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There is an interesting article in
Canada’s Globe &
Mail about the
lack of growth in the US money supply. Ignoring for the moment that the
quantity of
dollars in circulation is significantly underreported, it observes:
“The money supply in the
United States is doing something that almost never happens: it’s shrinking,
after taking into account inflation. Similar episodes in the past have
usually been scary times for investors. Declines in the amount of money in
circulation have coincided with recessions, and some analysts looking at the
current trend say it is a harbinger of trouble. Despite signs that the U.S.
is in recovery, they worry that the money supply numbers indicate the economy
remains vulnerable to the feared double-dip downturn, or is close to
experiencing deflation.”
I agree with the first half of this
proposition about a renewed economic downturn, but not the second. In
fact, rather than deflation, the dollar is moving ever closer to
hyperinflation.
How is deflation possible when crude
oil prices have more than doubled since their post-Lehman crash low? Or
more broadly, how can there be deflation when the price index of 19
commodities compiled by the Commodity Research Bureau rose 47% during this
same period? It cannot of course, which means there is no
deflation.
The ongoing decline in the purchasing
power of the dollar has been masked by wealth
destruction as
over-priced assets like houses fall back to realistic levels. There is
also the problem that the mainstream media broadcasts only the government
calculated CPI, which is an inaccurate measure of the dollar’s eroding
purchasing power.
As John Williams of www.shadowstats.com notes: “Over the decades, the BLS [Bureau of Labor Statistics]
has altered the meaning of the CPI from being a measure of the cost of living
needed to maintain a constant standard of living, to something that no longer
reflects the constant-standard-of-living concept.” John reports
that his “SGS-Alternate Consumer Inflation Measure, which reverses
gimmicked changes to official CPI reporting methodologies back to 1980, rose
to about 9.5%” in March from a year ago.
So the Globe & Mail article
is wrong about deflation, but I am not drawing attention to it just because I
agree that “the economy remains vulnerable to the feared double-dip
downturn”. Instead, this article unintentionally offers
compelling evidence that the dollar is approaching hyperinflation.
The so-called “shrinking”
money supply that arises when adjusting for the loss of purchasing power from
inflation is a characteristic portending imminent hyperinflation.
Let’s call it a ‘Havenstein
moment’, named after the ill-fated president of the Reichsbank
who presided over the destructive hyperinflation that devastated Weimar
Germany.
I first explained this phenomenon in September 2007 and questioned then
whether the dollar would eventually hyperinflate
because Ben Bernanke would follow the footsteps of Herr Havenstein.
I quoted an insightful section from Murray Rothbard’s
excellent book, The Mystery
of Banking, that explicitly
explains the consequences of the inflation-adjusted money supply. Here
is the relevant part of that quote:
“When prices are going up
faster than the money supply, the people begin to experience a severe
shortage of money, for they now face a shortage of cash balances relative to
the much higher price levels. Total cash balances are no longer sufficient to
carry transactions at the higher price.”
As the Globe & Mail
observes, these circumstances prevail today. Prices of goods and
services are rising, but as it warns, the quantity of dollars in circulation
is “shrinking, after taking into account inflation.” This
“shortage of money” is being widely misinterpreted as deflation,
which is exactly what happened in Weimar Germany shortly before the Reichsmark was swooped up in its hyperinflationary
whirlwind.
Rothbard provides his usual brilliant insight
to explain what happens once the “Havenstein
moment’ is reached. There are two alternatives.
“If the government
tightens its own belt and stops printing (or otherwise creating) new money,
then inflationary expectations will eventually be reversed, and prices will
fall once more – thus relieving the money shortage by lowering prices.
But if government follows its own inherent inclination to counterfeit and
appeases the clamor by printing more money so as to allow the public’s
cash balances to ‘catch up’ to prices, then the country is off to
the races. Money and prices will follow each other upward in an
ever-accelerating spiral, until finally prices ‘run
away’…[i.e., hyperinflate]”
Weimar Germany took the second
alternative.
The dollar has now reached its ‘Havenstein moment’. Will policymakers follow
the prudent advice of Murray Rothbard and
‘tighten its belt’? Or like Herr Havenstein,
will Mr. Bernanke continue to ‘print’?
No need to ponder these two
alternatives. The Federal Reserve must ‘print’, for one
reason. Despite the noble goals assigned to it in textbooks and offered
in Congressional hearings, the Federal Reserve exists for only one reason
– to make sure the federal government gets all the dollars it wants to
spend, which consequently has put the dollar on a hyperinflationary
course.
Spending by the federal government is
out of control, causing it to borrow record amounts. The money to fund
this growing mountain of debt must come from savings or
‘printing’, and the sad fact is that there is not enough
accumulated savings in the known universe to satisfy the spending aspirations
of Washington’s politicians. So beyond what it can collect from
taxpayers and extract from the world’s savings pool, the dollars
the federal government is spending can only come from one place – the ‘printing
press’, which in the prevailing monetary system means bookkeeping
entries of the Federal Reserve.
This process of creating new dollars
‘out of thin air’ creates the hyperinflation, which the ‘Havenstein moment’ indicates is near. Sadly,
like Weimar Germany, few people are prepared for this impending destruction
of the dollar, but the remedy is simple – as much as practical, avoid
the dollar. Own physical gold and physical silver instead.
James Turk
Free Gold Money
Report
Article originally published by the Free
Gold Money Report.
James Turk is the
founder of the Free Gold Money Report and of GoldMoney.com. He is also the
co-author of The Coming Collapse of the Dollar (www.dollarcollapse.com).. Copyright
© by James Turk. All rights
reserved.
Copyright © 2008. All rights reserved.
Edited by James Turk
This material is prepared for general circulation and may not have
regard to the particular circumstances or needs of any specific person who
reads it. The information contained in this report has been compiled from
sources believed to be reliable, but no representations or warranty, express
or implied, is made as to its accuracy, completeness or correctness. All
opinions and estimates contained in this report reflect the writer's
judgement as of the date of this report, are subject to change without notice
and are provided in good faith but without legal responsibility.
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