My Inflation Epiphany . . .

. . . I subscribe to the classic definition of "inflation" which is simply an increase in the money supply. Inflation is NOT an increase in prices per se! Rising prices are a symptom of inflation. What's the distinction you might ask. There can be inflation but no visible effect on prices . . . at least for a time. There's an interesting take on this so read on . . .

Image via WikipediaThat distinction between inflation and rising prices can help you make better investment decisions. Inflation is the universal tax . . . anyone holding a money subject to inflation is suffering a de facto tax. Whomever is creating the inflation is likely to receive the benefit of creating free money in effect. The inflator dilutes the value of everyone else's money. That loss in value really is not lost, it goes into the pocket of the inflator. If someone is going to skim money off of your investments, don't you want to know about it?

Having argued for years there is, in fact, inflation I watched closely the Federal Reserve's money supply figures . . . M-1, M-2, and M-3. M-3 was the "big number" which was supposed to count all the money, e.g. dollar bills, bank accounts, etc. Most folks were outraged when the then Federal Reserve Bank man-in-charge, Alan Greenspan, eliminated the M-3 figure just about two years ago. That action was proof there wasImage via Wikipedia inflation and the government was trying to hide it . . . at least that was the new "view" because the old proof, M-3, was no longer being published. (Sometimes my head hurts when I try to explain things the government does.)

It occurred to me I have been misguided or at least inconsistent in my view of inflation. It so happens I also subscribe to the definition of "money" as having these three intrinsic qualities:

• A unit of account . . . a standard way of measuring your money and counting it.
  
• A medium of exchange . . . it is usable to buy and sell things loosely speaking.
• A store of value . . . generally, most folks recognize it HAS retained its buying power and so they trust it will continue to do so in the future.
  

In my opinion, Gold best fits that definition and has a history of serving as money for about 6000 years. So, in the context of inflation, the "Store of Value" aspect of money is the point in question. One of the most often cited examples of Gold's staying power is it has always bought about 400 loaves of bread. That's not earth shattering for the high finance types. But, I find it interesting to think about being able to go back in time 6000 years with an ounce of Gold and being able to give it to the bread maker (wearing an animal skin). Without saying a word, that bread maker would start stacking up my 400 loaves.

Just how does Gold manage to store value and do the other things which make for good money? Gold's physical properties are very unique and it is very rare. Being rare and impossible, for now, to create from other materials, Gold makes for good money since it can't be inflated away . . . it is an especially good store of value.

This is where I had my "inflation epiphany" . . . Gold is money not the dollar or the other paper products of other countries. So, all these years I have been watching the wrong thing for inflation . . . the M-3 total of dollars. The true rate of inflation is about 1.5% to 2.0%. That range is generally agreed upon by the high finance and economic types. It also happens to be the increase in Gold "above ground" due to mining. I find it telling that the high finance and economic types also call Gold a barbarous relic . . . which way do they want it.

I admit to getting paid in dollars and using those dollars for living expenses. I don't carry gold around with me. So, I am interested in what those dollars will buy, I am concerned about increasing prices quite naturally. However, inflation is only 1.5% to 2% yet prices are rising. And, I have a really bad feeling we ain't seen nothing like what is coming. This leads me to believe I have done the right thing by storing "value" in Gold through the years. But, I have a few dollars also and I am interested in protecting those from inflation . . . this is where I run by you my interesting take on inflation without rising prices.

First off, it's really not inflation when talking about dollars. We have already established inflation in terms of Gold. This makes me question what a dollar is . . . it's not money and it is not subject to inflation . . . so, what is the dollar and all those other "currencies" around the world? I researched the word "dollar" and found it interesting the word comes from a town in Bohemia . . . "Joachimstal". How do you get "dollar" out of that name? Apparently, there was a silver mine near the town from which coins were made. They were named the "Joachimstaler" which was eventually abbreviated "...Taler". As time pasted by and the English got involved "Taler" became "Daler". And the rest is history. Ironic isn't it . . . the origin of the dollar was a coin made of Silver, a close second to Gold as money. I'm going to cut the history lesson short except to say the U.S. Constitution provides for "coin" in Gold and Silver to be denominated in dollars. The bottom line is we have over the years allowed the U.S. Government to denominate paper in dollars. Take note, that is the U.S. Government not the U.S. Constitution. To my knowledge the U.S. Constitution has not been amended to permit anything other than "coin" in Gold and Silver. There has been and still is considerable debate as to the legitimacy of the paper dollar and the Federal Reserve Bank. I find it no coincident both the dollar's constitutionality AND value are in question at the same time.

