The Death of Money
There is an inflation feedback loop where inflation leads to inflation expectations, which in turn leads to more inflation and so on.
Deflation is avoided because it can lead to bad debts and bank insolvency. Deflation also prompts hoarding of money, which stifles economic activity and GDP growth.
The only way for the US to really break persistent deflation is to declare gold’s price to be dramatically higher by becoming a buyer of all gold below its desired price. This would also lead to prices in dollar terms skyrocketing (hence battling deflation).
Terrorists or rival nations need not attack us in traditional military manners—they can wage financial war on our capital markets. Whether through hacks, false tweets, nefariously acquired insider information, or outright attacks such as 9/11, groups or nations can take advantage of stock market plunges even if they quickly recover on hearing the news was fake. The emotional nature of markets leaves them exceptionally prone to manipulation. Sometimes the attack on the financial markets isn’t even for financial gain, it’s merely a distraction to make other geopolitical moves.
Financial warfare or even the credible threat thereof could be used as leverage to prevent the US or others from interfering in certain affairs (like the invasion of Taiwan) because it could lead to substantial paper or real losses.
The US has curbed some of the negative effects of its inflation by relying on the cheap goods it imports from countries like China.
Low interest rate environments result in billions of dollars moving from regular Americans to the banks. While citizens earn little to no interest on their savings held in banks and, thus, are encouraged to spend to avoid the threat of inflation, banks can profit off the free debt environment and lever up to make more money. Low interest rates also encourage banks to aggressively chase yield through off-balance sheet derivatives that increase the system’s susceptibility to implosion.
Growth in an economy is the result of labor force participation and productivity. The main drivers in labor force expansion are demographics and education, while the main drivers of productivity are technology and capital.
GDP consists of consumption, investment, government spending, and net exports.
Because the Chinese savers struggle with the same low interest rate environment as the US, but have underdeveloped capital markets, these savers have turned primarily to real estate, thereby contributing to a rather aggressive bubble.
The United States and China have always preferred a stronger euro for trade purposes meaning any lack of trade that might push the euro down would be firmly fought by the two largest economies.
Keynesians argue wages are sticky in that they rise with inflation but do not tend to fall with deflation. Rather, wages stick and unemployment simply rises instead of wages falling, which lowers aggregate demand and further adds to the deflation.
Many thought the rise of the euro would motivate nations to devalue their currencies relative to the euro to stimulate economic growth, but choosing national currencies over the euro opens the door to massive inflation, eliminates checks and balances on corruption, and derails ambitions to be part of the European inner circle so peripheral nations preferred the euro.
The euro was always a political endeavor aimed at unifying the European nations, not economically motivated.
A dollar is a perpetual, non interest-bearing debt the Fed owes to its holders. The dollar is money, money is value, value is trust, trust is a contract, and a contract is debt, so the dollar is debt.
Deficit spending is acceptable if it meets three conditions: the benefits of the spending must be greater than the costs; the money must be used to fund projects the private sector cannot; and the overall debt spending must be sustainable.
US deficits are sustainable if economic output minus the interest expense is greater than the primary deficit. Right now, a combination of low interest rates and inflation is the only way the Fed can sustain its deficit spending.
A central bank has three primary roles: it employs leverage, it makes loans, and it creates money. These qualities allow it to be a lender of last resort in times of crisis.
The SDR was made for the purpose of serving as a global reserve asset and providing liquidity when needed to avoid problems with deflation.
Deflation is every central bank’s nemesis because it’s difficult to reverse, impossible to tax, and makes sovereign debt un-payable by increasing the value of the debts.
You can’t expect cyclical recessions and recoveries if the problems themselves are not cyclical. The US is facing structural problems and, therefore, is fighting off a depression, not a cyclical downturn.
Deflation is the natural state of a depression; economic activity slows, revenue declines, unemployment rises, and people begin to sell assets to raise cash, which leads to the decline of prices. This acts as a feedback loop known as a liquidity trap.
Banks want inflation to lower the real value of government debt and transfer wealth from savers to the banks, but they want it to occur slowly so it goes unnoticed. By doing it only a few percent each year and suppressing inflation signals like gold, they can slowly but effectively eat away at their debt.
The global nominal GDP to gold ratio is a little over 2% meaning countries are leveraged to real money 45 to 1. Russia, Germany, and the United States are the leaders in gold reserves if a transition away from fiat and back to gold ever occurred.
Escaping the debt spiral and structural issues of the USD and petrodollar system has a few possible outcomes: SDRs, gold, or social disorder. SDRs replacing USD as the reserve currency would lead to the USD inflating relative to SDRs as demand for it sinks and the US would have to compete for SDRs globally as other nations have had to compete for USD. If confidence fades in fiat and gold becomes the standard, an approximation of the non-deflationary price would be about $10,000 per ounce and would wipe out much of the fiat-denominated savings in the world. If neither of these two play out, social disorder from a deflationary or inflationary collapse is inevitable.