My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author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: “A successful man is one who can lay a firm foundation with the bricks others have thrown at him.” – David Brinkley
Last week continued with Chapter 9 looking at deflation and illustrating the effects of inflation with yet another ‘thought experiment’. Here is the link to last week: Issue 46
Basel III – Bank of International Settlements (BIS)
Last week was also a major landmark for banks because Basel III regulations have now come into effect after some years of preparation. The general emphasis is to cause banks to hold greater amounts of reserves than in the past which may well impact on their profitability going forward. Here is an overview for those who may wish to know more:
https://www.investopedia.com/articles/economics/10/understanding-basel-3-regulations.asp
And in connection with Basel III, this story (translated from a Russian site) is not confirmed to be true as yet, but if it is so, will prove to be quite a bombshell because it is forecasting global mayhem in the autumn, just six months away:
http://thesaker.is/basel-3-a-revolution-that-once-again-no-one-noticed/
Now that Brexit might be coming to a conclusion after almost three years I will continue to provide weekly updates as events progress:
Brexit Update – 12th April 2019
Parliament has continued yet more debates during the week, all of which remain inconclusive with no definite decision either way as to how to carry forward the exit strategy. The week ended with the two leaders, Theresa May and Jeremy Corbyn engaging in head-to-head discussions in an effort to agree some sort of compromise which could be acceptable to a majority of MPs in Parliament.
In the early hours of Thursday, 11th April the European summit meeting agreed to extend the Brexit deadline to 31st October 2019 but with a review at the end of June should a decision be passed by Parliament to leave by 22nd June. This means that UK will have to engage in the European elections for MEPs in UK on 23nd May 2019.
Theresa May reported at the press conference in the early hours that she believed that the UK could still exit the EU by 22nd May and therefore avoid sending MEPs to Europe. Details of Parliament’s deliberations can be found here:
The UK Parliament is on holiday now until after Easter but inter-party negotiations will continue with the hope that a solution for exit will be found before the UK has to complete the European elections on 23rd May.
The big news this week is the launch of the new ‘Brexit Party’ headed by Nigel Farage, who is a great friend of Donald Trump, and they are expected to gain many EU seats if it gets that far.
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
Savings compound the problem
There is yet another aspect to our thought experiment which economists find so fearful; this is where the money supply is distorted by people not spending but saving part of their disposable income.
Using the first set of parameters from last week, there are 20 apples and a money stock of £10. We assume now that £5 of the money stock is not available for spending but placed under a mattress for a rainy day because the consumer believes that prices might fall in the future. The market now has only £5 of money available for consumption; thus the market will find its equilibrium by setting the price of apples at 25p each and economists will say that ‘deflation’ has occurred and people are saving too much.
They will further urge the government to make up for the lack of spending power by injecting £5 into the economy to return prices to ‘normal’. What economists have missed is that the money stock has not changed; rather it has been temporarily removed from the market, to be spent on another day. If the government responds to the economist’s pressure they will have created a permanent ‘inflation’ downstream by increasing the stock of money unnecessarily.
Examples of inflationary effects in closed economies
The economists’ fear is in fact well placed because if the savings situation is allowed to continue for a long time prices will continue to fall and this would result in failing businesses and unemployment will increase.
There is always a certain amount of what economists describe as ‘stickiness’ in both ‘input’ and ‘output’ prices. If we are constantly matching supply and demand we would need to continually adjust wages and salaries and check price labels every day which would be both confusing and impractical.
However, this has happened on many occasions; Germany in 1922-3 and more recently in Zimbabwe in 2008 and Venezuela now, but these events were confined to a virtually ‘closed national economic system’ and did not seriously infect the global financial system; they did not become ‘systemic’.
One aim of national economic policy is that of ‘price stability’ and money printing works against this in general. In the last experiment, when the government adds £5 to the economy, it initially benefits those that receive the money first, government and banks, and penalises the late receivers of the money, the wage earners and the poor; thus transferring resources from ‘poor asset holders’ to the ‘asset rich class’ thus increasing wealth inequality which we witness today. The early receivers, ‘the rich’, will spend their money in a certain way, or more often than not actually invest the extra money rather than spending it, again distorting relative prices in the economy and increasing asset prices which we see in 2019.
An expanding economy adds more problems, extending the thought experiment
A problem arises when the economy improves; people reverse their hoarding traits and start spending their savings and borrowing more money.
