The Paradox of Inflation/Deflation
QUESTION:
Martin
You have really added dimensions to my thinking. Thank you very much.
One thing that continues to puzzle me is how empire’s die and inflation/deflation.
I get the part about the deflationary aspects of killing the economy via regulation and taxation. It is right in front of us every day. I get the part about that will not allow hyperinflation ala Germany and Zimbabwe.
What I do not get is how you can debase the currency such as you show in various Roman currency charts and not have significant levels of inflation [to me that is 10%+ per year]. If you debase the currency does not the person using that currency suffer a wealth reduction in their capital and therefore require more of the same currency to buy the same amount of goods [inflation?]? Seems like ‘stagflation’ at best.
Thanks for your continued help.
H
ANSWER: We are all victims of how we were taught to think in a linear fashion. It is a difficult thing to let go of this archaic thinking process and many people simply cannot make that step forward to see the dynamic world that exists around them. They will forever remain captive of their linear world trapped in a paradox they cannot escape. Those linear people tend to be people who gravitate toward government. If you grasp what I am talking about no doubt you are nearly there or you would not read this blog since it is not for the fainthearted nor the linear thinker.
What was written about Winston Churchill in the Last Lion is on point. Winston Churchill’s teacher, Davidson, had conceded that Winston was quite remarkable and intelligent. His grasp of history was outstanding. However, Winston was still considered to be a hopeless pupil. “It occurred to no one that the fault might lie, not in the boy, but in the school. Samuel Butler defined genius as “a supreme capacity for getting its possessors into trouble of all kinds,” and it is ironic that geniuses are likeliest to be misunderstood in classrooms. Studies at the University of Chicago and the University of Minnesota have found that teachers smile on children with high IQs and frown upon those with creative minds. Intelligent but uncreative students accept conformity, never rebel, and complete their assignments with dispatch and to perfection. The creative child, on the other hand, is manipulative, imaginative, and intuitive. He is likely to harass the teacher. He is regarded as wild, naughty, silly, undependable, lacking in seriousness or even promise. His behavior is distracting; he doesn’t seem to be trying; he gives unique answers to banal questions, touching off laughter among the other children. E. Paul Torrance of Minnesota found that 70 percent of pupils rated high in creativity were rejected by teachers picking a special class for the intellectually gifted. The Goertzels concluded that a Stanford study of genius, under which teachers selected bright children, would have excluded Churchill, Edison, Picasso, and Mark Twain.” (id/pg 158-159)
This is why our thinking process is so archaic. Schools want order – not to be challenged. They are the teachers, not the students. The best and the brightest typically leave school or graduate to have the piece of paper and pursue a field in which they never studied. Schools want linear thinking – not dynamic. This is our greatest curse for to advance, you have to think out of the box. They ridiculed Einstein. They accepted his ideas only when forced to do so.
In economics, we are plagued by one-dimensional theories that lead nowhere and are constantly proven to be wrong. Inflation is not a single one-dimensional field. It is driven by various causes. The central key component is DEMAND for here we have a rather binary stimulant that produces important different effects.
If the economy is in a boom and people are BULLISH, then you will also find economic growth and the typical inflation that people expect – rising prices that are really driven by DEMAND. However, you can also have a decline in economic growth with rising prices that ends up being DEFLATIONARY for it depends upon what you are measuring. Such trends produce the rise in the cost of government (inflation) mixed with the decline in disposable income (deflation) as government expands and consumes an ever increasing proportion of society’s total productive capacity.
Such confusion admixture trends of inflation/deflation emerge with rising prices because of the rise in taxation and regulation increase the cost of doing business. This is by no means set in motion by rising DEMAND. The total volume of business declines asDEMAND collapses with the velocity of money. The first trend of inflation with rising prices coincides with a BULL MARKET and the second form of rising prices unfolds with aBEAR MARKET driven by rising taxes and regulation – not an increased in DEMAND. This is part of the eternal battle between Public and Private sectors.
The hyperinflationists are linear-thinkers. They build everything upon the idea that an increase in money supply MUST result in rising prices and thus inflation. They assume a one-dimensional fixed relationship and cannot see the binary aspects of DEMAND that produce the bull and bear market trends. To them, they are locked into this primitive archaic thinking process that there must be a single relationship that is constant. They cannot grasp for an instant the dynamics of the real world.
In the case of Germany, it was a communist revolution where many wanted to join Russia and outlaw all private wealth. Money fled the banks and was hoarded or left town out of fear they might succeed. Capital moves ALWAYS in anticipation. This resulted trend of a flight of capital resulted in the collapse of the German monetary system as was the precise case in Russia for the very same reasons. When the government steered away from communism, there was no gold or silver left in the banks so the replacement currency was backed by real estate – not precious metals. This reflected TRUE wealth – the productive capacity of the people.
Japan had a different sort of collapse. Each emperor issued new coinage and devalued the previous coinage in circulation. He decreed that his coinage was now worth 10 times that of previous issues. Eventually, the Japanese people did not trust money issued by their own emperor and resorted to bags of rice and they used Chinese coins just as many nations use dollars today – the EMPIRE syndrome. Hence, Japan lost the ability to issue coinage for 600 years. Zimbabwe followed this path were people adopted currencies of other nations. This is why the Japanese emperor lost power and became stooges of of generals – shoguns. Japanese society fragmented until the Meiji Era – restoration of a strong emperor.
This is the real strength behind the dollar – the currency of the dominant EMPIRE. It is the lack of ability and confidence in the currencies of other nations such as Russia, China, and even developing now in the Euro. The net result has nothing to do with money supply compared with CONFIDENCE in the government. Germany makes this fatal mistake of imposing austerity upon the rest of Europe assuming it is only money supply. This theory is destroying Europe tearing it apart at the seams. Unfortunately, there are now far too many people living off the taxes in Brussels in charge and they will not go quietly into the light. They will rage against the fading of the light. The Euro is collapsing for fear it will not survive and no degree of monetization will reverse the economic implosion. We are in the collapsing stages as was Rome. This is a CONFIDENCE factor those in charge are refusing to see.
