Inflation A' Comin'

Right now, we are witnessing asset deflation coupled with price inflation. In other words, the things we own are worth ever less while the things we must buy keep getting more expensive. If left alone, it would reach a new equilibrium eventually. However, it will not be left alone.

First, banks are heavily leveraged right now. This means they have borrowed money to make money. As asset prices depreciate, their portfolios depreciate as well. Values become 'marked to market', meaning sold and a price established, rather then held with an estimated value. When this happens, the average sale price becomes the value of the asset.

Now, with the subprime collapse and the collateral reduction in high-end properties due to uncertainty and unemployment, banks are seeing massive chunks of their portfolios drop in price, which puts them in a net loss position. Further, they are required to maintain minimal reserves against just this sort of situation, and those reserve requirements are a percentage of their total outstanding debt, modified by assets. As the asset value decreases, the asset to debt ratio grows and the reserve requirements increase, meaning banks cannot loan any more money, and, indeed, must borrow to cover what they've loaned already.

When the banks won't lend to each other and there's no other source of income, such as foreign investors, money becomes hard to get. This drives down the cost of capital investments and assets, as purchasers dry up due to lack of funds. Of course, this becomes an overall drag on the economy as companies begin to run out of orders for capital goods as their assets depreciate as well.

In order to prevent a death spiral, the federal reserve in concert with the treasury and a compliant congress will inflate the economy by any means necessary. Expect federal mortgage aid. Expect bailouts, both public and private. Expect a tax rebate coupled with more credits aimed at low-income households. Expect bold new government programs. Expect none of this to really work.

However, the other side, where things are getting more expensive to buy, things we need every day and are not optional, expect that trend to continue unabated. The very measures the administration will use to fight deflation will by their very nature drive inflation. Since the asset depreciation is a form of deflation, it will be fought with more money in the system in order to enable higher prices.

This will happen not because it is necessarily beneficial, but because the ones who control whether it will happen are the ones who will feel the most pain if it happens. In other words, the ones in charge of the money supply are bankers, and they are the ones who are being hurt the worst.

Don't get me wrong; inflation will make my life much easier. I have a fixed apr mortgage. If the dollar falls, my house gets relatively cheaper. Many people are in this same position, many of them with houses they can no longer afford. This will be the populist justification, as wages go up due to inflation. For a time, this will be considered a good thing.

The problem is, of course, that any inflation may end in runaway inflation, which results in the destruction of the economy, and, often, violence. The collapse of the Weimar Republic and the subsequent rise of Hitler was partly a result of the Weimar hyperinflation. The reign of terror in France was due partly to a destroyed economy due to mismanagement and inflation. Mismanagement and inflation brought down the Roman empire.

This is, in the opinion of the Bureau, the strongest argument for free money. Not hard money, free money. Money needs to be created outside the government and not be in the control of the government. The government should pick either gold, silver or platinum and use it for all their accounts. This means all receipts and all payments are to be in the metal of the land. Actually, I prefer a specific alloy of the three to reduce the effects of volatility. The government should not coin money; the money should be value in weight and the government taxes and so on should be in weight of metal, not some abstract amount.