Inflation or Deflation?

There is always evidence of inflation.  Some prices are rising.

There’s also always evidence of deflation.  Some prices are falling.

Whether we live in a time that can be accurately described as “inflationary” or “deflationary” depends on whether prices are predominantly rising or predominantly falling.

Right now, we seem to live at a time that’s confused and unclear.  More importantly, we are living in a moment where it’s unclear whether we are headed to more deflation or more inflation.

To understand where we might be headed, here are some arguments:

 

Premises:

•  Inflation makes debts cheaper and easier to repay since they are repaid with devalued, inflated, cheaper dollars.

Inflation tends to stimulate the economy by making currency less valuable and thereby increasing the consumers’ inclination spend quickly and before their currency loses its value.

Inflation is typically associated with economic booms.

Inflation is great for borrowers and debtors and terrible for lenders and creditors.

As the world’s biggest debtor and borrower, in order to survive, the US government wants and even needs inflation.

•  Conversely, deflation makes debts more costly and harder to repay since those debts are repaid with deflated, more valuable dollars.

Deflation tends to slow the economy by making currency more valuable and increasing the people’s inclination to save their currency rather than spend it because it’s gaining value.

Deflation is typically associated with economic depressions.

As deflation persists, existing debts can grow so large in terms of purchasing power that the debts can’t be paid and debtors are increasingly forced to declare bankruptcy.

As world’s biggest debtor, the U.S. government can’t stand—and might not even survive—a prolonged period of deflation.

Government fears and hates deflation.

 

Evidence

A.D. 1971:

President Nixon stopped redeeming foreign-held US dollars with gold and thereby converted the dollar into a pure fiat currency.  The market price for gold was $45.

 

A.D. 1972:

The Nixon administration reached an audacious deal with Saudi Arabia:  the US would guarantee Saudi Arabian security; the Saudis would only sell their crude oil for dollars.  Later, a similar agreement was reached with OPEC.

Result?  Anyone who wanted to purchase crude oil on the international markets had to first have intrinsically-worthless fiat dollars.  The resulting international demand for dollars created the dollar’s perceived value and status as “petro-dollar”.  The dollar was implicitly backed by crude oil and therefore allowed to continue as World Reserve Currency—despite the fact that it was no longer backed by gold or silver.

Gold was $64.

 

A.D. 2000:

The US was the world’s only, undisputed super-power.  The US dollar’s value on the US Dollar Index (USDX) was 125.  The market price for gold was $273.

 

A.D. 2001:

Saddam Hussein began to sell Iraqi crude for euros and threatened the dollar’s hegemony as the world’s only petro-currency.  Gold: $265.  USDX: 125

 

A.D. 2003:

Under the pretext of seeking to destroy Weapons of Mass Destruction, the US invaded Iraq.  Gold: $417.  USDX: 80

 

A.D. 2011:

Prior to A.D. 2011, government policy was to inflate the fiat dollar.  Price of gold and the USDX are evidence of that policy.

However, starting in A.D. 2011, CNN-Money published “IMF calls for dollar alternative” and claimed,

 

“The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world’s reserve currency.

“The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system . . . . as a less volatile alternative to the U.S. dollar.

“The goal is to have a reserve asset for central banks that better reflects the global economy since the dollar is vulnerable to swings in the domestic economy and changes in U.S. policy.

“The IMF also proposed creating SDR-denominated bonds, which could reduce central banks’ dependence on U.S. Treasuries. The Fund also suggested that certain assets, such as oil and gold, which are traded in U.S. dollars, could be priced using SDRs.”

 

That report went largely unnoticed, but it was big news.  The almighty IMF was saying:

 

1)  Since A.D. 2000, the fiat dollar’s value had fallen from 125 to 72 on the USDX and was therefore deemed too “volatile” to continue as the World Reserve Currency;

2)  The fiat dollar should be replaced as World Reserve Currency with Special Drawing Rights (SDRs) issued by the IMF.  That would make the SDRs the “World Reserve Currency”.

5)  Replacing the dollar with SDRs would serve the best interests of central banks and the global economy.