Why did the Roman monetary system collapse in 8.6 years where the coinage of Gallienus goes from silver to bronze? His father, Valerian I, was the first Roman Emperor to ever be captured. He was kept alive by the Persian king, used as a footstool as depicted on this relief in Iran. When Valerian I died, he was stuffed and put on display as a trophy. Rome could do nothing. The CONFIDENCE in the empire collapsed. Everyone was suddenly afraid of invasion.
The Roman people began to hoard money and expected the worst to unfold. This created DEFLATION as the money supply shrank due to hoarding and the velocity of money imploded. Gallienus was forced to debase to pay troops for as the economy imploded, tax revenues collapsed. On the one hand you expect INFLATION under the one-dimensional relationship thinking. When you realize that if the VELOCITY of money collapses (AS WE ARE WITNESSING TODAY) you cannot create more money fast enough to offset the collapse. This is WHY QE1-3 and the QE of the ECB will fail. This is by no means a flat one-dimensional model. EVERYTHING must be considered.
The collapse of the Roman Monetary System was under no condition simply because Gallienus decided to debase the currency. This is the classic Paradox – what comes first – the chicken or the egg? The debasement was not the CAUSE of the collapse of Rome, it was the reaction to the collapse in CONFIDENCE that resulted in hoarding for a rainy day and people stopped consuming luxuries. The economy fell to necessities and those prices did rise.
This is when Rome split into three empires. In Europe, you have Postumus (259-268AD) who breaks away from Rome forming the Gallic Empire – France, Britain, and Spain. He issued mostly visible silver coinage depicting him as the restorer of Gall. The fact he even could issue silver coinage when Rome could not shows that there was CONFIDENCE in his new administration.
In the East, Zenobia carved out her empire. But here coinage remained as that of Rome – bronze silver plated. This illustrates that she did not have the same level of CONFIDENCE as did Postumus for she could not issue silver coins when the people would have hoarded them.
There were 16 emperors in the Roman division between 268AD and 284AD. This is the rarest of all Roman coins probably worth more than $5 million today. This is a historically important coin for it is of Saturninus (280AD). There was a book entitled Historia Augusta. Academics originally called it a fake because it listed emperors nobody heard about. When two gold coins were discovered in Egypt of Saturninus who was named in this disputed list, it proved the book was genuine. (one coin is in our collection and the other is in the Louvre). The discovery of this coin demonstrated that indeed this list of 16 emperor in 16 years reflected the total chaos of the period and the collapse in CONFIDENCE.
This is WHY even Christianity rose NOT because people saw the light or crosses in the sky as Constantine pretended when he faced a Christian army. Romans prayed to the various gods and nothing happened. They turned to Christianity out of desperation – not conversion. Constantine used this religious turn for two material gains. First he declared there was ONE GOD and thus as in haven it should be on earth –ONE EMPEROR. He issued coins showing himself with the sun god Sol who was seen as the supreme gold who was invincible - Sol Invictus (“Unconquered Sun”).
Secondly, Constantine confiscated all the wealth in the pagan temples to fund building Constantinople. He then issued special reduced coinage to celebrate the founding of the NEW CAPITOL of the Roman Empire. He was thereby restoring CONFIDENCE that this would be a new beginning – IT WORKED. This is why we too must crash and burn.CONFIDENCE will only be restored with a new reformed government. The question become – what will that look like?
Constantine threw special coinage to the crowds in parades to demonstrate Rome was renewed. This became a tradition as depicted by his son engaging in the same practice on his coinage. So the whole shift to Christianity was the direct result of Valerian being captured that shook the very foundation of Rome itself. Romans were then praying for security that did not come so they change gods.
This is why I named the business cycle model the Economic Confidence Model. The cornerstone is what the public believes. Lowering interest rates to NEGATIVE will not cause people to borrow and invest rekindling the economy while you simultaneously hunt down loose change raising every tax possible and piling on more regulations. This line of linear thinking that lowering interest rates will manipulate society is BRAIN-DEAD. It has NEVER worked a single solitary time in history and there is ZERO evidence anyone can point to without ignoring everything else.
Sorry. Theory is nothing. It requires OPEN minds and just follow the capital flow without predetermined conceptions. Let the economy and history teach you – not prejudiced academics who support dead theories. Milton Friedman was a rare exception for he thought out of the box and never remained fixed always open to explore. There is no one-dimension in which we should confine ourselves. That is stupid and archaic thinking.
The stock market has NEVER peaked twice in history with the same level of interest rates because there cannot be a one-dimensional relationship to anything. Interest rates will impact the stock market ONLY when they exceed expectations of profits in a DEMAND led boom. Stocks are NEVER suppressed when capital is fleeing government because it fears that government may not survive in its present form. Just as interest rate go negative in a crisis to park money, stocks will rise when bonds collapse likewise to park money when it is government you fear.
Likewise, there is lot more to inflation and deflation. Government and all the academic theories ignore the battle between Public and Private. If you increase the money supply by $1000 and increase taxes by $2000, it is really being BRAIN-DEAD to look only at the quantity of money increase and ignore everything else. This is what the hyperinflationists have been doing. This is why they are wrong and why they have cost so many people so much money. Many still call for the stock market to fall to 10 cents on the dollar without a single thought beyond the linear world in which they exist.
So don’t worry – be happy. The press will never cite this article because it drives a spike into traditional archaic linear-thinking. This is a realization that will come only with the crash and burn mixed with a lot of pain.
