Best of the Week
Most Popular
1.Stock Market in DANGER of Strangling the Bears to Death - Nadeem_Walayat
2. Germany Pivoting East, Exit US Dollar, Enter Gold Standard - Jim_Willie_CB
3.Flight MH17 – Kiev Flash Mob's Last False Flag? - Andrew_McKillop
4.Stock Market Crash Nightmare! - Nadeem_Walayat
5.Gold - The Million DOLLAR Question... - Rambus_Chartology
6.Gold And Silver – BRICS And Germany Will Pave The Way - Michael_Noonan
7.The Jewish Selfish Gene, People Chosen by God, Everyone Else is Goyim to Kill - Nadeem_Walayat
8.The Israeli Promised Land Dream - The Criminal Roadmap Towards “Greater Israel”? - Felicity Arbuthnot
9.Which Way is Inflation Blowing? Watch Commodities - Gary_Dorsch
10.U.S. Economy Quarterly Review and Implications for 2014-2015 - Lacy Hunt
Last 5 days
The Big Energy = Power Battle Is Coming - 25th July 14
USrael - Zionists in Control of America's Goyim Brainwashed Second Coming Slaves - 25th July 14
More Weakness Ahead for Gold Miners - 25th July 14
Gold Price Strong Season Starts - 25th July 14
Geopolitics and Markets Red Flags Raised by the Fed and the BIS on Risk-taking - 25th July 14
Gold Lockdown Until Options Expiry - New Singapore Gold Contract Threatens Price Manipulation - 25th July 14
The Bond Markets, Black Swans, and the Tiny Spirit of Santo - 25th July 14
No Road Map For Avoiding The Future - 25th July 14
Israeli War Machine Concentrating Women and Children into UN Schools Before Killing Them - C4News - 25th July 14
Israeli Government Paying Jewish Fundamentalist Students to Post Facebook Gaza War Propaganda - 25th July 14
Why the Stock Market Is Heading For A Fall - This Time Is Not Different - 25th July 14
An Economic “Nuclear Strike” on Moscow, A “War of Degrees” - 25th July 14
BBC, Western Media Working for Israeli Agenda of Perpetual War to Steal Arab Land - 25th July 14
Ukraine: What To Do When Economic Growth Is Gone - 24th July 14
Stock Market Clear and Present Danger Zone - 24th July 14
The Five Elements to Creating a Something-for-Nothing Society - 24th July 14
Instability is the New Normal? - 24th July 14
Israel's Suicide Bombers Over Gaza - 24th July 14
EUR-AUD Heads Into The Danger Zone - 24th July 14
Tesco Supermarket Death Spiral Accelerates as Customers HATE the Mega Brand - 24th July 14
Ukraine MH17 Crisis - Best Remember Who Your Friends Are - 24th July 14
Three Reasons Why Gold Price and Gold Stocks Will Rise - 24th July 14
HUI Gold Bugs Fighting To Break Downtrend - 23rd July 14
What Putin Knows About Flight MH17 - 23rd July 14
Why Microsoft Will Continue to Rebound, Huge Upside Potential - 23rd July 14
Will Putin Survive? - 23rd July 14
MH17 Crash Next Phase Economic Warfare - 22nd July 14
The TRUTH about China’s Massive Gold Hoard - 22nd July 14
Forex Multi-week Consolidation in EUR/USD Ended - 22nd July 14
Bitcoin Price Medium-term Trend Being Tested - 22nd July 14
Beware Of The Flash Mob - 22nd July 14
Can Putin Survive? - 22nd July 14
Israel Assault on Gaza: A Historic Crime, Nazi Like Final Solution - 22nd July 14
Zionist Israel an International Pariah - 22nd July 14
Reflections on the Global Misery Index - 22nd July 14
GDP Economic Statistic : A Brief But Affectionate History - 22nd July 14
TransTech Digest: Super Battery Bio-Power vs. Dirty CleanTech - 21st July 14
How to Find Trading Opportunities in the Currency Markets - 21st July 14
Stock Market One More Pull Back - 21st July 14
The Conquest Of Real - Degenerate Philosophies of the Book - 21st July 14
A Clear Way to Profit from a Graying Population - 21st July 14
Last Chance Critical Financial Market Forecasts Special Total Access - 21st July 14
Stock Market Crash Nightmare! - 21st July 14
Why the Stock Market Is STILL Cheap - 21st July 14
From Gore-Bore To Gore-War - 21st July 14
Gold Price Looking Drab - 21st July 14
An In-Depth Look at Gold Chartology - 21st July 14
The Jewish Selfish Gene, People Chosen by God, Everyone Else is Goyim to Kill - 20th July 14
AUD NZD Taking The Forex Bull By The Horns - 20th July 14
US-backed Israeli Invasion of Gaza Unleashes Death and Destruction - 20th July 14
The Israeli Promised Land Dream - The Criminal Roadmap Towards “Greater Israel”? - 20th July 14
Stock Market in DANGER of Strangling the Bears to Death - 20th July 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Devalue US Debt Through Inflation? Three Lessons from History

