AN
ANSWER FOR THE MOGAMBO
by Castrese
Tipaldi
May 19, 2005
"So, now, YOU answer the question: Did they have deflation or inflation?"
Well, Powerful Mogambo, the answer is quite simple: they had Inflation!
Rectius: they had Hyperinflation!!
In a fiat-money regime you can get deflation just in theory. Twenty-four centuries ago, Aristotle understood that very well already: "A paper money would not be a bad idea, at condition that you have a God ruling the printer".
" .....if all those derivatives go bad, and houses deflate in price, and stocks deflate in price, and bonds deflate in price, and debts are bankrupted, then money will simply disappear."
To tell the true, the value of the houses, of the stocks and bonds do not belong to any monetary quantity, neither the broadest one. So if their value collapsed, just a POTENTIAL money would disappear, a money already drawn out from M1, M2 or M3.
About the derivatives I refrain from any comment, because the matter by then belongs rather to the metaphysics than the economics.
“......if I bankrupt out of the debt, doesn't the money disappear, too?”
Probably, the most of the borrowed money is not money anymore because it’s been used to do or to buy something, but sure the fiat-money can disappear at once in many cases. This happens continually, because of its intrinsic nature: from nothing it come, to nothing it goes.
But please remember, you have a MAN, not a GOD, ruling the printer.
As soon as money disappears, the MAN running the printer.......... you guess what!
In any case, in a fiat-money regime, I would adopt a more correct definition of the deflation, that is: an increase in the purchasing power of your money towards everything you need to live and survive!
So you can forget a deflation!
In such a regime, the value of the so-called money is tied to the value of the debt; ergo, a debt collapse ends in a collapse of the money, apart from the moves in the quantity of money in the system. You can have a falling money supply, and a demand for that money falling more. Ask to Russians or Argentines how much they wanted their money during their debt/monetary collapse! And yet, it could very well be that the supply of that money was falling at that time.
Their bonds, stocks and houses' value collapse meant a decrease in the purchasing power of their money of about 70% in a blink.
Maybe, the deflationist should ponder better these things, don't you think?
Sure, with a senior monetary currency in a global fiat-money regime the things could be different. There has been at least one exception.
For example, in Japan a stocks and houses’ value collapse did not result in a bonds' value collapse; au contraire, the bonds' price soared to absurd level, and so their currency did not collapse, notwithstanding their central bank and government pumping money as there was no tomorrow.
A decade later we have the United States with a terrific increase in debt at all level, private, public and commercial. And yet, their bonds' value is still near its apex, and their currency suffers, but sure it does not collapse. You can be sure that every Country with a trade deficit approaching 6% of its GDP (GDP grossly overstated in the case of USA) would be facing a financial Hell.
But, in both cases we sure can't say that their currencies' value has increased towards the necessities of life. Both have held, the yen has done better because Japanese have a huge pool of savings and they don't need foreigners to borrow some bucks, but finally you need more of that money to live and survive, in Japan as in the United States.
Therefore, I’d conclude that with a fiduciary money the most important thing is the public trust, and in the case of the Big Boys (senior fiat-currencies) acting in a world of fiat-money this public trust can resist even debt and assets’ price collapse.
By the rest, if you think how big and pervasive governments have become in our days, and how great is their power to control and to direct people’s perceptions, the thing should come as no surprise.
Even if the child today would scream that the Emperor is naked, newspapers and TVs would be prompt to lull everyone: “How nice! It’s just a child!”
And everybody will smile on his way to the bank to buy a governmental bond yielding a little more than 4% for thirty years.
Just please, tell them to stop chattering away deflation because of the low yields on the governmental bonds of the Big Boys. That is a symptom of inflation, not deflation.
Coming to its purchasing power, however, this fiduciary money is doomed. It will decrease ever more, ad infinitum, excepted to cancel some zeroes now and then.
Sure, in the next years you could buy more stocks or more houses with your money in the States, maybe even more governmental bonds (I’d not bet on that anyway), but do you think you’ll pay less of it for what you need to live and survive? No, I’m sure you don’t think so!
You can call it deflation, if you like, but you have to remember the outcome of this strange deflation: your money is worth less against the necessities of life.
Some final words about the value of your senior currency on the Forex.
Well, my friend, I think its value against other currencies will keep on falling, even if it’s produced from the Big Boy One.
Some observers of financial market history could learn it the hard way, because their sights on that history is superficial, and they continue to compare apples with oranges failing to realize that a senior FIAT-currency is something completely different, and will require a different outcome.
About the value of a fiat-currency in a global fiat-money regime, the rule is just one, and it’s very simple: its value depends exclusively on the trade, current account and budget balance situation of the Country producing it, in order of importance!
In other words, its value depends on the quantity of debt tied to it. More the debt, above all the external one, less the value of the currency.
Even a senior currency will have to submit to that rule, in time!
A senior currency will not collapse in a blink, but its value will go down anyway compared to other currencies.
Sure, when the credit bubble burst in Japan, as I’ve said, the value of their bond jumped to the sky and the yen did not collapse; opposite, that currency soared greatly against every other currency in the world. But this is the exception that confirm the rule!
Their debt problem was entirely an internal one. Differently from South East nations, Russia, Mexico, Argentina, Brazil (and United States today), they had no foreign debt, their trade balance was instead positive big way, and the Japanese had the equivalent of trillions of dollars in saving. That’s the reason why the yen soared in a post-bubble environment which saw a massacre in the value of real estates and stocks, and a never-ending series of bankruptcies.
Besides, today we have several currencies suitable to act as reserve currency. Euro for example has all the features to act as such, and also the yen to a lesser extent. When the Chinese will decide to get a real currency you could have another competing. You see, several Big Boys endowed with Senior Currencies.
What is the role of Gold in all this? Its role remains the same since the beginning of the human civilization: a store of value!
My educated guess is that in time gold will always appreciate against every fiat-currency, because the printer which produce it is ruled by a God, instead of a Man.
By the rest, in a world awashed in debt and funny money, you want to have an asset class with no debt attached.
And don’t forget to pick some good gold shares, above all now that the Gold/XAU ratio is around 5,4.
Excuse me for my funny accent (anyway I wish to see you speaking italian), and........................
God save the Mogambo!
©
2005 Castrese Tipaldi
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Castrese Tipaldi
Riga, Latvia
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