hope it won´t happen. Let´s all hope for some Japan-style cuddle-muddle on the 65% US-$ transaction “power” for decades to come.
    By the way, just because the US-government is not printing enough money to cause a hyperinflation does not mean a hyperinflation is not possible.
    When a hyperinflation strikes involuntarily 1000$ notes will be printed after or rather into the fact as a carton of milk costs 1000$ and the note is suddenly needed. Government money printing FOLLOWS the hyperinflation and does not lead it on.

    • Benjamin August 9, 2010, 7:38 pm

      “Rich: I don´t understand “Magic Negro”…”


      Not what I thought it meant, either!

      But now that I see what Rich was getting at, I agree, except to say that in a collapse, gold and silver aren’t worth anything close to their actual worth. Again, panners in S Africa were paying 3 grams (then about $30) for bread. Their usefulness lies in keeping things sound and honest to begin with. However, reintroducing them, at the expense of some paper “wealthy” losing that label, would help matters greatly. Cure things, even. Anyway…

      “just because the US-government is not printing enough money to cause a hyperinflation does not mean a hyperinflation is not possible.”

      If hyper is defined as an increase in money supply, we’ve got it. It just hasn’t hit circulation to hit prices like it had been expected to. And I dare say that it never will.

    • BlackTooth August 10, 2010, 5:39 am

      The Zimbabweans were paying .1 (1/10) gram of gold for a loaf of bread….not 3 grams. The video said they needed 3/10 grams a day to make it.

  • Chris T. August 9, 2010, 6:39 pm

    Rick, you write:
    “Dare we imagine that if he were still alive, that, seeing the catastrophe that Fed manipulation of interest rates had wrought, he’d be more willing to allow market forces alone, rather than a supposedly all-knowing central bank, determine when the supply and demand for money were in equilibrium?”

    That is very doubtful.
    Friedman had already evaluated such catastrophic maniuplation by the Fed, in his “seminal” yet highly misguided work, together with Schwarz, on the causes of the “Great Depression”.

    The Fed’s actions of the last 20+ years may have been much more in quantity, they were not different in kind from the actions back then. If he had no issue with it then, he would not today.
    This book informs most of Bernanke’s thinking.

    Rothbard’s refutation of Friedman’s work is by far clearer on this point, and while not nearly as well known, probably is in this round (and to you as well I would believe), so no need to cite him beyond referencing the work.

    It is somewhat ironic the AEP would cite falling yields as disproving any inflation, when these very same falling yields imply a devaluation of the currency in terms of government bonds.

    We all get too hung up on inflation/deflation in terms of prices, when what we really should be talking about is an appreciation or a depreciation of the currency.

    From a price point of view, the “deflationationist” argument right now seems to obtain, yet intuitively, there just is not reason to believe that the dollar should, or will be, an apreciating currency. Down the line, depreciation is all the should happen (and thus CONTINUE the depreciation of the dollar from 1913 onward, having already lost 96-98% of its value since then).

    BTW, if we are going to refer to CPI here, we should perhaps use John Williams’ SGS CPI, which is by far less biased than the official one.
    He also shows a major decline from the loftier numbers of a little while ago (that which we see currently), but they are no where near the non-existent level either.


  • Rich August 9, 2010, 6:29 pm
  • Ricpent August 9, 2010, 6:16 pm

    The average American understands something that rich capitalists do not. We are paying more for everything! Almost all cities, counties and states are running huge deficits. They will need Federal money. Save the country, save our schools, save our infrastructure, now! Worry about the bill later! DUH!

    • Rick Ackerman August 9, 2010, 7:45 pm

      As opposed to state, county and city money, what, pray tell, is Federal money? As far as I can surmise, it is a kind of money that, for one, Warren Buffett thinks can be used to bail out the municipal bond market when it comes unglued. RA

  • Steve August 9, 2010, 5:56 pm


    House to the west of me.
    Loan by Countrywide 700,000.00
    Now owned by B. of A. at book value 680,000.00
    Will not bring a 280,000.00 bid.
    B. of A. not doing repairs, house mildewing, rotting, leaking – – – for three years now. Value – less than 280,000.00.

    Its all accounting my friends, all cooked books. Bankers flush with cash, G.M. with 10% profit on pension funds that are bust – its all accounting.

    Figures don’t lie, but; liars figure !

