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February 1, 2009
Issue 31  -  Inflation

This week I’m going to do something different and focus on a particular monetary topic. Most people "know" what inflation is and are quite happy to complain about it and the effects it has on them. However, most people don’t understand inflation, which is exactly what the government and central bankers want. In fact, it is imperative to their scheme, and it is a scheme, and it’s continuation.

The general public equates inflation with rising prices. Inflation equals higher prices. This just doesn’t convey the true nature of what is going on. Rising prices is merely a symptom of inflation. The original definition of inflation is:

An increase in the money supply or credit available.

Generally, if prices are going up, the consumer will rail against the manufacturer. "Those darn oil companies, they’re screwing us!" This is the intention of moneychangers behind the scenes. If you blame the wrong people, they are free to continue behind the scenes with their scam.

To fully understand inflation we have to back up a little and look at how we got here. The constitution demands that money be "coined" of gold or silver. Now why was the term coin used? Because the founders understood the evils of paper money. Paper is easily produced and has no practical limits. Gold and silver are scarce and hard to produce. This is anathema to the central bankers and government. With these restrictions, "New Deals" and "TARP" type plans are IMPOSSIBLE. Without enough gold or silver, the government can’t constitutionally operate. So does that mean that current government activities are unconstitutional? Yes.

Notice on any paper bill that it says "Federal Reserve Note". It doesn’t say certificate. A certificate can be exchanged for something real. A gift, or in this case, gold or silver. The notes were originally fully exchangeable for gold. The bankers/government saw this as bad because it limited their pet programs and giveaways. With notes, they are unencumbered and can print away.

With a fixed money supply, prices will NEVER go up. Think about that for a second. NEVER go up. So why don’t we go back to that system? Well there is a small problem with that. When the population grows there is insufficient money to go around and it becomes scarce. The money supply must be increased to meet this added demand. If the supply were only increased with the population increase, all would be well. Unfortunately, government officials like give-aways and new programs. Without a fixed amount of gold to stop this, they are free to print and lend as much money as they want. As the credit and money supplies go up, the value of the existing dollars goes down which THEN leads to too much money chasing too few goods and the prices are forced up.

The Federal Reserve always talks about the "target inflation rate". This is more misdirection. Ideally, we would have slight deflation. This would be caused by increased productivity leading to reduced prices of goods. This is what is happening in electronics like, flat screen televisions. This is a great thing, but the Fed acts like deflation is the most horrible thing ever. Nothing could be further from the truth.

Believe it or not prices naturally go down. Don’t believe me? Check out the inflation calculator here. Put in the first year as 1800 and the second year 1900.  Put 100 in for the amount of money.  The price of a $100 item in 1800 was $48.94 in 1900. Prices dropped in half! That’s 100 years! It wasn’t until 1913, when the Federal Reserve was created that the PRICE inflation started. Fool around with calculator and find out for yourself.

So how did this become entrenched (the idea that prices always go up) in the American psyche? Well it was a struggle for the powers that be. Witness this propaganda government video. This video was done in 1933. This is right about the same time that FDR confiscated all privately owned gold. This was completely unconstitutional, but was you’ll see in the video, this type of thing is lied about to the public to get the policy implemented.

This type of nonsense, and it is nonsense, is entirely meant to mislead the public into allowing policies which will benefit the banks and government.

The main problem with inflation is that it eventually leads to hyperinflation. Hyperinflation is where the money and credit creation has gotten so out of hand, that the price rises are given in monthly rates instead of yearly rates. This can lead to 100% inflation per year or even much, much higher.

This has never happened in the United States. In case you think that means it can’t happen here you might want to read this story:
"Hyperinflation is a possibility, say Morgan Stanley

Posted by Izabella Kaminska on Jan 30 10:38.

That's not in Zimbabwe by the way.

Morgan Stanley's Jocahcim Fels and Spyros Andreopoulos look at the possibility of hyperinflation hitting the western shores of the UK, Europe and the US in their latest note. Their conclusion is a little scary (our emphasis).  One stark lesson from the ongoing financial and economic crisis is that so-called black swans — large-impact, hard-to-predict and seemingly rare events — can occur more frequently than generally believed. With policymakers around the world throwing massive conventional and unconventional monetary and fiscal stimuli at their economies, we think that it is worth exploring the black swan event of very high inflation or even hyperinflation.