The phrase "paper dollar" is important. Prior to creation of theImage via Wikipedia Federal Reserve Bank in 1913, U.S. Government paper money was, in fact, real money . . . it was in reality a certificate which could be exchanged for gold. You could send the Treasury your dollar certificate and they would send you a little bag of gold dust. Nowadays, the dollar is whatever the U.S. Government folks say it is. It is like someone being able to write all the IOU's they want because no one can collect on them. The holders of those IOU's can use them to exchange with others but they can never go back to the person who wrote it to exchange it for something. That is exactly how I see the dollar . . . an irredeemable IOU, an unlimited number of which the U.S. Government can write.

But, do we have to take them? Does anyone in the whole wide world have to take those dollar IOU's? Not really . . . expect anyone in the U.S. to whom a debt is owed. Remember the "legal tender" blurb on your dollars? That refers to a law which states anyone in the U.S. to whom a debt is owed must accept dollars when they are "tendered". So, if I understand it correctly, you can go into a restaurant asking if they will take dollars to pay for a meal and they can say . . . NO! There would be no debt yet. However, if you first eat your meal creating a debt to the restaurant, then they must take the dollars. That's another interesting thing . . . that dollars and debt are connected in a legal way.

Dollars and debt . . . there seems to be no end to either. Come to think about it they are interchangeable. You can pay debt with dollars and vice versa. Do you ever buy something with debt, a credit card that is? Then [we] pay off, most of the time but less so today, the debt with dollars. Ever pay a debt with a debt . . . as in using a credit card check to pay off another credit card? Dollars and debt . . . they are one in the same. Why is it this way and who benefits?

The U.S. Government benefits from the "dollar-debt". It does write those dollar IOU's and doesn't ever pay them off . . . that sounds like a benefit to me. The U.S. Government exchanges incredible sums of dollars and debt everyday. The U.S. Treasury creates the debt and the Federal Reserve Bank creates the dollars. What a great deal! I would like that deal if I could get it. My wife could create all kinds of debt and I could just create the dollars our of thin air to pay the debt. So, how does the U.S. Government get that deal? The U.S. Government also gets to create law. And, as we know not all those laws are constitutional. Dollars, debt, law . . . that is a powerful combo especially if there is no limit as in ignoring the U.S. Constitution.

One type of law is taxation. That is direct taxation where the U.S. Government says it will take your money and does so ultimately under the threat of a gun . . . or at the point of a gun as Neil Bortz likes to say. Dollar, debt, law, and the ability to directly tax away everything you own . . . and the 16th Amendment to the U.S. Constitution says it doesn't have to be done in a fair manner. You can imagine the U.S. Government could one day have us so far in debt we could never pay it off . . . especially if we don't have anything because it's been taxed away.

So, what is to stop the U.S. Government? You would think nothing since the U.S. Government is currently, in fact, the world champion debtor in world history. Never in history has a government created such debt that it exceeds the total wealth of the country. Just what can stop the U.S. Government? Our willingness to vote can do that. Our vote prevents the U.S. Government from taking all we have by way of taxes . . . direct taxes that is.

The dollar-debt-law combo though allows the U.S. Government to tax us indirectly. The dollar, and so everything we price in dollars, is only worth about 2% of what it would have been worth is 1913, the year the Federal Reserve was created. So why don't us voters stop this nonsense? Well, if you have made it this far in the blog post, the dollar-debt-law thingy can get fairly complicated . . . and I have gone to great lengths to offer up a simple treatment of the subject. I wonder how many readers I lost at the use of "M-3" above.

To be sure "dollar-debt-law" as I call it is a complex subject, much more so than outlined here. Do you find it interesting that the affairs of the people are not well understood by the people? I'm not the conspiracy type, but I do find it fascinating things have come to what they are. But, the question is why doesn't the U.S. Government inflate-tax us to death?

There are two reasons I can see. Firstly, we do use the vote when things go bad with the economy. That's how we got F.D.R., Jimmy Carter, Bill Clinton, and now Barack Obama. Does it matter they are all democrats? I don't think so. Secondly, the U.S. Government does not have a monopoly on the "dollar-debt-law" scheme. Substitute dollar with Euro, Pound, Yen, etc. and the other players appear on the field. Essentially, most of the world governments are playing the perpetual "dollar-debt-law" game also.