    Tell me the ‘Banks’ are flush with cash and I’ll laugh, and laugh, and laugh. With just one house in Oregon there is a 400,000.00 sucking sound waiting to be uncapped.

    Bottom line – ya owe 1.06 for the 1.00 fed reserve note congress borrowed.

    Bottom line – 100 years ago ya all had allodial title – free hold.

    Today – ya all have fee simple absolute – under escheats the state is the lord of lands over a people who have lost their inheritance.

    Your inheritance was the Covenant of Abraham – making you Free – YA UR UL SLAVES now ! Even the ones of you that think everything is OK because you HAVE – fact is you don’t have – you are debtor in possession with only the right to inherit slavery, – fee, fife, feod, feud, tenant, peon, serf, slave – look at your supposed ownership deed in ‘fee’ ‘simple’ ‘absolute’.

    Absolutely the simple may inherit the ‘fee’ of the Lord of Lands in Escheat. The People cannot pay the debt of fee, except by blood ! Read the Framers and if you think you are absolutely safe because you have gold and silver – think again – someone will take what you have by accounting, or by force – make the mistake fatal if you wish by denying the reality of survival.

    • redwilldanaher August 9, 2010, 7:05 pm

      Steve you make great points. What you’ve covered here is what I was alluding to a few days and a few week back when I made a few comments that were responses to the commentary of others. There’s a few around here, Gary L. for one, that have actually argued that there hasn’t been any fraud and that even if there had it could have been perpetrated for so long and thus hasn’t had the impact on reality that folks like us believe it has on our economy and society. I note that JJ brought Williams’ Shadow Stats into this as would have I. Rick even notes that “they” began to ramp things up in the early 90’s. The FED may have began to ease then massively as Rick asserts but as is evidenced in some form or another they never really stopped. Nearly everything that was “tried and true” began to be discarded in the 90’s and was replaced by expediency of many varieties. Many want to blame “the people” for letting it all happen but pre-Internet, how realistic of a chance did the average working parent really stand to be truly informed? He!!, with all of us trying to stay on the “case” we’re still outsiders and with all of us working to piece it together we probably still don’t know the half of it. The real failure IMO lies with the so-called fourth estate. In theory they should serve the role as the informant since in theory they are the closest to the situation with adequate resources in which to do it. The lock down of our “free press” by the Manipulation Cartel is really what makes all of this possible. That’s why I have a problem with those that vociferously support the “Gary” legacy permabull position but since I’m a nobody I’ll defer to Paul Craig Roberts, mind you this is paraphrasing at best: “Americans won’t even believe their own eyes!” PCR has effectively “given up” and retired from trying to awake the American Debt Slave from his conditioned slumber. The Internet has allowed us to forensically investigate some of “their” crime scenes and time lines and even speculate as to their next calculated move but after the unpaid work of thousands that have offered up the evidence that is effectively small doses of the antidote to the Matrix, there are still plenty of people that would rather not consume the red pill for they fear what they will see. I’m not sure where or when I first saw this but this could help to explain the deeply-ingrained permabull reluctance: “I think we are living in a world of lies: lies that don’t even know they are lies, because they are the children and grandchildren of lies.” ~ Chris Floyd Compared to 10 or 12 years ago, it is incredibly easy to find information that reveals the truth about how fraud has permeated everything yet if you read the comments here at Rick’s and other places there literally seems to be millions that would prefer believe there is NO Fraud whatsoever occurring. Has the permabull conditioning been that effective? I’m not an expert so I ask that question genuinely. I’d like nothing more than for a new, powerful Bull Market to emerge based upon solid financial and economic underpinnings so that I can do all that I hope to assist my four young children as they move through life. Yet even with that desire and the pressure that it places upon me I’d still reject that scenario if I knew that it was only the great Sebastian Cabot making it all possible. Red Will

    • Robert August 9, 2010, 7:41 pm

      I love reading Steve’s posts.

      “Your inheritance was the Covenant of Abraham – making you Free ”

      And, notice that the Covenant of Abraham predates the formation of Judaism, Christianity, and Islam…

      Today, the “Lords that would be” are all framing their righteousness on false premise- Think Lloyd Blankfein daring to profess to doing “God’s work” in front of Congress.

      The question is- Does God expect us to fight, and to kill our fellow man, in the interest of restoring the covenant of Abraham?

      Or , should one simply choose to have faith that the ultimate intelligence will deal with the ultimate stupidity on its own terms, and in its own time?

