We are now in a paradoxical situation when America, Europe, Japan and
China appear to be on the point of descending into a deflationary
economic recession but yet, just under the surface, an inflationary
tsunami is actually building up. So far, only a little of this wave
of inflation is seeping out into the everyday economy. What is the
evidence for this? And where is the rest of the cash?
We need only confine the evidence in a representative way to the
American dollar because this accounts for about 70% of world trade
and what happens to the dollar is inevitably followed by the other
currencies. (In the past week, the European Central Bank has
initiated a series of massive euro "loans" which will be fully
equivalent to the quantitative easing of America and China in the
last three years.) A graph of the true dollar supply (of available,
spendable cash) is exponential (ever-steepening) and passed through
$2.5 trillion in 1999. It is now $8 trillion and will approach
verticality within a year or two.
At the same time, and at an almost identical pace, the price graph of
gold has been rising exponentially as more investors and central
banks buy gold (Turkey bought a huge amount only this month). It was
$300 an ounce in 1999 and is now $1600. At this rate, its price, too,
will approach verticality within a year or two. More of this a little
later when the brains get to work.
Back to the cash. Where are dollars? Most of them go in and out of a
great cloud of insurance policies which are called derivatives.
(These are negotiable instruments and therefore count as practical
money.) The net balances of these are intended to repay the banks for
the diminished value of the collateral (mainly of property) they are
presently sitting on as pledges against loans. And this peaceful
unfolding could, in theory, happen in due course. All could be well
in the years to come. But this is subject to various practical
provisos. One is that the banks will survive in the meantime (and
most can't at present without repeated government support). Another
is that the governments of the advanced countries will be able to
pare back their own national debts out of increased taxation for many
years to to come. Another is that unemployment in the advanced (and
advancing) countries will not rise to the point of social breakdown
or even the overthrow of governments.
Governments (not so much the elected politicians but the highly
intelligent and knowledgeable individuals behind them in their
Treasury Departments and Central Banks) know all the above but
they've never had the courage of advising their politicians to call a
halt to their incessant money inflation according to Keynesian dicta.
Nor, according to today's 'democratic' guidelines can the officials
overrule elected politicians in normal times. But if Keynes were
alive today, he would be aghast as to the whopping extent of today's
inflation and for how many years it has been going on (since 1970 but
accelerating since). The Keynesian idea of governments adding to
consumers' aggregate demand for goods by borrowing and then issuing
extra money was only intended to be a temporary one -- two or three
years at the most. Even if these demand-push policies were correct
(no evidence so far), even Keynes was well aware that the
governments' debts had to be paid back in times of full employment
and prosperity.
So what will happen? Nothing can happen until we arrive at a
catastrophe when all the principal currencies approach worthlessness
compared with the prices of commodities. Western politicians, like
foxes caught in headlights, will be paralysed with mental confusion
(and very possibly physical fear in some countries), so the brains
will have to take over. The most effective short-cut will be that of
US treasury officials getting together with the Chinese government
(who are jointly officials and politicians) and producing a new world
currency. The next short-cut, for want of anything better to hand
will be to equate the world supply of existing money (by then, very
large) with the price of gold (by then, very high) and call this the
new world trading currency -- something the Chinese have been
suggesting for years. (And they, like the Russians, have been mining
and accumulating gold like crazy in the last few years. Why? Because
America has been holding onto its gold like grim death since 1971 --
and has probably been adding to it in recent years, like many other countries.)
The above is a foregone conclusion in my view. My other view,
developed in my mind in the last few months, is that the best
short-cut to getting this currency into circulation fast (and it will
need to be) is to ask the leading transnational corporations in the
world to put their present financial accounts on hold (to be sorted
out later) and to reactivate their accounting software from zero with
the new currency. They'll have to be trusted to do the job properly,
and most of them will be for their own sake as credit-worthy players.
The new currency will thus spread fanwise within days -- a week or
two at the most -- to all other businesses in the world down to the
smallest (those with computerized accounts anyway). Governments
meanwhile, in distributing food stamps to their populations will
have plenty on their plate (forgive the pun). They will also have to
instructing all their their national food wholesalers to adopt the
stamps for a few days while the real currency is descending
downwards. In a few days, when the food stamps meet the new currency,
an exchange value created between them.
The value of the new world currency would undoubtedly wobble for a
while -- while a more precise calculation of the world money supply
and total gold (jewelry plus coins plus bullion) is arrived at. But,
within weeks, it should settle down to a largely stable value that
would then hardly change from year to year. (Slight changes in gold
value due to mining from year to year would be countervailed by
increases in world economic productivity. The net effect would be
well within 1% per annum either way.) For reasons of nostalgia,
governments might like to retain their traditional names for currency
and/or establish fixed parities with the world
currency. Pre-existing debts remain, of course. When translated into
the new currency they would still have to be paid off. Many banks (if
not most) would be bankrupted, as would many of their creditors and
many businesses (but by no means all) would be also. It would be very
hard grind from then onwards but, without no more printing of money
by governments, there'd be no inflation from then onwards. Total
balances of trade between all the countries of the world should
become what they ought to be -- zero, not the gross imbalances as
presently obtain. The world economy would have a chance of stable
development from then onwards, shaped as it always is, by innovations.
With money supply (and gold prices) rising vertiginously at some time
during 2012 or 2013, the best I can wish for readers is: "Have a
non-giddy Xmas. You're going to need it in preparation for what's to come."
Keith Hudson, Saltford, England http://allisstatus.wordpress.com
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