Economics / US Debt May 18, 2008 - 08:04 AM GMT

By: Adrian_Ash

Economics

Best Financial Markets Analysis Article"...Might the scam work? Can the United States really settle its debt with devalued dollars, free of all historical fall-out...?"

"WE CAN PAY ANYBODY by running a printing press," said Thomas Gale Moore, one of Ronald Reagan's economic advisors, when the United States became a net debtor to its foreign investors in 1986.


"Frankly, it's not clear to me how bad [being a net debtor] is," he added. And for the next two decades or so, owning fewer assets overseas than foreigners laid claim to inside the United States didn't seem so bad at all.

The long boom delivered by a steady inflow of foreign credit and cash delivered the greatest stock market gains ever enjoyed by US investors. When they topped out, the party switched straight into real estate – adding more than one-third to America 's household wealth on the Federal Reserve's metrics.

So what if non-US claims on that surging wealth rose faster still? Now the party's over, inflating away the value of America 's debt will worked just as beautifully as it always before. Right?

"In my view," says John H.Makin – a visiting scholar at the American Enterprise Institute writing in the Wall Street Journal " the least bad option [in fixing the financial crisis] is for the Federal Reserve to print money to help stabilize housing prices and financial markets."

" America is a country that owes money," agrees Philippa Malmgren, a former Bush advisor and now head of a risk consultancy in London . "It is natural when you are a debtor that you lean in the direction of inflation, because it makes paying it back so much easier."

The logic is simple: inflate the number of Dollars in issue, and you'll shrink the real value of each outstanding Dollar you owe. But if escaping your debts really could prove that easy, how come history is littered with the mischief that inflation causes instead...?

Restoration England , 1668

Charles II – still playing his "divine right" as king some 20 years after Parliament cut off his father's head – steps up the issue of new bonds. Then called "stocks", they let the King raise cash for yet another losing war against the Dutch.

Charles side-steps Parliamentary approval for these new debts, and starts selling stocks against the promise of future tax receipts (the same wheeze adopted by governments worldwide today, of course). Come 1671, however, all the new money raised went straight to paying interest on the outstanding loans. So Charles opted to default, wiping out 11 of London 's 14 biggest goldsmiths – those early banks who'd first lent the Crown money – and destroying his credit with England 's loyal subjects.

The upshot? The King strikes a secret deal with France, promising to stay out of its war against the Dutch in return for regular cash pay-offs. But the deal – uncovered amid a rash of anti-Catholic panics in London – undermines all support for the Stuart royal family. Fifteen years later, and with the English crown bankrupt once more, his brother James II is overthrown in a popular and (pretty much) bloodless coup.

He's replaced by William of Orange ...head of the Dutch Republic !

Revolutionary America , 1775

Lacking a mandate to tax its population while fighting a war, the second Continental Congress authorizes the "limited" issue of paper money. The new notes, known as Continentals, are backed by neither Gold nor silver, but by the expectation of future tax receipts.