Let's just use "dollar" since it is the world's reserve currency . . . originally that meant the dollar was supposed to be the standard, the anchor against which all other currencies were measured. That was when the dollar was backed by Gold which means Gold was really the standard. Interesting . . . we didn't have these frequent and wide economic swings when we backed our dollar by Gold.

So, that is why the U.S. Government can't just go wild and print infinite amounts of dollars. The dollar, as the reserve currency, is supposed to be the standard . . . whatever that means. There would come a time when the rest of the world would not play. But, are we there yet? You would think so since the U.S. Government is now openly professing to print whatever amount of money "is needed" in order to extend credit (debt) to anyone asking for it. About the only other thing the U.S. Government has is the military.

Go back to the above discussion about "the point of a gun". Did the U.S. Government invade Iraq because of WMD or was it because Sadam threatened the dollar-debt-law? There were no WMD's so what did Sadam do? To be sure he was a bad man who did very evil things. However, he was that way for 30 years. Sadam did within a few years prior to Golf War II attempt to sell Iraq's oil priced in Euros. Did that threaten the dollar? Why would the U.S. Government care if it did at all? There is the well known concept of the petro-dollar. That is there is a mutual agreement between the U.S. and Saudi Arabia to fix oil prices in dollars. The benefit to the U.S. is a tremendous source of demand for the dollar . . . the whole world uses and, indeed, must have oil. When priced in dollars, the demand for oil also translates to a demand for the dollar. And, the Saudi's get the protection of the U.S. Government. It is a fact we have gone to war three times in the middle east . . . Iraq twice, Afghanistan once, and Iran soon it seems. This topic may seem way out there but it is relevant to the discussion here. How does the U.S. Government create so many dollars and yet get others to take them?
We already know from the legal tender law the U.S. Government does want to put that dollar-debt off on someone else . . . remember the dollar is a irredeemable IOU. It should be intuitive others would not want to take those IOU's. Somehow though, of the total U.S. Government dollar-debt half of it is owned by foreigners.

So, here we are. My dollars, your dollars, and everyone else's dollars spead across the globe are U.S. Government debt. I don't like the idea of getting paid in irredeemable IOU's and I'm sure the rest of the world doesn't either. That in and of itself is a problem for the U.S. Government. The dollar-debt situation of the U.S. Government has come to world's attention through the years but more so with the recent credit bubble associated with housing. And, what is the U.S. Government's cure? Why that would be more dollar-debt of course. Remember, that dollar-debt is irredeemable . . . so much so the U.S. Government can not pay it off even if it wanted to do so. Where would it get another kind of money, real money to redeem that dollar-debt? It could impose confiscatory taxes but the voters would vote that idea out of office. There is Fort Knox. The U.S. Government has more Gold than the rest of the world's other governments combined. How about that? It appears the U.S. Government does not want to let go of its Gold. So, here is were the game gets more difficult.

What if the U.S. Government could just make those irredeemable IOU's just go away, destory them in effect. How is this for a possiblity? Make the dollar price of something go way up and then make the price collapse. That would destroy those IOU's. The recent housing and oil price collapse followed by stocks, banks, cars . . . you name it . . . seems to have destroyed trillions in so-called wealth recently. Even foreign currency investments in U.S. are worth much less simply due to the relative value of the dollar going down.

Yes, that is my interesting take on inflation with no increase in prices. The U.S. Government creates dollar-debt, fends it off on others, and then waits for, if not acts to cause, a collapse in dollar value to wipe out the dollar-debt. It sounds cynical to me too. But, it does seem to be what is happening. It was only eight years ago we had the dot-com bubble. Collectively, we a not a bunch of dummies here in the U.S. of A. After all who are the dummies? All I can say it is not us . . . we are the one getting others to take our worthless dollar-debt.

So, that is my inflation epiphany. There is little inflation . . . with Gold. The dollar-debt scheme is a con game and any dollars I have are trash. So, to the extent possible I'm keeping as much of my wealth (meager as it is) as possible in Gold with the objective of storing value. With a few bucks in materials and other "real physical stuff", I hope to make some gains to increase value. For another few months at most, I am maintaining my year old positions in U.S. Government bonds. Those I'll let go when Obama's version of the massive dollar-debt scheme kicks into gear . . . June 2009 perhaps.

Good luck and pray that my take on the situation is completely in left field.

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