      “And forgive us our trespasses, as we forgive them that trespass against us”… seems to suggest the latter.

      And the funny thing it, I’m not a very religious person 🙂

  • Barry August 9, 2010, 5:15 pm

    By forcefully recommending to Nixon to leave the gold standard, Friedman ruined this country. What a fraud. And people think so highly of him.

  • Rich August 9, 2010, 4:36 pm

    Good ole AEP cut his journalistic eye teeth for the Telegraph in Washington DC exposing the criminal politics of the Clintons that led US to the state of unfair trade, corporate warfare welfare and the defacto bankruptcy of our Social Security “Trust,” despite misinformed LA Times editorials:
    It seems most still buy and swallow the bitter infotainment distraction pill of corporate government monopoly media 7-year old puberty in girls, “reality” elimination shows, McChrystal Pat Tillman’s death by friendly fire, Model Naomi Campbell blood diamonds or the CNBC GE GS perennial bull market…

  • Benjamin August 9, 2010, 4:11 pm

    “Perhaps those who remain skeptical of deflation’s irresistible power are renters who have not experienced the pain of having their mortgaged homes decrease in value by 30 percent or more”

    I haven’t read the comments yet, and the day is still young, but I just had to pre-empt any comment about the thrift of renting, should it appear.

    We’re not hurting, they would brag, because we were smart. But the thrift of renting would not have been at all if that is what most people had done. We would have had the same problems, only revolving about lanlords defaulting on their obligations instead.

    Not that the landlords and renters haven’t been hurting. Renting has a slew of regulations and controls slapped onto it because the government “fights price gouging”, “slumlorddom”, and “encourages fair prices for all”. Glorious are these mixed, free economies! Thus many people over the years have to come to loath renting. I mean, really, go to a civil court some day and see how many cases are about problems between landlords and tenants. Policy has turned an otherwise sound and civil practice into a war zone which many would as soon not be caught in…including landlords themselves, which is why they wind up in court. They don’t want to abide the silly rules any more than many renters ever wanted to live in the results of them!

    Naturally, this would affected demand for housing. But that isn’t the root of the problem either. Ultimately, bad regulatory policy up the wazoo came about as a “fix” to bad monetary policy up the wazoo. Fred and Fannie came about as a means of managing that growing problem. So buy or rent, the result would have been the same. No one was going to escape the pain of this. And I do mean NO ONE.

    • Rich August 9, 2010, 4:45 pm

      “Glorious are these mixed, free economies!”
      Like being a little bit pregnant, mixed economies lead to the foregone conclusion of economic failure as fixes to fix the fixes become blowback bankruptcy, with the power elite scrambling in market musical chairs to leave the bill with middle class taxpayers…

    • gerold August 9, 2010, 5:40 pm

      you obviously have an axe to grind but it’s off topic.

    • Benjamin August 9, 2010, 7:22 pm

      Gerome: “you obviously have an axe to grind but it’s off topic.”

      Yes and not really. Every now and then, here, I see someone make the comment about renting vs the “stupidity” of buying. Just about anywhere else, it’s a rampant sentiment. But it’s all false…

      1) Fred and Fannie didn’t finance a bunch of over-priced McMansions. Those homes came about for the same reason that several UK developers took a bath on their investments in Spanish real estate. They were built on the expectation that somehow the world’s (Russians, in the case of Spain) “new glut of millionaires” were just going to want to buy them right up. The million/billionaires never showed up. Anywhere.

      2) Those in Fred/Fannie homes (fairly modest) were put there under special terms because they couldn’t be kept as life-long renters. Way too many problems were (and still are) developing between renters and landlords, as well as landlords and their financers. Living in Chicago as I do, I can tell ya… lots of apartment buildings were built in the last decade. Rents are (comparatively) cheap to attract renters, which probably means landlords are underwater with their mortgages as well.

      3) It is often said that American’s own “too much house”. But those who did get in over their head with a McMansion really financed an over-priced peice of junk, built of cheap materials, labor, and in some cases on bad land or foundations. This was not the majority of bad mortgages, though, as a great many of those houses simply never sold in the first place (see point one).