Effectively acting as tradable bonds – but exchangeable for goods and services amongst the Patriots, rather than hard currency – the Continentals will only be redeemed when the Colonies win their independence from Great Britain . But long before that happy day, they race towards zero, becoming progressively worth less as their supply increases.

During the first six months, the supply of Continentals goes from $2 million to $6m. By 1779, the total supply reaches $242m on one estimate – more than twenty times the volume of gold & silver money in circulation before the war began.

"A wagonload of currency will hardly purchase a wagonload of provisions," complains George Washington. In March 1780, Congress announces a plan to redeem the Continentals at one-fortieth of their face value, effectively stuffing the American people and taxing the new citizenry more aggressively than George III ever did.

"So much for Congress's honor," notes Thomas E.Woods for Mises.org today. But for once, at least, these un-backed and over-inflated notes don't end with political or military defeat. Other than for the Patriots' cry for lower taxation, that is.

Weimar Germany , 1920

Besides losing 13% of its territory and 10% of its population under the Versailles Treaty after World War One, Germany also owes "reparations" to the Allied victors worth almost 37,000 tonnes of gold – around one-third of the world's entire above-ground supplies at the time.

Expected to settle the final payment seven decades later, the German government opts instead to pay early by printing money. The volume of Reichsnotes in issue rises 35 billion times over between 1918 and 1924 – and "the young and quick-witted did well," as the German journalist Sebastian Haffner will record, fifteen years later.

Equity prices in Berlin rose some 2,772,164% by the time a loaf of bread cost a wheel barrow-full of banknotes. The value of those Reichsnotes, however, went the other way – sinking from 8.0 per US Dollar to 4.2 billion per Dollar.

The resulting chaos, now regularly blamed for the rise of Hitler during the Great Depression of the early 1930s, saw "wages paid twice a day and promptly and completely spent within the hour," notes Glyn Davis in his History of Money .

"Large sections of society, including the middle classes, became impoverished; food riots were common; there was a complete flight from money, which had clearly become worthless to hold."

A more honorable legacy, perhaps, was the inflation-fighting Bundesbank of the 1970s and '80s. Staffed by bankers and academics who'd lived through both the Weimar inflation and its World War Two replay – which saw worthless coupons issued as money to Nazi citizens, Wehrmacht troops and even concentration camp victims – the West German central bank refused to devalue the Deutsche Mark alongside the Dollar, British Pound and French Franc by setting interest rates low.

The Bundesbank kept inflation far below the double-digit rates suffered by UK and US households as Gold Prices rose 20 times over against the Dollar. It finally bit the bullet with the birth of the Euro in 1999.

The new European Central Bank has since let slip its money-supply growth target of 4.5% per year. At last count, the supply of Euros was expanding by 10.3% per year, just below 2007's three-decade record for Europe monetary inflation.

The Global Banking Crisis, 2008: " US money supply growth is running at a 47-year high," notes Bedlam Asset Management, "as the authorities seek to inflate away the debt bubble and prop up house prices.

"Clearly printing such huge amounts of money is not great for the exchange rate. A weak Dollar has forced the hand of other central banks as they try and keep their currencies competitive with it."

But might the scam work? Not if China , Japan and the big Dollar-holders of the Arab oil kingdoms can help it. Will they really let their own currencies rise...just so the United States stuffs them by paying its debts with devalued Dollars?

Inflation, it's claimed, eases the burden of settling your debts. But for government and private debtors alike, that's only true if your income rises faster than your on-going cost of expenditure. Otherwise, you end up struggling to make ends meet today, only to leave yesterday's debts for repayment tomorrow again.

Middle-class families and savers looking to get ahead of the game – both inside and outside the Federal Reserve's fast-inflating currency zone – might want to consider Buying Gold as defense. Because however this latest attempt to inflate away debt pans out in the long run, it's sure to make history.

And history says – time and again – that solid Gold Bullion holds its value whenever man-made currencies are forced to lose value.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Koichi Ito
18 May 08, 09:36
Inflation?

Only way pay off National Debt is to Devaluing the Dollar. There is no other way to pay off this much debt. If so find it, and tell us about it!


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014