4)  The role of US Treasuries on the international financial systems should be replaced by bonds issued by the IMF and valued in SDRs.  That would dramatically reduce the demand for and value of US Treasuries.

5)  The price of crude oil should be denominated in SDRs rather than US dollars.  That would make the SDR the world’s “petro-currency”.

 

The IMF was clearly attacking the US dollar’s hegemony as “petro-currency” and World Reserve Currency.

 

  • USDX fell to 72, reversed, and began an initially slow rise to today’s 97—that’s a four-year, 35% increase in the purchasing power of the fiat dollar as measured by the USDX.
  • Gold hit its all-time high, $1911—and began a 4-year, 42% descent to (now) $1,100
  • the US military leaves Iraq.

 

You can see the probable correlation between the 35% rise in the USDX and the 42% fall in the price of gold–especially in the USDX low of 72 and the gold peak of $1911.

But were these A.D. 2011 events merely coincidental?  Or are they evidence that government’s pro-inflation policy of most of the previous 70 years was giving way to a pro-deflation policy?

Did the IMF threat to replace the fiat dollar as World Reserve Currency throw the US government and Federal Reserve into a panic?  Did that panic cause government and the Fed to start raising the USDX and lowering the price of gold in order to maintain the fiat dollar’s status as “World Reserve Currency”?

Remember, since A.D. 1971 the only thing that really gave the fiat dollar any value was its status as the world’s “petro-currency” and World Reserve Currency.  If the dollar lost either status, it would also inflate, lose much of its perceived value, and perhaps die in hyperinflation within two or three years.

Did the US government and Federal Reserve embark in A.D. 2011 on a policy of international dollar deflation in order to preserve the fiat dollar?  Did they risk the US domestic economy stagnating or even falling into depression, in order to preserve the fiat dollar?  Did they increase government’s debt burden and risk of insolvency in order to protect the fiat dollar?

IF the feds/Fed adopted a policy in A.D. 2011 to cause dollar deflation in the international/USDX level, that policy seems to have worked well enough to stop the IMF’s proposed replacement of the dollar as World Reserve Currency—at least, until now.

 

A.D. 2014

USDX 80  Gold $1,300

USDX deflation accelerates.  The USDX rises over 25% from 80 (2014) to nearly 100 in early A.D. 2015.  Gold falls another 15% to today’s $1,100.

Was the 2014 acceleration in deflation accidental?  Or was it evidence of the feds/Fed determination to preserve the dollar’s status as World Reserve Currency in the face of growing competition for that status from the Chinese Yuan?

 

A.D. 2015

Reuters recently published an article entitled, “Opportunities open up as U.S., UK prepare to go it alone on rates”.  According to that article,

 

“Amid all the uncertainty swirling around financial markets, one clear picture is emerging: U.S. and UK interest rates will soon rise, while most of the rest of the world is easing monetary policy.” 

 In other words, much of the rest of the world is promoting inflation by lowering interest rates and increasing their domestic money supplies, thereby making it easier for domestic consumers to borrow and spend and more profitable for domestic industries to export goods to foreign countries.

The U.S. and UK, however, are allegedly preparing to raise interest rates and thereby increase the forces of deflation that make it more expensive for US and UK consumers to borrow and spend, harder for US and UK industries to export, and harder for the US and UK governments to repay existing national debts or borrow more.

If both the US and UK officially raise interest rates and thereby risk causing deflation and even economic depression, then the accelerated deflation seen on the USDX over the past sixteen months is probably not accidental.  It’s probably the result of intentional policy.

 

Why might government want to cause deflation?

On the domestic level, causing deflation is tantamount to economic suicide.

However, a strong dollar on the international level will tend to resist attempts by the Chinese Yuan and/or IMF SDRs to seize the roles of “petro-currency” and World Reserve Currency from the US dollar.

Faced with growing competition from other currencies and the threat of dollar destruction, it’s conceivable that the government and Federal Reserve embarked on a policy to make the dollar more valuable on the international level.  That might explain why they’re at least allowing and perhaps encouraging dollar deflation on the international level.

Written by Alfred Adask
Full report at Adask’s Law

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