      So what it all adds up to is ZERO chance of a recovery.
      It also means that renting vs buying had zero chance of ever preventing anything, as quite a few seem to think. But the main point I wanted to make was…

      Hyper-inflation? Won’t happen. I won’t even say that it could or might. I say it won’t because if it does, those who would be most hurt by it are the one’s firmly in charge of things. Which is why policy, for all that they yammer on about the dangers of inflation, is _deflationary_ and will remain so until… Well, there is no mathmatical reason why it can’t be indefinite. See my response to Mario Cavolo, above. Far better, from their perspective, to keep up all appearances and deceit, and everyone else as either a working or welfare debt slave. Manage THEIR way through the decline. And just because that can’t work in the long run… Oh well. Those in charge will die natural deaths before they have to come face to face with what they’re doing. They don’t have a solve single problem with deflation and still get to be rich. If you, or anyone, were them… which would you choose?

  • F. Beard August 9, 2010, 2:06 pm

    I think what Milton may have missed is that the banking system is a choke point for the money supply. The only other source of money is the US Treasury but the inflationistas wish to choke that off too.

    • Rich August 9, 2010, 4:49 pm

      Treasury income tax revenues fell a third each of the last two years, with Harvard Winthrop House Bernanke, Blankfein, Frank, Geithner, Summers et al forgetting the working middle class paid over 12 times what corporations paid, and people are out of jobs.
      We may be witnessing the end of neoKeynesian neoCon free lunch policies as voracious starved governments implode…

  • F. Beard August 9, 2010, 1:57 pm

    We would be especially grateful to anyone who can drive a stake through the heart of the oft-repeated phrase, “inflation is always and everywhere a monetary phenomenon.” RA

    P = MV/Y

    P = the price level
    M = amount of money + credit in circulation
    V = average money exchanges per year = velocity of money
    Y = aggregate output

    So right off we see that Milty was wrong (if he meant price inflation) since increasing V and/or decreasing Y can cause price inflation.

    But since the banks won’t lend and business won’t borrow during a deflating economy then M is decreasing as existing debt is repaid. It’s a catch 22 with our money-for-debt scheme: No one wants to borrow during a deflating economy and with no borrowing the economy continues to deflate.

  • Avocado August 9, 2010, 1:41 pm

    Didn’t anyone notice the picture of the middle man holding the uncut sheets of one dollar bills? The only way you get hyperinflation in an economy is to inflate the production of paper money, and have the government pay its bills with paper.

    Slight problem with that. The government is not setup to buy goods and services with paper, nor is the Treasury likely to start overprinting it anytime too soon.

    The rest of the so-called increase in the money supply is credit, not paper money.

    ALL hyperinflations in the past have involved the excessive printing of paper money. There is no history of a hyperinflation involving excessive credit.

    On the contrary, ALL deflationary impulses have involved the excessive creation then destruction of credit.

    In a strange way the two forms of “flation” are complete opposites. One is paper, one is credit. We have the second, we do not have the first.

    Some will argue that the paper money supply rose faster than normal after the depression started in 2007. One can argue that it did so because of an increase in demand for paper money when some consumers ability to use credit was squashed. Lose your job, lose your credit, use cash.

    I see the post office selling money orders every week when I ship books to my customers. Money orders have soared during this crash, which argues for an increased demand for paper money to purchase them. Plus the underground economy is expanding as more people drop off the rolls. But there is nothing in the increase of currency to even hint at hyperinflation.


    • Rich August 9, 2010, 4:23 pm

      Excellent point.
      The problem with credit usury being it must be paid back, thus robbing the future or leading to debt default deflation Jubilee Winter Season like now collapsing the economy. In a few years the service on Treasury debt may be the largest budget item…

    • Other Paul August 9, 2010, 5:12 pm

      If I may, I’d like to build on Oliver’s excellent “airplane” example and Avocado’s insightful comments–

      In the fall of 2008, we saw a flight to the dollar, and, in some cases, individuals and businesses converting digital cash to “hardcopy” cash. If the passengers in Oliver’s airplane can sense that the plane is losing speed they can, again, re-act like some depositors did in 2008, and go to dollar bills, not T-bills. (OK, parachutes, while they last)

      Going to cash has been and will be an easier and easier decision for those holding: struggling stocks; CDs and Treasuries paying, effectively, nothing; and falling real estate.

      The time value of money is, essentially, zero. More and more people will see that there is no use letting it sit in digital form at your bank when you can, literally, sleep well at night on a FRN-stuffed mattress.

      The tricky part comes when the plane-stalling moment occurs, as Oliver so well paints the picture. The first ones who have a shot at buying real goods (parachutes, hard currency, food, etc.) will be the ones with FRNs in hand, not the ones still waiting in line at soon-to-be empty ATMs, or the 56th person in line to the bank teller.