Extending our experiment yet again, we now have 20 apples and £15 of money stock in the economy meaning that the price of apples will eventually balance the market to arrive at 75p each, showing that inflation has returned with a vengeance. We can further extend the experiment by assuming that £5 extra is ‘borrowed into existence’, which has increased debt, thus the money stock becomes £20 and apples are selling for £1 each.
This can be compounded again if, at the same time, the supply of apples falls to less than 20 when prices could ‘shoot through the roof’ and eventually arrive at a state of ‘hyperinflation’ or extreme inflation.
This occurred in the early 1970s when the price of oil increased due to restrictions place on oil supply by the ‘OPEC’ oil producing countries. Energy supply is crucially important because people have no option but to consume oil and gas regardless of price and which economists describe as, ‘price elasticity of demand.’
Furthermore, in a global economy, almost all raw materials and goods need to be transported, at one stage or another, during the distribution cycle. Energy prices therefore influence many of the costs associated with delivery and manufacture of end-products. This aspect of economics will be discussed in more detail in Chapter 11 about the basics of macroeconomic theory.
The complication of multiple products confuses the simple model
So far we have been dealing with a ‘one product’ economic model using ‘apples’ but our world in reality has many and varied products offering people a choice to substitute alternative products when prices change. For example, if beef prices increase consumers can switch to cheaper chicken or, as happened in the 1970s inflation period, when pensioners on fixed incomes were so pressed to buy basic supplies they began consuming pet foods in place of regular produce!
Also in a multi-product world, inflation from excessive credit growth will cause changes in relative prices that result in unsustainable investment as happened to housing in the period 2001-2007. Deflation, in the ‘bust’ phase of an economic cycle, is a partial realignment of these relative prices closer to what society really wants to be produced.
The printing of money simply interferes with this essential clearing process. The real solution is to end fractional reserve banking and central banking systems and replace it with a sound money system as advocated by the ‘Austrian’ school of economists who are gaining more credibility as time passes; the principles will be discussed further in Chapter 11.
The virtues of deflation versus inflation
I consider inflation to be much worse than deflation because it robs wage earners of their purchasing power and seriously affects the relative ‘poor’ in our community. Central banks are the primary cause of inflation and are the main reason for the growth of income inequalities, as the rich get richer and the middle class tends to sink towards ‘relative’ poverty.
This trend has been growing since the 1971 ‘sound money system’, based on gold, was replaced with ‘fiat currency’ in the form of the mighty American dollar. Ever since, the dollar has depreciated in value continuously as central banks print more money and create inflation; now it has lost 96% of its value during the last century.
The banks have been generous in supporting economic research in academic institutions serving to theoretically justify the central banks’ inflationary policies. The common fallacy of “a little inflation is good economics” is disseminated by the mainstream media and economists to lull the populations into a false sense of wellbeing when in fact inflation is nothing short of theft because it reduces the value of money in your pocket.
A ten percent per annum inflation over seven years halves the value of your money and for savers and particularly pensioners this is a daunting prospect. We know that the government CPI figures substantially understate inflation but we have no way of measuring the actual rate of inflation which we are each experiencing only by noting our perceptions and daily living activity.
To be continued next Saturday
I think Basal III shows the American Zionist don’t control The Late Great Western Economic Ponzi Scheme anymore, and the BRICS are really kicking their crooked asses. The US and UK Banksters would never have agreed to gold being 100% money when they know they stole all the gold their countries had and sold it to China and Russia. The US Treasury vaults now contain mostly some unrefined gold, some gold plated tungsten bars, and 8,000 tons of IOUs. When their jig is up, they send the Goy to War and haul ass to another country.
Excellent analysis Robert, thank you. You are so right about the gold and the leasing that has taken place together with re-hypothecation. They have sold the precious metals many times over. Only the paper market is keeping prices fairly steady at present.
Likewise, as you say, the BRICS are definitely building up reserves ready to pounce when the dollar goes to hell – which I believe won’t be too long now. The bond market knows what is going on but the stock markets are still hoping for more Fed bailouts. This time they are going to be disappointed because ‘bail-in’ is the order of the day and then the bond holders will get a haircut shorter than ever before IMHO.
I missed parts 1-34 and since then I still have no idea what’s going on . . . STUCK! STUCK! STUCK! STUCK! STUCK!
No worries Niebo, I can always send you the whole book if you would like to email me at: [email protected].