My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
Quote of the Week: “Historians are pessimistic by nature because the only future they can imagine is the past.” Robert Skidelsky
In the final Issue of Chapter 8 – ‘Financial Engineering’, we looked at some examples of bankers’ fraud and manipulations. Whilst there are many financial engineering devices, we have covered the main ones, but I always recommend further reading and research.
Here is the link to last week: ISSUE 44
Now that Brexit is finally coming to a conclusion after almost three years I will now be providing weekly updates as events progress:
Brexit Update – 29th March 2019
This was the original deadline for UK to leave the EU club but which has now been extended to 12th April 2019 by agreement. This week Parliament took control of government business on Wednesday in an effort to find a solution with which a majority of Members of Parliament (MPs) could agree. However, they could not agree on any of the 8 options and so the government moved to try again on Friday to no avail. Next Monday Parliament will have another try at finding a solution. In the meantime Mrs May’s Withdrawal Agreement remains on the table to be visited yet again before the deadline. Details can be found here:
For those of you who wish to follow the Brexit saga each day, you can do no better than follow Dr Richard North’s blog at: http://eureferendum.com/ Please note that Dr North has always promoted his ‘Flexcit’ solution, a 400 page thesis on an efta/EEA exit plan.
Chapter 9 – Inflation & Deflation
In this Issue we open the Chapter with a mind game, a favourite of Albert Einstein, and which I find exemplifies complex issues rather more easily than long, tedious descriptions.
It should be noted that the causes of inflation are not generally agreed among even the most academic of economists. The truth for me is that of the Austrian school of economics which states clearly that inflation is caused by the expansion of the store of money. Here is my Institute’s very good summary of inflation:
In a fiat money economy, such as ours, debt is created out of nothing by commercial banks, but they don’t create interest, this is added to the debt. By this means it is always necessary to continually expand the money supply in order to service the expanding debt in a growing economy.
More about this will be discussed in the coming Chapters. But suffice to say that the effect of inflation is to continually erode the purchasing power of money and is in effect a hidden tax on the people. Because it is hidden and a gradual process the people are only aware of the price of goods and services increasing but have no idea about the causes. The banking and money system is designed deliberately in this way by the ruling elite and utilises the concept of the “boiling frog syndrome.”
Important note on inflation from Mike (Mish) Shedlock:
“Unlike others, I do not believe these are purposeful actions by the Fed for the benefit of banks, so the only logical answer is the Fed does not properly understand what inflation is, how to measure it, or the vast array of problems associated [with] blowing asset bubbles.”
CHAPTER 9
Inflation & Deflation
“There are known knowns; there are things we know that we know
There are known unknowns; there are things that we now know we don’t know
But there are also unknown unknowns; there are things we do not know we don’t know”
The original source of this koan may be ‘Landmark Education of Seattle’, Washington;
although generally it is attributed to former US Defence Secretary, Donald Rumsfeld
“There are three kinds of lies: lies, damned lies, and statistics”
Mark Twain
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value”
Alan Greenspan
The significance of the above quotes is that nobody can define precisely what inflation and deflation, and all the variations in between really are, what their causes might be and how we might compensate for their ravages. There are so many economists who promote their theories to fit specific examples in a world of supply and demand where prices are constantly on the move, in a complex web of multiple markets.
This includes interference from financial institutions which adds bias to the natural course of market events. Oil prices, for example, which affect us deeply, are influenced greatly by speculators and financial market actors that distort true supply and demand beyond any rational measure
Wages have stagnated irrespective of ‘inflation’
We all experience the direct effects of inflation in the movement of consumer prices together with (hopefully) a steady increase in earnings but which have been far and few between these last few years.
The fact is that wages have stagnated yet we are expected to pay increased prices in just about all we consume, especially fuel, electricity and taxes; not forgetting a rise in Value Added Tax (VAT) in Europe and local taxes all of which remain hidden and lost in the daily trumpets of the mainstream press, TV and internet articles.
Most of us rely on our money savings to build some kind of increase in net worth and provide for emergencies and the future. Regrettably inflation erodes the purchasing power of our savings at a steady and debilitating rate and is the reverse of what Albert Einstein quoted when he recognised the value of compounding interest or dividend income: “Compound interest is the eighth wonder of the world. He, who understands it, earns it … he who doesn’t … pays it.”