  • Jeff Kahn August 9, 2010, 1:07 pm

    Inflation is always and everywhere a question of the multiplier. Plain and simple. If banks can’t lend and people can’t borrow it doesn’t matter how much the Fed prints. The multiplier is contracting so we do have deflation. Yet, to play devil’s advocate, if your stock portfolio and house value contracts 10 percent, and your income stagnates, but you child’s tuition, health care, your rent, gas, food and meds and cost of guns, amunition and water all increase: where’s the deflation? In your asset base, but not in your basic cost structure. This is the worst of all possible worlds.

    • Rich August 9, 2010, 4:20 pm

      Not only is the multiplier below One,
      M3 contracted at -10% and adjusted monetary base slowed at -90%.
      Even the WSJ doesn’t understand deflation, claiming it may be good for some stocks and gold:
      Paying no attention to the Central Bankers behind the curtain entails more and more economic risk for those who believe despite the historical record of margin calls after we got off the Constitutional gold and silver standard, that copper, gold or silver are magic deflation hedges.
      At Merrill while teaching evening courses at Stanford, both Uncle Alan and Miltie responded to late 1970’s correspondence inquiring about the feasibility of returning to the gold standard to tame inflation.
      Both replied without hesitation it would not happen, that gold was a proxy for real interest rates.
      Indeed, Volcker brought 14% long treasury rates to reward capital and savers, preparing the soil for the 8% GDP Reagan recovery peak in 1984 that wasn’t seen since.
      Maybe Kass, Nenner and Taleb are onto something, shorting T Bonds like Big4.
      So far the Feds did not have the guts to do what they must to avoid the total destruction of free markets, still not repudiating the destructive lure of QE II, right up there with the Emperor’s New Clothes.
      Speaking or Reagan, his speechwriter just put a dark insightful essay into WSJ suggesting American leaders are so out of touch they risk Amerika boiling over:

  • Oliver August 9, 2010, 9:26 am

    I still have a comment ringing in my mind, and many other writings elsewhere, which seem to indicate that the average US-professional investor (or semi) does not seem to know what hyperinflation is at all.
    Hyperinflation is NOT too much money chasing too few goods. Hyperinflation IS paper-money falling in value like a stone. Obviously, people begin to throw that money at tangible assets that minute and it might look as if some stuff gets scarce (food will, you can bet on that). But that´s not tangible assets rising in value due to scarcity, it is tangible assets quickly becoming unbuyable with paper money dropping like a rock.
    Those assets (food will be one of them) are absolutely available in good numbers, it´s only that no one is so crazy as to exchange anything against paper-money which is falling in value on an hourly, daily, weekly, monthly basis (the other way around is the speed at which hyperinflation accelerated in Germany). Stores will be empty because no provider delivers anything against the paper, not because they don´t have anything. For silver and gold you will be able to get anything you wish.
    Maybe this is the reason everyone seems vexed about the deflation-inflation debate: what happens now is that a comparable trifle of paper-money is being inflated into a cosmic deflationary basin.
    It is like the stalling of a plane, the engines run smoothly, loud and fine, but the angle of ascend is too steep for the speed. In the stalling moment no one can tell anything is wrong until all of a sudden the plane drops like a stone. That is hyperinflation.


    Bullseye, Oliver. Thanks for your lucid explanation. RA

    • Rich August 9, 2010, 3:59 pm

      Like the inflation stall metaphor, but really…

      “Stores will be empty because no provider delivers anything against the paper, not because they don´t have anything. For silver and gold you will be able to get anything you wish.”

      Right up there with the delusion of the Magic Negro.

      Like the last days of the Soviet empire, will there be special hard currency stores for those with gold and silver?

    • Benjamin August 9, 2010, 4:21 pm

      I agree. Great metaphor, Oliver!


      A “Magic Negro”? If that’s what I think it is, that’s hysterical!

      Anyway, about a year ago, I was seeing youtube footage of gold panning in South Africa. iirc, 3 grams for a loaf of bread. It wasn’t a grocery store, though. Just a black market which had emerged.

    • Rich August 10, 2010, 6:32 am
  • koos August 9, 2010, 8:44 am

    quote : “Think about it: If the price of a gallon of gas were to rise to $10 a gallon tomorrow, tens of millions of financially stretched households would have no choice but to cut back on the consumption of something less important. So where’s the inflation?”

