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Credibility Inflation

Credibility Inflation

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Published by rmullis

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Published by: rmullis on Feb 19, 2012
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02/19/2012

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Wednesday, August 25, 2010
Credibility Inflation
Here's a neat little concept that FOA introduced briefly in 1999. I think it explains a lot about the inflation,deflation, hyperinflation debate when it finally sinks in that this is where all the money went for the past 30years: into inflating the credibility of the $IMFS far beyond the underlying reality. And yes, it has a directimpact on the Freegold revaluation as well. So here I will try to expound on this enlightening concept just abit.
The Setup
 Part of the reason the rest of the world did not abandon the dollar in 1971 was that the rate of economicexpansion flowing from Middle Eastern oil cheaply priced in U.S. dollars was already exceeding theexpansion rate of the money supply. So the switch from a semi-gold-(con)strained monetary system to amuch more expandable "balance sheet money system" as I like to call it — or another name I like is "purelysymbolic monetary system" — allowed for the non-deflationary addition of many new "quality of life"gadgets, widgets and shipping lanes that the world had never before imagined.For the next three or four decades we would be able to comfortably afford the new introduction of BetamaxVCR's, microwave ovens in every home, personal computers, DynaTAC cell phones, camcorders, digitalcameras, LaserDiscs, Compact Discs, DVD's, MP3's, and on and on. Eventually, all of these wonderfulproducts would be built cheaper by someone else on the other side of the world and shipped to us cheaplyusing the oil purchased from the Middle East with easily available U.S. dollars.
Sony BetaMax®
 
 
 The reason I like the term "balance sheet money" is that whenever there is a need for more dollars they canbe easily gotten from any bank's balance sheet. The dollars don't have to be there in the bank. You simply jot down the "need" for them on one side of the balance sheet and the dollars magically appear on the otherside. Presto!Of course once that "need" (demand) is supplied, the balance sheet must then be serviced with interest. Butthe thing about easy money is that you can always borrow new to service the old. In the previous system(con)strained by its parity fixation to the U.S. Treasury's limited supply of gold all these wonderful life-enhancing advances would have put a deflationary pressure on the dollar.What this means is that when all these new products came to market, the dollars we needed to purchasethem would have become more and more precious with each new widget that came to market. The cost toborrow dollars to buy a new BMC-100P or DynaTAC-8000 would have been prohibitive. And even if youdid borrow the money, the service of that debt would have grown more and more burdensome over the lifeof the loan as dollars became ever more precious.
 
 This deflationary dynamic would have stifled the global economic growth rate and confined it to onlyreasonable risk-taking. Which is part of the reason the foreign central banks, represented by the BIS, didnot lobby the U.S. to officially devalue the dollar against its Treasury gold in 1971.Rather than closing the gold window, the U.S. could have, for example, raised the price of gold to $200 andkept the system going for another 30 or 40 years. A move like this would have been the mathematicalequivalent of increasing the Treasury's physical stockpile 5X to double what it was at the height of theBretton Woods experiment.But while that would have satiated the monetary transgressions of the past, it would have done little for thefuture. It would not have substantially changed the system to one of easy money. It would only haveextended the old system of hard money.
BMC-100P - The first camcorder
 

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