The human brain has a problem when confronted with mathematics and more so when statistics are concerned; the computed math result rarely matches our intrinsic ability to rationalise our intuitive answer. Here’s a little test to prove the point:
A mind-game test to assess your mathematical intuition
There are 26 people, chosen at random, in a room. You are required to assess the chances of two of them having the same birthday (exclude the year); thus, 26th September, 1st April, 13th June etc.
You can choose between four options: Are the chances of two people sharing the same birthday; high, average, low or very low? The answer is found a little lower down in this article. If you get this right, without calculating it, you are likely to be within the ten percent of people who have some degree of an intuitively mathematical brain and perhaps you should consider a career in investment banking or economics!
Inflation and its opposite, deflation, is the result of the interaction of market forces confused by the application of fiat currencies. In a normal, free market we have already seen that prices go up naturally if demand increases and supply remains the same. Likewise if supply falls but demand remains the same, which is described as a shortage or scarcity, again prices tend to increase.
We would recognise this as ‘inflation’ because it feels like it; prices are increasing but the reality is more complicated when experiencing inflation in a complex, interconnected financial system. It is not easy to define the causes of inflation as so many factors have an influence on prices over and above normal demand and supply and which has been the subject of continuous discussion in economic circles for many years.
We know that much has to do with peoples’ perception of what is likely to happen to prices in the future and this is where the answer to our earlier question becomes relevant because perceptions are often misleading.
The answer to the probability of two persons, out of 26, sharing the same birthday is extremely high, in fact, it is almost a certainty. You can prove this by doing an experiment: take one person and compare their birthday with the remaining 25 people. Then, putting aside the first person, you take the next person and compare their date with the remaining 24 and so on. In mathematics this would be expressed as: 1+2+3+4……. + 26 or what is known as a divergent series and the formula; x = (26 x 26) + 26 all divided by 2, results in the answer 351 which is very close to the 365 days in the year.
Probability theory suggests that there is almost a 96% chance of two people sharing the same birthday! This is of course counter-intuitive to most people’s thinking and demonstrates how we can be confused and fooled by the manipulations of mathematicians and statisticians. Governments know this and make full use of it by compiling and manipulating statistics to support their policy aims and objectives leaving the populace none the wiser.
Government uses mathematicians to project pension policy
Government statistics are compiled and published in the UK by the Office of National Statistics (ONS) which employs government actuaries, a rare breed of mathematicians and statisticians, whose main task is to not only work on current national accounts but more importantly to prepare forecasts for politicians to assess the future impact of their current policies.
A good example of the fallacy of these forecasts involves state pension calculations after the Second World War when actuaries calculated the average life expectancy of a male in Britain to be 64 years. The pension age for a male therefore would rest at 65 years on the basis that, on average, the state would not need to pay out much in pensions but would be collecting contributions from day one and ‘selling’ the public on the promise that these contributions were going to pay current old age pensioners; in actual fact it was projected that little would need to be paid out! You see, the elites use every device to fool and manipulate the populace to their own ends.
As time passed it became clear that men (males) were living longer and now the average life expectancy is 77 years for a male in Britain which has thrown into disorder all the actuaries’ calculations; the government now has a serious problem with pension projections and has already started to increase the pension age beyond 65.
Inflation arrives in the mathematician’s toolbox
These examples of the inability of our best and brightest to forecast future trends highlight the implausibility of statistics in general and no more so than those involving inflation. The consensus view of economists is that a long sustained period of inflation is caused by the money supply growing faster than the rate of economic growth.
The money supply is controlled by central banks and by the setting of interest rates; however, printing too much money can cause inflation. This is admittedly a simplified way of looking at a complex subject, however the contra argument points to the lack of significant inflation in the period 2009-17 during a time of excessive money printing.
Some argue that the world is in a period of deflation following the crisis of 2008 and that all the excess money supply has not yet reached the mainstream economy but has been ‘stuck’ in the banking system.
It is true that nobody is quite sure what is actually happening except that I know, as many others do, that I am experiencing inflation in prices from electricity costs to food prices sometimes cleverly disguised by reduced pack sizes and weights, i.e. stealth inflation:
https://modernsurvivalblog.com/survival-kitchen/food-price-inflation-hidden-in-packaging/
There is no doubt that the standard government measure of inflation, the Consumer Price Index (CPI), in no way reflects the reality experienced by the general public each and every day.
To be continued next Saturday
