A Flood of Money

Well, the G7 met and decided that what we needed was, unsurprisingly, a flood of money. An unlimited wall of new money to replace the money that mysteriously evaporated into the mist of the credit crisis.

I say "unsurprisingly," because this has all been tried before.

When John Law's infamous credit experiment started to unravel in 1720, the French authorities first resorted to decreeing that their failing paper promises were worth more than gold and silver, and then, upon the almost immediate failure of that edict, to printing as much as necessary to buy out the failing equity and debt issuances upon which the entire bubble was formed.

The whole thing collapsed in rather short order, and the angry, destitute crowds took matters into their own hands shortly thereafter.

Here's how I summarize the news from this weekend:

And I almost certainly missed a few things, because it was a firehose of information.

And the US? $1.5 - $2 trillion total cost for the next year.

So far I have not yet read ONE article that asks the most obvious question of them all, "Where will all this money come from?"

That's it. That's the $64,000,000,000,000 question.

"Where will all this money come from?"

It's a pretty obvious question.

So how come nobody is asking it?

Because the answer is the same as it was during the French South Sea Bubble in 1720 - it will be printed up by central banks.

Which raises the uncomfortable follow-up question, "So why is it that we are expecting a different or better outcome this time?"

It is a serious question, and it deserves a serious answer. But it's hard to get an answer to a question that practically nobody is asking....

This is exactly why I created the Crash Course and spend so much time writing this blog and Martenson Reports: If the people in charge aren't going to ask serious questions and offer serious answers, it is up to us to do this for ourselves.

This is a companion discussion topic for the original entry at https://peakprosperity.com/a-flood-of-money-2/

Should we expect deflation first? Then inflation? Then hyperinflation?

Can anyone clear a question up for me?

I can see how the printing presses might run even faster if no one is willing to lend money to a particular government at a rate they are prepared to pay for it. But what happens if private and institutional lenders around the world are willing to lend to a government that is seeking to borrow? Does this mean they avoid the need to print/create new money?

yes–but 11 of the 13 bullets above are just guarantess of deposits…if they "SAVE" the banking system…they never have to print anything…they just made a promise they can’t keep.

However, the EU interbank lending and US debt will demand enough printing out of thin air to tumble the world economy anyway…

I wrote following to an earlier post where I quote below but decided to post my comments here since it is up to ourselves to ask the serious questions and take action:

[quote=hewittr]hewittr said:

For the buy-and-hold long term investor, the safest bet anyone can make is is the complete destruction of fiat currency. Anyone who thinks otherwise, doesn’t know monetary history. The price of gold has tripled what it was in 2001 while currencies and financial assets have fallen considerably. And we haven’t seen a mass exodus for safety yet. If I were you, my friend, I would buy some precious metals and keep them on the side as insurance. Because I know some day you are going to need it. [/quote]

I don’t necessarily disagree with the merits of owning precious metals but can you point out how many fiat currencies that have failed that were replaced by precious metals versus how many failed fiat currencies were replaced by a new fiat currency?

In either case at the time of the failed fiat currency the rules governing the relationship between creditors and debtors have to be rewritten leading to a range of "winners" and "losers" (a hard reset or jubilee that Chris has mentioned). If you are currently a creditor with wealth to protect one strategy is to buy precious metals as a store of wealth and, regardless of whether they are used as a new currency, if you can continue to own them after the rules are reset, then they could hold their value. Currently some regions of the world do look at precious metals as a store of wealth and should we see a fiat currency collapse, such as the US dollar, the value ascribed to precious metals will simply be that much higher.

After a "hard reset" there isn’t anything wrong with starting again with a new fiat currency. We just need to look around us at the efficiency of using fiat currency; conducting transactions electronically is the only viable method of conducting a modern world. However I think that Chris has pointed out, with brilliance, that currency created out of debt that must grow isn’t compatible with a world with physical limits - and humanity is now reaching the limits of this physical world. Chris has briefly mentioned a cash based transaction system - perhaps something like this will be compatible with the physical world - however I expect that this will be a new fiat currency.