While such an outcome is clearly not our main case, the risk of hyperinflation cannot be dismissed very easily any longer, in our view. We discuss the historical evidence, the conditions that can lead to very high or hyperinflation, and whether and how it might happen again.

So hyperinflation is a black-swan event that, given all the other black-swan events of late, should not be dismissed.

As they remind, the classification of hyperinflation is: an episode where the inflation rate exceeds 50 per cent per month. In history this has occurred in the 1920s in Austria, Germany, Hungary, Poland and Russia. Germany in 1923, for example, experienced a 3.25m per cent inflation rate in a single month (see picture left). Since the 1950s hyperinflations have been experienced in Argentina, Bolivia, Brazil, Peru, Ukraine and Zimbabwe - so confined largely to developing and transitioning economies.

The root cause of hyperinflation is: 'excessive money supply growth, usually caused by governments instructing their central banks to help finance expenditures through rapid money creation.'

Back to whether it could happen to Europe or the US? Morgan Stanley says possibly yes, under certain conditions.

Firstly, the rapid expansion of the monetary base by the Fed, ECB and BoE would have to continue and feed into a more rapid and sustained expansion of money in the hands of the general public.

Secondly, Morgan Stanley says governments would have to face difficulties financing their bailout packages and funding their debt.

Lastly, public confidence in the government's ability to service debt without resorting to the printing press would have to disappear, as well as the government's actual ability to withstand the pressure to do so in the first place.

And while all of the above is an extreme scenario, the Morgan Stanley analysts say:

…given the size of the current and prospective economic and financial problems, and given the size of the monetary and fiscal stimulus that central banks and governments are throwing at these problems, investors would be well advised not to ignore this tail risk, especially as markets are priced for the opposite outcome of lasting deflation in the next several years. Put differently, we believe that buying some insurance against the black swan event of high inflation or even hyperinflation makes sense and is relatively cheap currently.

Of course, when hyperinflation occurred in the eastern block countries towards the end of the communist era, most citizens hedged via significant purchases of black-market US dollars, the US dollar becoming the effective proxy store of value. This time round, that would not be an option."

Buying another currency would not be an option. Hmmmm…. What would be an option? Maybe this article will give us a clue.
"Hedge funds offer to price in gold   ByJames Mackintosh and Javier Blas

Published: January 29 2009 00:15 | Last updated: January 29 2009 00:15

A hedge fund has begun offering investors the chance to have their investment denominated in gold, as worries grow over governments debasing their currencies by printing money.

Osmium Capital Management, a $178m hedge fund manager based in Bermuda, is launching a new share class allowing investors to hold shares measured as troy ounces of the fund, rather than US dollars, sterling or euros.

The move follows a surge in investor demand for small gold bars and coins held by individuals and gold-backed exchange-traded funds that are holding a record amount of bullion.

This week London spot gold prices hit a 3½-month high above $900 an ounce and set all-time highs in sterling and euro terms as investors rushed into the metal. Gold on Wednesday traded at $886.75 an ounce.

Chris Kuchanny, Osmium chief executive and a former London ABN Amro trader, said he was putting almost all his personal wealth into the new share class: "Investors have voiced concerns that they're overly exposed to the major fiat [paper] currencies in an environment where the fundamentals of those currencies are clearly deteriorating with governments assuming more debt and having lower revenue and more expenditure."

The gold share class will be hedged into the fund, just as the sterling and euro classes are. So a 10 per cent rise in the fund should turn 100 ounces of the share class into 110, minus hedging costs estimated at 0.1-0.2 per cent a year.

Several other hedge fund managers have voiced concerns about the impact of the printing of money and have begun investing in gold but no other funds are thought to have gold-denominated shares."

This is just the beginning. Gold is the ONLY safe haven in a sea of worthless assets. If the wealthy are moving toward this, then you should too. Inflation can WIPE YOU OUT! You will have virtually nothing but the roof over your head. Housing will increase in a hyperinflation.  House prices would not rise as fast as the prices of other things, but enough to survive the storm.

Inflation is the hidden tax that politicians use to hit the poor while at the same time they are trying to "save" the poor. If any politician wanted to help the poor, they would abolish the Federal Reserve and get us back to sound money. Sound money based on gold and silver is the only way to right our fiscal ship and get the United States back to NO inflation. Anything else is just noise. Protect yourself.