Monday, August 11, 2008

The Case Against Deflation

The case for deflation hinges on the decrease in the amount of money. Money can only theoretically be destroyed in two ways and neither involves the actual destruction of money.

For every dollar that the US Treasury creates it must create a corresponding debt instrument. To decrease the monetary supply, the Treasury must pay off and retire the bonds it has already issued, issue new bonds and not spend the money it receives in return for them or not spend and hold in reserve, tax revenues that it takes in. When do you think any of these things is likely to happen? That is the "good" money scenario. The "bad" money scenario is that the bonds already issued, must default and be written off the books of the agency, corporation or foreign government which holds them. The flaw in this system, is that the US Treasury unilaterally controls, with the rubber stamp of Congressional approval, the amount of new debt and therefore money, created.

The reason for the current euphoria in and strength of the US Dollar market, has to do with the US Treasury's decision to prop up the failing US monetary system, by printing even more money and thereby creating even more debt. The US Treasury is not allowing irredeemable debt to fail but to be kept on the books of the institutions that hold them and allowing these institutions to use those debts as collateral to borrow even more money, from the government, which these institutions then use to pay off their obligations and stay afloat. They do this, of course, by issuing even more debt. The rest of the World is blackmailed into accepting this debt, because not to do so, would result in the collapse of the US Dollar. In return for this debt, they surrender US trade deficit dollars, which they know to be, in fact, worthless. This is nothing but a huge Ponzi scheme which results in the creation of huge new amounts of government debt that it has no chance of ever being able to redeem, except through the creation of even more money and its accompanying debt. It allows a continuing outflow of money into the economy, long after all meaningful wealth held by the American public has been exhausted. The government funnels this "funny money" into the economy by means of huge spending appropriations, for which they receive little or nothing in return. They even go so far as to send stimulus checks directly to each citizen. This is the ultimate in "free" money, bread and circuses, if you will.

I know that this sounds convoluted and stupid and that is exactly what it is. In order to keep this Ponzi scheme going, the US must convince the rest of the World to keep huge amounts of American Debt in "cold storage" and to accept as a reward for this, a postponement of the day of reckoning, for the American monetary system, when free markets determine the real value of the Dollar. What a depressing thought. Everybody goes along, because they hope they can get out with a better deal than the other suckers, before reality comes crashing down, just like in any Ponzi scheme.

As this situation progresses, the participants who stand to lose the most, will become more and more anxious. Eventually, they will start to panic and try to unload their American debt holdings, even at deep discounts. The end will ensue shortly thereafter.

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