Chris has suggested that the debt based money system is currently running into the constraints of our physical world. He may be right. However our current monetary system has accumulated imbalances that was balanced precariously like a house of cards and this was solid as long as we believed it was solid. However as the imbalances continued to accumulate it took a trigger (US subprime) to force the system to begin to reevaluate itself - and now the system is moving backwards (deflation) unwinding these imbalances - taking with it a lot of innocent parties with it.

Now we obviously can’t store our wealth in a future fiat currency that hasn’t been created yet. In our current deflationary environment money does become more valuable - but needs to be watched vigilantly because its value would depreciate rapidly in a hyperinflationary environment and which seems likely since US is not placing limits on how much borrowing (and debt monetization) that it is willing to do. Also, not all fiat currencies are equally valuable.

So I agree that precious metals are probably the simplest approach - but cash (but likely not US cash) in a deflationary environment might be the most profitable there are other considerations.

Paying off debt is Chris’ number one suggestion. Why? So that you don’t lose the underlying asset in a foreclosure. Another reason to pay off debt is because if cash is becoming more valuable, at say 10% per year, then paying off debt gives you the same return on the money plus the rate of interest.

Cutting expenses is Chris’ second suggestion. Just buying and consuming less is the obvious way of doing this but if you consider all possibilities there are a variety of avenues. Should you move from a suburban to a rural area if you can telecommute or if you are retired or if you can create employment for yourself in a rural area? The price of rural real estate may be underpriced compared to its true value as we head towards a world constrained by physical limitations. Why rural? Not only would you be putting yourself closer to your source of food but it may also be easier to develop a network of relationships when everyone in a community knows each other and therefore there is more accountability for one’s actions.

Regardless of whether you move or not you can then consider having your home evaluated for energy efficiency and use your money to implement the changes - more energy efficient windows, better insulation, a geothermal heating/cooling system, woodstove, photovolatics, more energy efficient appliances, more fuel efficient car, etc., etc. How about having a cold cellar built so that you can store food when it is abundant locally so that you have it when it would otherwise be more expensive. All of these items lead to sustainability in a hyperinflationary environment, the savings are tax free, protect yourself from your deflation (where creditors fall like dominoes and you are at the end of the chain), allow labour in the economy to be unlocked as your money pays others to do this work and helps reduce the impact of the economic slowdown, and protect yourself from all of the other factors that Chris has identified that are down the road (demographics, peak oil, natural resource limitations).

I’d suggest that readers use Chris’ link to Amazon and pick up a copy of Deep Economy by Bill McKibben. His ideas are great and have a look at his section on complementary currencies.

All the best,

And what is the potential range in the timeline for deflation and inflation? days, months, a year or two?

I think the plan is to print up a ton of Treasuries and Gilts to finance the borrowing for this.

Surely with a flood of new sovereign securities the market is going to become quickly saturated, leading to higher interest rates?

So what is the magnitude of the world central banks printing 64 Trillion Dollars worth of currency? Granted more printed currency depreciates its value, resulting in inflation. But is this resulting inflation likely to be absorbed into the world economies in a matter of a few months? 50 years? Never?

Sure, let’s ask the question "Where’s this money coming from?"… So… various governments print it. So what? We understand the theory that financial trouble can result. But based on what we know and what we can best project, what are those results? What do honest 2 year / 5 year / 20 year / 100 year scenarios look like?

Giving us a sense of magnitude for various likely outcomes would be much appreciated. Granted this is new territory. And prognosticating, versus reading and disseminating historic facts, is more difficult and dangerous - at least to one’s credibility - but we must be able to suggest some realistic scenarios…

IF there is no run on the banks, there’s no money printed to guarantee someone’s deposits that they aren’t taking out… IF there’s no bank failure, there is no money printed to guarantee interbank loans. The gov’ts have put things in place to bolster confidence and the money that the gov’t wants to get down into the public’s hands is being held up by the banks so the interbank loans are there to ensure each bank that the other bank won’t go bankrupt but there is NO money supply creation if these overnight promises don’t get called upon. Confidence has momentum, you’ve seen it rise and especially fall recently… if these moves stop the fall of confidence, then the days and months ahead where there are no bank failures will grow confidence and hopefully, just hopefully we can all see liquidity come back to the markets… who cares if the markets go up, I’m just hoping liquidity comes back. If we do see more bank failures or country currencies going through an increase in volatility, then I’d definitely change my way of thinking but for now, this move is a good move, take it for what it is… re-evaluate, re-hypothesize, observe…
Has there been an increase to financial failure over the past few months? Yes. So there’s nothing wrong to prepare for the worst but don’t let it affect your ability to see what’s before you today.