    …………so for the rest of us who arent stretched, what have we got coming??


    “The rest of us” is most surely a statistically insignificant number in America — but enjoy your Premier Cru Bordeaux, I suppose, and motoring tours in your Bugatti Veyron. RA

  • jj August 9, 2010, 7:03 am

    mario, we know China is diversifing away from buying more US debt instead they are buying energy, gold.

    The US Fed does not control the FX markets, if loss in a currency unfolds from digitally printed QE2-3-4 than the FX boyz will make the bond vigilante’s look like school girls!…..the hedgies of today will turn on their own mothers to make a $ and the US$ is no different.

    Lets hope it never happens but I like to deal in reality not hope

  • mario cavolo August 9, 2010, 6:30 am

    Related points of wonder (hell, its all related one way or another )…

    1. Bonds seem to be taking off beyond stock prices… a strong unusual divergence to note suggesting no confidence in the market’s continued strength…Nenner and Taleb both have been suggesting shorting bonds, but its certainly in everyone’s best interests for yields and interest rates to remain low.
    2. Corporations, I have read in a variety of places, are flush with cash. How could American corporations deploy that cash to stimulate meaningfully? Start hiring more to help unemployment, but demand isn’t strong enough…?
    3. Banks are capable of starting to lend again, rather than hoard as they have been…what has to happen for them to start doing that…?
    4. Come hell or high water, has the market ever tanked when interest rates were already low?….doesn’t seem so.

    Cheers all, Mario

    • Rich August 9, 2010, 3:54 pm

      Turns out that $1.8 T of American Corporate Cash not only went to porn stars to keep up the bottom line, it is overshadowed by seven times more debt…

    • Benjamin August 9, 2010, 4:43 pm

      “4. Come hell or high water, has the market ever tanked when interest rates were already low?….doesn’t seem so.”


      I was going to make a similar comment on the Friday article (more specifically, the Saxena article linked to it). I think you’re right there. Look at it this way…

      With an increasing number of people put on subsitence wage slavery only (unemployment), their debts never disappear. One point Saxena made was the disappearing level of debt since 2008. Ha! I don’t doubt that some have, but most haven’t because they couldn’t, not even in the best of times.

      Okay, so created money goes more into sustaining debt to allow people to stay in their homes. The money piles up in the banks. But so what? Falling interest on savings needn’t hurt anyone when it’s mostly the banks money anyway! And so long as they contain the growing money supply, the value of their personal paper wealth doesn’t diminish, even as their instituions take the infinite losses. Everyone else already has taken them. They don’t save because they can’t and they don’t pay off their debt because they can’t.

      And even if H.B. Bernanke lives up to his name, it’s not likely, imv, that all that money will come flowing out and into circulation and assets. Banks will hold it to protect the system. The only thing that might foil that kind of outcome is foreign reserves of dollars. I’m not too clear on what I mean by that, it’s just snap judgement at this point. Anyway…

      Which is why I think we will have depression until people get fed up with it. And there ain’t no way that that can be predicted. And when/if it does happen, I don’t think it’ll be a case of hyper or anything else. Evaporation, death of the currency and the whole system. People will just create and sustain their own alternatives.

    • Robert August 9, 2010, 7:01 pm

      “4. Come hell or high water, has the market ever tanked when interest rates were already low?….doesn’t seem so.”

      Ahhh, but has aggregate demand ever been this low during periods of ultra-low interest rates…?

      Past performance, future results, blah blah blah…:)

      Actually, the fact that spending is tanking while interest rates are being held down artificially is the only part of the “This time it’s different” argument that I actually buy into.

      Demand, demand, demand- without it, supply is meaningless, and only serves to create economic distortion as productivity is wasted creating stuff that ends up generating net capital losses.

    • redwilldanaher August 10, 2010, 2:41 am

      Hi Mario, picking up on things from a few weeks back, can you please comfort us by confirming that this is the exception to the norm? And this too:

    • redwilldanaher August 10, 2010, 2:48 am

      Appears as though my links didn’t work properly. One more try: http://www.youtube.com/watch?v=ektMQGbW3wk and http://www.youtube.com/watch?v=0h7V3Twb-Qk&feature=player_embedded I’ve seen a handful of these and read and heard what Chanos has had to say. I’d like to know what the people that make these videos are missing. As well as the ones that have covered the off the scale pollution within China. I’ve only seen a chasm as large as the one that exists between your outlook and those of hedge fund managers a few times and quite honestly the skeptics have eventually won out in a rout. I hope that they are wrong and you are right. I sincerely do.

