In Jim Cook's Archive


By James R. Cook

“The Fed can and does increase the money supply all the time, whether it be boom or recession. There hasn’t been a contraction of the money supply since the early 1930s, and there is not likely to be another in the foreseeable future. So now that the money supply always increases, prices in general are always going up, sometimes more slowly, sometimes more rapidly.”

Murray N. Rothbard

Currently the economic writers I read warn about a faltering economy, a housing bust, lack of liquidity, stagflation or deflation. The Federal Reserve and Wall Street sound far more optimistic. They are cheerleaders for a renewed boom. If we are on the verge of a new recession (who knows), it could get nasty in a hurry with stocks falling and unemployment worsening. Recent strength in the dollar means dollars are more in demand (to pay down debt and renew savings). That would confound the Federal Reserve and terminate the great era of speculation, money creation and credit expansion. Some experts claim that the Fed doesn’t have a way to continue to issue credit, and their failure to do so will burst the financial bubble.

However, we don’t know exactly what the Fed has up its sleeve. Big budget deficits help them out. The Fed creates new money to pay the government’s bills. According to analyst Doug Noland, it could take as much as a trillion dollars this year to keep the mortgage bubble aloft, leveraged finance intact and the economy perking. In the past few decades our financial markets have been most creative. It’s probable that reflation will be a success. There may be some hiccups along the way, and even a mild recession, but long term, the Fed’s going to figure a way to inflate.

The alternatives are far too serious. We are an over-extended nation. Nothing brings fear to the debtor class like deflation. It means they can’t pay their bills and it means the loss of their leveraged assets (homes and cars). Nothing brings more fear into the hearts of politicians and central bankers. A nation gripped by fear will not hesitate to debase its currency. The only question is, how will it be done?

The depression of the 1930s was blamed on the inability of the Federal Reserve to expand credit. They say it was like pushing on a string. For one thing, the government was tiny then. There was no massive government spending. Nor did they have exploding assets to leverage; borrowers that became sound by lowering credit standards; massive foreign bond buying; huge quantities of money already in existence; stupendous non-bank credit creation, and intervention in the stock, bond and currency markets. There were no Federal Reserve governors talking about new and creative ways to expand money and credit, or dropping hints about the Fed buying corporate bonds and who knows what else.

I believe you can see the future in what Andrew Dickinson White wrote about the great French inflation, “At first, new issues [of money] were made with great difficulty; but, the dike once broken, the current of irredeemable currency poured through; and, the breach thus enlarging, this currency was soon swollen beyond control. It was urged on by speculators for a rise in values; but its simple fiat, could stamp real value to any amount upon valueless objects. As a natural consequence a great debtor class grew rapidly, and this class gave its influence to depreciate more and more the currency in which its debts were to be paid.”

We already have significant levels of price inflation. The government claims otherwise, but their index relies heavily (according to articles I’ve read) on apartment or housing rents and the price of used cars. When you look at the price of new homes, health insurance and tuition to name a few, you know the government is cooking the books. Stock jockeys are always swooning on TV about low inflation, but I wish one of them would explain how a three-cent postage stamp that we used for years is now going for thirty-seven cents, or twelve times higher and there’s no inflation. Oil could soon be $50 a barrel and asset prices have gone bonkers.

I don’t have to tell you about real estate prices, especially in California. The rate of appreciation is rising. I pay attention to a wide variety of collectors items. Things you could have bought for several hundred dollars a few years ago are blowing people’s minds. An old Harley-Davidson sign just sold for $41,000. A Hires Root Beer syrup bowl brought $57,000. A carved, decorative Canada Goose was recently hammered down for $650,000. A series of early twentieth-century photographs sold for $200,000 to $400,000 each. Every collector I talk to, in every field of collecting, is in shock at the prices. If we have asset hyperinflation, this is how it would start.

Many necessities of life (clothing, furniture, building materials) come from overseas. Wal-Mart is full of consumer goods that originate in Asia. Low labor costs and greater efficiencies hold the price of these goods down. In a sense we export inflation, and Asian countries are now experiencing some inflation. They have accumulated huge dollar balances through trading with us. However, too many dollars can drive the greenback lower in currency markets. This causes raw materials and goods from overseas to be more expensive. Worst of all, this money can purchase U.S. assets to the extreme or ultimately be dumped to decimate the dollar. Exporting dollars for goods and bringing the dollars back by selling government bonds to foreigners may be a virtuous circle while it works, but, should it come unglued, it promises a firestorm of inflation.

The Fed will do everything in its power to keep inflating, even while it claims to be fighting inflation with tiny raises in the interest rates. The economist Murray Rothbard saw through this. “…the drumfire of propaganda that the Fed is manning the ramparts against the menace of inflation brought about by others is nothing less than a deceptive shell game. The culprit solely responsible for inflation, the Federal Reserve, is continually engaged in raising a hue-and-cry about ‘inflation,’ for which virtually everyone else in society seems to be responsible. What we are seeing is the old ploy by the robber who starts shouting ‘Stop, thief!’ and runs down the street pointing ahead to others.”

We must either inflate or face economic perdition for a number of years. We are not going to take the necessary, but bitter, deflationary medicine now. However, the consequences are profound. London Times Editor William Rees-Mogg wrote, “Inflation gradually pushes the whole community towards speculation, since ordinary life begins to require speculator’s skills.” The free market thinker, Henry Hazlitt summarized, “In a free enterprise system, with an honest and stable money, there is dominantly a close link between effort and productivity, on the one hand, and economic reward on the other. Inflation severs this link. Reward comes to depend less and less on effort and production, and more and more on successful gambling and luck.”

Another great monetary thinker, Elgin Groseclose, explained the process we’ve employed in America for many decades. “By mortgaging the future, pledging the productive power of unopened mines, uncut forests, unbuilt factories and unborn generations, a tremendous demand may be created for wares already produced in the markets.”

When you hear the media and left-wing politicians renouncing business, it brings to mind Henry Hazlitt’s explanation. “A period of inflation is almost inevitably also a period when demagogy and an antibusiness mentality are rampant. If implacable enemies of the country had deliberately set out to undermine and destroy the incentives of the middle classes to work and save, they could hardly have contrived a more effective set of weapons than the present combination of inflation, subsidies, handouts, and confiscatory taxes that our own politicians have imposed upon us.”

Nobody knows the future. We can only guess. I make my personal financial decisions based on the belief that we will have worsening inflation and, ultimately, runaway or hyper-inflation. If we keep expanding credit, there comes a time when too many people no longer want to hold the money. They want to exchange it for goods and assets. Quite suddenly prices begin to run away and nobody wants to hold dollars because they are depreciating too fast. The economist Hans Sennholz said it best. “The ultimate destination of the present road of political fiat is hyperinflation with all its ominous economic, social, and political consequences. On this road, no federal plan, program, incomes policy, control, nationalization, threat, fine, or prison can prevent the continuous erosion and ultimate destruction of the dollar.”

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