My sincere view is that we fundamentally have a crisis of solvency, not liquidity.

That is, most of the world’s banks are insolvent and many should be bankrupt.

Thus, a guarantee of deposits is the same as a guarantee of the bank’s solvency. That is, the ‘cost’ of the deposit guarantee will equal, more or less, the amount by which any given bank is insolvent.

Conclusion: A guarantee of deposits is the same as printing to the extent that the banking system is insolvent.

As we ‘delverage’ from 40 or 50 to 1 back to, say 12 to 1, my estimate of the degree of insolvency is in the trillions of dollars.

points well taken…and lets be honest–we WILL see dozens and dozens of bank failures in the coming 15 months even if their plan does "work" this will require these guarantees to pay out ( I.e.–Print money )

Good point but my only point is that what we saw happen over the weekend was a positive event. If the view that banks are insolvent, there’s nothing anyone can do anyways and everyone should rush to the banks to get their money out. That hasn’t happened just yet, when it does, I will re-evaluate but what just DID happen is a good thing, not a bad thing. What is the actionable outcome? Well, it could mean to buy the rally, it could also mean to be nimble and take profits on any bounce but this whole mess came out of leverage, complacency and a misunderstanding of risk. Could the average peasant be complacent still and trust that his money is safe in the banks because the King has said it is so? Ummm, well yes, they just might believe it. Could that mean that the markets look oversold for the short term and that one could make 10-20-30% off realizing that? Ummm, yes it could… While I may agree with your longterm outlook, I am just saying that there are ways to make money and help you better prepare for the final outcome but only if people see the data points as they come out for what they are. Guaranteeing interbank loans made sense, if they didn’t, we’d be in a lot more trouble and I would have reacted to that so while it may be seen as the obvious thing to do, the actual action did mean something. We’ll just have to see if it helps, things are so fluid these days that anything can happen but I think you’ll agree that despite your views on solvency, guarantees don’t mean printing money unless a guarantee is called upon which won’t happen until the bank runs out of money and has to dip into these guarantees. My guess is that before that EVER happens, that there will be a banking holiday anyways… when the banks get to 50% of their deposit base, they’ll just do something else and there will be plenty of time to watch what unfolds when the banks and reports come out from the press that bank deposits are falling. I mean plenty of time by a day, or even hours to liquidate everything… your financial position is always in respect to the size of your portfolio versus the liquidity of the markets…

Do you still think we’ll experience a period of deflation before the eventual inflation and hyperinflation that seems inevitable with the recent increase in Monetary Base and the central bank guarantees? If so, what’s your best guess on how long that deflationary period might last?
People like Mike Shedlock at Mish’s Global Economic Analysis are absolutely convinced we’re headed for deflation. However, there are several other analysts who seem to believe that the monetization of debt that is happening now will take us to hyperinflation very quickly.
What’s your opinion?

I don't necessarily disagree with the merits of owning precious metals but can you point out how many fiat currencies that have failed that were replaced by precious metals versus how many failed fiat currencies were replaced by a new fiat currency?

Theoretically, paper is just as good as gold as a medium for money. Here’s the catch. For whatever form money takes, to be viable it must be both a practical medium of exchange and a store of value. To be a viable as a store of value, the supply must be stable. Gold has endured though three millenium because it is difficult and expensive to mine. Paper is limted by the size of your forest.

Without exception, every government that took the path towards monetary debauchary ended up destroying it’s currency. Before paper money, the Romans would shrink the size of their coins and reduce their alloy content. So again, the issue is not paper verses gold; it’s an issue of supply. All boom and bust cycles attributed to a weakness of capitalism are in fact an outgrowth of the expansion and contraction of the money supply.

In past inflations, governments have tried issuing new currencies with the zeros dropped off. Sometimes they have a temporary effect of quenching inflationary expectations. But once the public senses that their government is inflating the new currency, it begins another round of price increase. We may see attempts at replacing the dollar with a basket of currencies or a new currency like the proposed Amero. I would see it as a ruse to keep the public fooled. It will fail too.

