Sunday, July 18, 2010

Returning assets to their rightful owners
I wonder if you could do a piece on the balancing act regarding
the Teeter/Totter of massive gov't borrowing (causing inflation), versus
high unemployment and low wages (causing deflation).

Is the government doing this as a purposeful balancing act ?

Regards, Randall B.

Hi Randall, there is no teeter/totter in that sense.  Inflation doesn't describe prices or wages but rather how much money is in circulation but of course inflation can drive prices up and if labor can unionize you can get higher wages too but primarily it creates asset bubbles and it will drive mergers and acquisitions if these are legal (and they‘re not but nobody has enforced the law since Carter).

Government borrowing takes money out of the system, that in theory would cool inflation. The Federal Reserve (a private bank) creates its version of money by creating debt which can be inflationary but doesn’t need to be. It has to do with what you allow the debt to be used for. Right now they are driving the all the markets worldwide by printing money for the big Wall Street banks.

You are starting to see food commodity inflation again being driven by this “inflationary” money.

Deflation is a different sort of monster that comes from an economy that is heavily indebted becoming unable to maintain the debt and the money supply collapses as people with assets begin panic selling. It makes no difference what you use for money, its entirely the result of allowing banks to become more than a utility.

They've had this problem since stone age times. That’s why all religions have prohibitions against usury (chase them from the temple). The founders of the United States warned against the bankers and their cycles of inflation and deflation. This has been the practice of bankers since there have been bankers, inflation requires borrowing. Deflation causes defaults and before the New Deal, bankers could call in loans at will (even if you were current).

Even if not everybody could pay and remember Mortgage means "death pledge" so people did pay or it was off to debtor’s prison. After deflation bankers could buy everything for pennies on the dollar and start the cycle over again since everybody needed loans to start over (after ten years or so of starvation). Nothing that is going on now is "natural" or an "accident". Thirty years ago you were a big wheel if you had a 100 million in assets, now they take that in salaries.

Listen to the words of Andrew Mellon, giant of both the financial and industrial sectors, and Secretary of the United States Treasury under the infamous presidents Harding, Coolidge, and Hoover: "During a depression, assets return to their rightful owners"  This guy had a fortune that in today's dollars would make Bill Gates money look like a skimpy tip. FDR put him on trial for causing the Depression (technically for tax evasion and not putting his assets in blind trust while at Treasury) but he did a Ken Lay (they said it was old age) before he could be convicted.

There is a provision in the Financial Reform Act to take these banks and companies apart if (x out “if“) WHEN there is another crisis. It’s a question of the people running the government having the will to do it. Elections do matter. Even at best it will be a rough ride. Otherwise all the assets will return to those very few at the top who think of themselves as the entitled class.