    • mario cavolo August 10, 2010, 11:21 am

      Robert, Rich, Benjamin, Redwilldanaher,

      Hi Gents….I’ve just read through the entire thread and actually, just dont have my head round it enough yet to even want to try to add anything reasonable….so seems HP’s Hurd was smitten by a trade show hostess….Larry Ellison is livid about it…meanwhile, two things on the China thing….however much the economy might crater, now exports are up 38% year on year….geez aggregate demand doesn’t seem a disaster Robert…meanwhile, just remember that there’s somewhere from 100 to 300 million homeowners whose homes have gone up in value 2-8 times (I’m not including the excess high end property pricing, that’s not the majority of the property market here) and who are virtually debt free. So without the choking leverage such as in the United States, even a nasty dip, even an empty town or a dozen empty commercial buildings won’t cause the masses to economically freak out…the low low debt and assets in property/bank accounts/mattresses are buttresses being underestimated by any media reports analysis I see. I can only begin to tell you how much business here is done in CASH. Tidbits for now…Cheers Gents and All, Mario

    • Benjamin August 10, 2010, 5:28 pm

      Hi Mario,

      I hate to nitpick, but I thought that the wonderful thing about China was that they were at the point that they didn’t have to depend on exports so much.

      See my comment to Shane, below. There very well might come a point when China finds itself in the same boat as Japan. And savings or not, we still haven’t seen things pick up for Japan, let alone the U.S. Not that I’m trying to be negative. I’m just trying to dash all faith/hope…if that makes any sense!

  • jj August 9, 2010, 3:56 am

    Rick, if ones income remains flat yet all the goods a family needs, food, water, gasoline, nat gas, hydro, all forms of insurance are going up (which they are) its that not inflation? All the goods we don’t need like tv’s, another golf shirt, new cars, vacations and alike are going down so isn’t the world dealing with both INflation and DEflation?

    Any governments CPI numbers are not worth 2 cents, shadowstats reports the true numbers and they are much higher.

    The upcoming HyperInflation that the US is going to face from QEasing to infinity will come from the lack of confidence in the currency, with a .50 US$ index what will all your imported goods cost the consumer, thtas not inflation? Yes consumers will find the means of buying $10 gas at the pumps but if ones pay cq doesn’t buy the same amount of goods to live thats a refection of inflation, no? Prices of goods we need….. to the moon, to the moon Alice!


    Sellers will have very little pricing power in an economic environment where incomes are falling in real terms. If this is occurring in the context of a deflationary recession or depression, especially where household savings are nil, sellers will not be able to raise prices at all.

    As the situation becomes more entrenched, look for a growing number of retailers to expand on the tactic that grocery stores have used to cheat amd deceive their customers — i.e., by providing smaller quantities (or perhaps a reduction in quality) for the same price. RA

    • Martin Snell August 9, 2010, 4:00 am

      I like Zero Hedge’s comment tonight (nice way to bring in Shrodinger’s cat too.):

      “the closer we get to the imminent realization that as tens of trillions of debt need to be eliminated (and guess what that means for a like amount in underwater equity value) before any form of self-sustaining growth can be achieved, the more likely it becomes that the Fed will commit to the nuclear launch codes which will eventually destroy the US currency, in what many have pegged as hyperinflation for the items we need, and hyperdeflation for the items that nobody really cares about: an outcome which will make the Schrodinger Cat nature of our economy apparent in its final wave function collapse, with the only difference that the US economy is dead in both worlds. “

    • mario cavolo August 9, 2010, 6:48 am

      JJ, what would the Chinese holding a $trillion USD have to say about the U.S. leaders/bankers going in the direction of policy decisions which will tank the USD? If they, as they will, stepped up to the plate, and said “don’t you dare” or we’ll… This is what they did in the Fannie and Freddie fiasco, where they had a large stake and let their position on the matter be known that there would be hell to pay if they were allowed to collapse…Cheers, Mario

    • jj August 9, 2010, 6:54 am

      The retail sellers Rick using Walmart for example will have no choice but to raise prices as the US imported goods will be so costly with a .50 US$ index.

      Here in Canada we see the smaller package same price in our grocery stores increasing dramaticly, how does one measure that tatic, less goods yet really for more money…INflation, no?

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