When our government makes a credible promise at minimum to abolish central banking and fractional reserve banking, then we can have confidence they have abandoned their means of inflating whatever new currency takes its place.

See http://en.wikipedia.org/wiki/Hyperinflation


Yes deflation is the strong force now, but inflation has not exactly gone away either. Now that authorities have taken the position that there is no lmit to the supply of money they are willing to create, this presents a new dynamic. I would be looking for both deflation and inflation to increase in intensity. This truly has the spector of an event of biblical proportions. These nation-states are fighting for their lives and they are going to take masses down with them.

So now I see two reasons to get out of debt. 1. Interest rates are sure to increase. 2. You’ll need the extra cash for much higher prices to come in the near future. I don’t plan to use my silver until I absolutely have to.

I think a lot of people have confusion with Deflation, Inflation and asset pricing.

Stock market decline and/or a fall in the price of equities, or real estate, or gold, is NOT deflation. It is a decline in the asset price.

Deflation = a contraction of the money supply (the Fed’s balance sheet).

Inflation = an expansion of the money supply.

The Fed has been expanding the money supply at unpresidented rates. Just look at Chris’s hockey-stick graph of the M3 money supply. Yes, right now we have a correction in the market where assets are being repriced, but this is not reducing the amount of money in the system. After the dust settles and all this new money circulates through the system we will have more dollars chasing after the same number of goods & services. The effect will be a rise in the price of goods & services.

Yeah, but what about Biflation? Undecided

> >Stock Market Definitions
> >
> >
> >Due to today’s rapidly changing stock market and the financial
conditions in industry, the following terms have had to be revised for
investors in order to more clearly reflect today’s economic market place:
> >
> >CEO – chief embezzlement officer.
> >
> >CFO – corporate fraud officer.
> >
> >BULL MARKET – A random market movement causing an investor to
mistake himself for a financial genius.
> >
> >BEAR MARKET – A 6 to 18-month period when the kids get no
allowance, the wife gets no jewelry, and the husband gets no sex.
> >
> >VALUE INVESTING – The art of buying low and selling lower.
> >
> >P/E RATIO – The percentage of investors wetting their pants as the
market keeps crashing.
> >
> >BROKER – What my broker has made me.
> >
> >STANDARD & POOR – Your life in a nutshell.
> >
> >STOCK ANALYST – Idiot who just downgraded your stock.
> >
> >STOCK SPLIT – When your ex-wife and her lawyer split your assets
equally between themselves.
> >
> >FINANCIAL PLANNER – A guy whose phone has been disconnected.
> >
> >MARKET CORRECTION – The day after you buy stocks.
> >
> >CASH FLOW – The movement your money makes as it disappears down the
> >
> >YAHOO – What you yell after selling it to some poor sucker for $240
per share.
> >
> >WINDOWS 2000 – What you jump out of when you’re the sucker who
bought Yahoo @ $240 per share.
> >
> >INSTITUTIONAL INVESTOR – Past year investor who’s now locked up in
a nuthouse.
> >
> >PROFIT – an archaic word no longer in use.
i dont know about anyone else out there but i really needed a laugh

om shanti


A possible, simple first step in the right direction.
Governments could rule that Credit Default Swaps are actually insurance, and, as such have been entered into unlawfully. They could establish protocols to simply reverse the purchases of CDS’ and set refund requirements. This would reduce existing leverages.
Also, going forward, CDS would be replaced with Credit Default Insurance (CDI) that could only be purchased by the debt holder up to 80% (for example) of the value of the debt and would have to meet insurance reserve requirements and be issued by an institution independent of the original debt instrument.

bearing01 said:

Deflation = a contraction of the money supply (the Fed’s balance sheet).
Inflation = an expansion of the money supply.

From an economists viewpoint, I agree with your definition. The general public looks at inflation and deflation in terms of price.

The supply of money does not necessarily correlate with prices because of other dynamics. In this case, wages have not kept up with price increases of staples, and there is nothing on the horizon to suggest that will change. I see foreclosures and bankruptcies continuing to increase as consumers get squeezed with higher prices for essentials. So yes the money supply will expand dramatically - and so will the fall of financial assets including real estate. By the time fo the bottom of the credit collapse, consumers will be lucky to have enough cash for basics.We think along the same lines.