We are told that we are in the recovery phase, but massive fiscal deficits remain the order of the day in the UK in particular; there has been a large run-up in public debt; the banking sector remains largely unreformed and in the case of RBS still in difficulties. It remains unclear whether we are really only half-way through the crisis.
I found this Moneyweek interview with Bill Bonner fascinating. He argues the real crisis is still ahead of us and seems to be saying a deflationary crunch–a credit crunch worse than in 2008–will be followed by hyperinflation (probably as part of the policy panic response to the deflationary crunch). I think it is worth discussion. He believes real money, probably gold, and not issued by a central bank, will emerge from the ruins.
“He believes real money, probably gold, and not issued by a central bank, will emerge from the ruins.”
And that is probably the optimistic view. If he is right, and hard currency becomes the only acceptable means of exchange during the next crash, most people will be buggered within hours – a few days, at most. The cash machine in the next village from me (at the post office) usually runs out on a Sunday afternoon in normal times! Worst case scenario, our just-in-time economy freezes up (no electronic credit, just hard cash!), and within days there is wide-spread murder and plunder as the starving masses fight for the last morsels, and the government cracks down with martial law, ending in some Orwellian totalitarian nightmare.
I’m sure the big crash is coming. I’m hoping none of the above happens, but trying to be ready for it anyway.
He also must be assuming (I haven’t read the article, mea culpa) that the government(s) will leave people alone to deal with their several crises as best they can. I think it’s far more likely that the PTB will impose dictatorship at gunpoint.
Roving, armed gangs, looting, raping, murder, etc. What! Empower the locals to maintain order? What, are you NUTS???
Sorry, guys.
And sorry, Ben. That’s the same thing you said. :>(
Thats Ok Julie – glad to know I’m not alone in my ravings! I’m off to check the supplies in my bug-out van, now 😉
A return to hard currency did not emerge from either Weimar or Zimbabwe. This seems to be the usual optimistic fantasy of the “phoenix from the ashes” which political outsiders frequently fantasise about.
Actually, hard currency did emerge from the hyperinflation of 1923 in Germany, as discussed in Nathan Lewis’ book Gold the Monetary Polaris, which I discussed in a blog, but which I don’t think Ian B has bothered to read. The hyperinflated paper mark was replaced by the gold mark at a parity of 86.85 marks per ounce of gold. This is discussed on pp214-217. Zimbabwe has not yet introduced its new currency and many currencies are in use, including the dollar. A move towards proper money would be easier if adopted internationally and not just by one country, but the emergence of China, which is accumulating gold as quickly as it can, may eventually lead to a new system that replaces the Bretton Woods system.
The old, worthless Reichsbank mark was replaced by the Rentenmark, which was notionally backed by a basket of land and industrial assets. The old paper mark had been a supposedly gold backed currency. There is a very good book about it all called When Money Dies, well worth a read.
Ian, this is my last comment to you in this comments thread, to avoid encouraging trolling and being sucked in a sequence of non sequiturs that I have to sit there and unpick. This is all explained in detail in Lewis’ book, on those pages cited and around p240ff. YOu can get the PDF and search for rentenmark to find the right passages
The Rentenbank had no gold bullion and the rentenmark was not convertible into gold, but it was introduced at the prewar parity against gold, and the supply of rentenmarks was managed in such a way to keep the mark stable against its gold parity (i.e. managed as a gold peg, much as the shares in issue of a gold-based ETF that has no physical gold holdings are managed to keep the value of shareholdings stable against gold — this method of monetary management is explained in great detail in a book you haven’t read, Gold: the Monetary Polaris). This was followed the next year in 1924 by the introduction of a gold-based reichsmark, equal in its gold parity value to the rentenmark, with both marks circulating until 1948.
The rentenmark successfully ended the hyperinflationary interlude, and the currency’s issuance (issuance of base money) was managed to keep the new currency stable against gold in much the same way that a currency board works. I can’t reply to ignorant comments. If you won’t read basic texts, you are talking to yourself.
Always beware the man whose entire understanding comes from one book.
The significant point here is that the original mark was gold backed. Gold didn’t stop the inflation because, as commonly happens, when a government wants to inflate, they just break the gold standard, which is what the Reichsbank did, and indeed what our own government did when they started printing money to fund the First World War. The same process that broke the “gold exchange standard” in 1971.
All the historical evidence is that once a money system shifts to a situation where people think gold receipts (bank notes) are “the money”, any gold standard will eventually break when the government decides it needs more money than it has gold. In other words, a gold backed currency does not prevent inflation, because the perceived benefits of inflation are greater than the perceived benefits of monetary prudence.
The second point is that the Weimar inflation kicked into hyper-inflation primarily as a consequence of increasing velocity rather than being caused by money printing- the printing ramped up as a consequence of that, and an idiot in charge of the bank. But then, I bet you haven’t read When Money Dies, so pot, kettle.
Yes – the endless increase in the “monetary base” (“narrow money”) is to prop up the vast, and already existing, credit bubble of “broad money” (bank credit). The establishment are actually terrified of a deflationary collapse.
Mr Webb and the others who have written are agreed on the fundamental point (that the present financial system is a mess – and that that the basic capital structure of the economy is a mess to), disputes are over details.
Yes real commodity money (most likely gold and or silver) is the money of the future – “time will run back” (and a lot further than any gold “standard” – it one can not produce the PHYSICAL commodity then it will be no deal).
Will there be social and political breakdown? Most likely – but the details I do not know.
I remember reading a short story (the name escapes me) where the Mormon Church (the LDS) had set up theocratic rule in Utah (and some bordering areas).
The unnerving thing was that compared to other areas (filled with cannibalism and so on) – the area of the new LDS polity, seemed the least bad option.
The question is whether a commodity can anchor a currency, and the answer historically seems to be “no”. The problem is that people soon tire of carrying around bags of gold, put it in banks, and then “the money” becomes whatever is written in the bank’s ledger, not the gold itself (which becomes increasingly rare in transactions) and the gold money decays to a gold standard, which decays to a fiat in all but name, which decays to a true fiat; which is what happened to the pound and dollar etc.
I don’t know what the answer to this is. You can’t force people to carry little bags of gold coins around. Especially these days. Anyone trying to set up a “true gold” virtualised currency (i.e. one with a 1:1 ratio of gold to receipts) is soon going to be out-competed in the free market by fractional reserve banks offering interest on deposits, and then you’re back where you started.
You state the problem yourself Ian – when you say “can a commodity anchor a currency” – of course the answer is “no”.
This is because the fraud occurs at the very start – in defining the currency as something different from the commodity (using special names such as “Dollar” or “Pound” or “shilling”).
The currency should just be the commodity – defined only in terms of weight and purity (no need for special names).
No “backing”, no “standards”.
As for people not being willing to carry round bags of gold – well they did for thousands of years.
But if people prefer to use cards that transfer the ownership of that gold (or silver or whatever) that is fine.
By the way the places where the commodity is stored would not be called “banks” – as that term is discredited.
Banks are addicted to an unsound system – for example “crediting to the account” rather than “lending money”.
I think that the term “bank” and “banker” is now so tired to unsound practices, that the terms “money lender” and “safe deposit centre” will have to be used in the future.
Someone who lends money should physically hand over that money, and they can not (soundly) lend out vastly more money than actually exists.
Banks, I repeat, seem to me to set in unsound practices to be reformed.
The present system will have to pass away at some point – and I suspect that it will be very messy.
For example, unless I die before it happens (which would be the best thing) I expect to die, very squalidly, during the mess.