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Failed Fiat Monetary System Heading for Rampant Inflation

Economics / Inflation Nov 26, 2008 - 05:11 PM GMT

By: Clive_Maund

Economics

Best Financial Markets Analysis ArticlePaulson's favorite song: "I wish it could be Christmas every day" - well it can be thanks to the Fiat money system...

So the trough is about to be refilled, this time with even more feed - $800 billion to be precise. Thanks to the Fiat money system this extra liquidity can simply be created out of thin air, all it takes is a few keystrokes. The cost could be passed on to the taxpayer via higher taxes, but they might balk at this so it's better to stealthily get them to pay for it by diluting the purchasing power of their money.


Better still though is to print up more Treasuries and sell them to stupid foreigners who up until now have had an insatiable appetite for them - could it be that they get a secret kick out of supporting the US consumer society at the expense of their own people?

Unfortunately, however, it would seem that foreigners are slowly wising up, perhaps due to being fleeced spectacularly by Wall St's conspiracy with rating agencies to peddle them garbage mortgage investments and vast tranches of derivatives that will end up being marked to market at a nice tidy 0. So their masochistic desire to support the debt-wracked United States may be waning. This being so it is important to "strike while the iron is hot" and soak them for all they are worth while the dollar is still strong, because once the forced liquidation driving the dollar spike has exhausted itself, and it may have just done so, the dollar is likely to plummet which should be a real disincentive to potential foreign bond buyers. Even this is not an insurmountable problem though as if foreigners' remaining brain cells start to function and they desist from buying Treasuries, then the Fed can monetize them and pass the entire bill on to the US taxpayer via rampant inflation. It's not as though there's going to be a revolution over it.

It's 2008, not 1870 when if the government tried to rip off the public in this manner, they would have found themselves hanging from lamp posts outside their offices. After years of comfy living, television and eating adulterated food and riding around everywhere in automobiles, the American public generally speaking have been effectively neutered, and don't have the stomach to confront the government directly. So the government can and will do just what it likes - and that is manufacture as much money as it takes to dig themselves out of the hole, which as the amount required is fantastic, means that the average Joe in the US, including Joe the Plumber, will have to gird himself for inflation morphing into hyperinflation.

Contrary to what many may think Bernanke and Paulson could actually to be considered to be acting with admirable restraint, for a Fiat money system admits of a universe of possibilities. This is because as a system that is not burdened with the tiresome limitations associated with a gold standard or indeed with any fiscal restraints whatsover, there is really no need for the government to be small-minded, as it could perhaps be accused of being up to now, by being selective about what companies and organisations and projects it supports with public money, as it can simply create whatever money it requires for whatever purpose.

So why stop with bailing out favored banks, AIG, Citigroup, Wall St generally and the big 3 automakers? - why not put a floor under the housing market by having "so far down and no further" floor prices for different categories of property? why not stand ready to bail out any company large or small that is threatened with going out of business, pay for health care and pensions for all, eliminate unemployment by repairing the entire infrastructure of the country, and of course sluice vast funds into the stockmarket to drive it up. Just create more and more bonds and monetize them. Anything is possible in a Fiat system.

So you see it can be Christmas everyday, contrary to what the song says. Sure people are going to have to pay more for the things they want, alot more, but isn't this a price worth paying to keep things humming along? It worked for Robert Mugabe in Zimbabwe who is still in power, did it not?

With the countdown to Christmas underway, many increasingly festive readers will surely be interested to read the lyrics of I wish it could be Christmas everyday and perhaps get the video in www.youtube.com going and sing along.

By Clive Maund
CliveMaund.com

For billing & subscription questions: subscriptions@clivemaund.com

© 2008 Clive Maund - The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

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