This blog was created to simplify the alchemy of economics. Economics is not rocket science, . I maintain that it isn't even a science at all. Behind the facade of formulas, theories and schools, the underlying principals are relatively simple.
The issue is separating economics from business and investing. Both are essentially the study of people. In economics, if people do a, the result is x. If they do b, the result is y, and so on. The problem in business and investing is trying to predict if and when people will do a or b. Of course, this can be impossible, and is the reason business and investing is difficult....and complex.
In economics there are "laws" or "rules". Economics doesn't follow the Austrian School some of the time and the Chicago School some of the time. This is ludicrous, despite the fact there is a huge industry of producing and employing economists and researchers. The Federal Reserve itself employs over 300 PhD level professionals.
So in the interest of offering people a clear view into the obfuscated world of economics, I am re-posting an article from a couple of years ago outlining the true stages of the economic cycle. This cycle has been repeated over and over throughout the history of mankind, and despite of, or perhaps because of, our technical progress we are still subject to the same cycle. Because we are now in stage 11, it is important to know the truth.
True Stages of the Economic Cycle
1. Hard Money. A form of currency is established to facilitate
commerce. In order to gain acceptance the currency is backed by something of
intrinsic value such as precious metals. This is known as Hard Money.
2. Debasement of the Currency. It is immediately evident that “free”
wealth can be created by Debasing the Currency. In its most fundamental form
this involves the practice of charging interest (or usury, the meaning has been
exactly the same throughout history up until recent times).
3. Enactment of Legal Tender Laws. Without Legal Tender laws, implied
values are self correcting and always closely match true value. Legal Tender
laws greatly facilitate the debasement of a currency. The Founding Fathers knew
this, Thomas Jefferson wrote:
"If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered".
"If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered".
The U.S. Constitution, Art. I Sec. 10 Cl. 1,
states:
"No State shall enter into any Treaty, Alliance,
or Confederation;
grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit;
make any Thing but gold and silver Coin a Tender
in Payment of Debts;"
The Supreme Court ruled in U.S.
Supreme Court - Wheaton
1827;
“The
prohibition in the constitution to make anything but gold or silver coin a
tender in payment of debts is express and universal. The framers of the
constitution regarded it as an evil to be repelled without modification; they
have, therefore, left nothing to be inferred or deduced from construction on
this subject.”
4. The Accumulation of Debt is unavoidable with legal tender laws in
general, and especially in a Central Banking scheme such as our current Federal
Reserve, in which the perpetual increase of debt is an essential component.
5. An Illusion of Economic Prosperity is created by the accumulation
of debt. This is no different in principle from a person going on a spending
spree with credit cards. They have the illusion of being very prosperous, but
in reality they are destined for a reckoning when the debt cannot be paid.
6. Monetization of the Debt. As the accumulation of debt becomes
unmanageable, it become necessary to monetize the debt. The debt grows so large
it cannot possibly be paid. There are a few ways to “resolve” this.
- The most obvious way is through taxation, but this is never politically acceptable.
- Another way is by directly devaluing the currency. This has been done many times in history, but is also not very politically acceptable.
- The third, and easiest (for leaders at least) is hyper-inflation. In simple terms hyper inflation erases debt by transferring wealth from individuals to government.
It is apparent that all
three solutions have one thing in common – all transfer wealth from individuals
to government, or more accurately, to the central banks.
7. Dilution of Currency Value The process of monetization directly
causes a Dilution of Currency Value.
8. Loss of Confidence. In essence Consumer Confidence is a measure of
how well the taxpayer is being fooled into thinking all is well. The dilution
of his buying power caused by the dilution of currency creates a Loss of
Confidence.
9. Inflation. As buying power decreases, the consumer tries to make up
the difference by charging more. The merchant charges more for his goods, the
laborer demands more for his services. This is classic Inflation.
10. Inflation Stabilizes as government
implements inflation control measures, but does nothing about the
underlying problems, causing a:
11. Return of Inflation, quickly followed by:
12. Hyper-Inflation, which effectively erases the debt. If the U.S. experiences the level of hyper-inflation
similar to Hungary
in 1946/7 (42 QUADRILLION percent per month), the entire national debt could be
paid off with less than a penny. This may sound like a good thing to some, but
the truth is, wealth is simply transferred from private individuals to the
government. This is the stage of Reckoning. It is obvious that there was no
real wealth created in phase 2. This is the essence of my argument against the
“Economy creates wealth” proponents. Economic trickery does not create wealth. It never
has and it never will.
The wealth transfer causes:
13. Depression, which leads to:
14. Reorganization of Government. It is only at this point that a
significant number of people understand the inextricable link between wealth
and real money. This enlightenment leads to:
15. Return to Hard Money, and the cycle repeats.
These phases are exponential
in nature. The time from the debasement of a nations’ currency to the loss of
confidence in that currency can be measured in decades or even centuries. The
time between the loss of confidence and inflation however, may only be weeks or
months. In the later stages of hyper-inflation the loss of a currency’s value
and the accompanying price increases can double in days or even hours.[1]
It should also be noted that
inflation is not bad for everyone in equal measure. It is actually a good thing
for those people of means who are in a position to borrow to purchase property.
The reason is the same; the repayment of debts, is made in currency that is
worth less than the currency originally borrowed. This is also the reason working people cannot prosper during times
of inflation or hyper-inflation. Wages are generally not indexed to
inflation and always lag price increases. Even in the case of the relatively
few people whose wages are indexed to inflation, the adjustment is always done
after the fact. Loses accumulated from the previous adjustment are never
recovered.
[1] In the Weimar Republic
in 1923 workers demanded, and were paid three times a day in order to be able
spend the money before it lost further value.
