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The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

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Douglas V. Gnazzo

Douglas V. Gnazzo

Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and…

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Silver Is Money: Behold A Pale Horse - Part Four - B

Professor Fekete should be honored to have written such a clear and concise theory of money, including explanations of linkage, and runaway inflation known as hyperinflation, as well as many other complex issues, one being his disagreement with Mises that a bank note is a present good. I agree with professor Fekete in that a bank note is a future good.

This is most crucial in understanding money and credit, and will be gone into in more detail in another article. His mention of the fallacy of non-linear models is the same as employed in part three of Silver Is Money, as well as the recognition that such non-linear events cannot be predicted.

As the professor states later on in the same article:

"We have two scenarios to choose from: global deflation and global runaway inflation. It is impossible to say which one is uglier, Scylla or Charbydis. Perhaps it is a mistake to formulate the problem in terms of these alternatives because, really, there is only one problem: the debt incubus saddling the world and sapping the vitality its economy.

Deflation and runaway inflation are different only in form; they are identical in substance which is the threat of shaking off the debt incubus. The former does it by wiping out the value of debt through defaults, the latter, through debasement. Both threats are wrought with danger for the world population at large.

It is not possible to predict which of the two will actually occur. The only certainty is that the debt incubus will be shaken off by hook or crook, at the cost of immense economic suffering - unless world leaders take proper measures in time to fend off the impending disaster. Luckily, the measure that will fend off one will also fend off the other. And this measure is the restoration of the gold standard." [Fekete - Deflation or Runaway Inflation]

Once again Professor Fekete makes a complex subject sound easy, with his clear and precise explanation. Notice the impossibility of predicting either deflation or hyperinflation, as they are in extremis as Sir Alan would say, they are non-linear and hence susceptible to chaos theory, and the bifurcation point of no return. See Scylla & Charbydis: The Scourge of Mankind for a more detailed explanation.

In another one of his many works: Quartermasters of Inflation, the Professor speaks of the thin line that separates deflation and hyperinflation saying:

"I am not predicting that interest rates will keep falling to zero and that the world economy will succumb to deflation. I just want to sound the alarm that it might, in view of the counter-productive monetary policy of central bankers.

Other scenarios, no less frightening, are also possible. Paradoxically, the threat of zero-interest (deflation) and that of infinite-interest (hyperinflation) are separated only by the knee-jerk reaction of the marginal bond speculator." [Fekete]

The knee-jerk reaction that drives the herd instinct to panic and stampede is the sounding of the death knell of the market, spewing forth the words:

"And behold, a Pale Horse, and its rider's name wasDeath, and Hell followed him."

Which Is It?

So which is it - deflation or runaway inflation that goes by the name of hyperinflation? Is it possible that one could first occur, and the other follow thereafter? Yes indeed, as all things are possible, even chaos in order and order in chaos - the Alpha and the Omega. So what's the prediction? Got me, I don't know.

I least I'm not alone, and actually in pretty good company. Doug Noland, Major Uncertainties, http://www.prudentbear.com/ [April 22, 2005] states:

"I have never experienced an environment with so many Major Uncertainties. Is the U.S. Bubble Economy slumping or in the midst of an intransigent inflationary boom? Are general inflationary pressures gaining critical mass, or is "deflation" waiting patiently to make its appearance?"

If hyperinflation is truly a non-linear event, which I believe it is, then as chaos theory states, it is impossible to predict such events with any degree of accuracy. One thing is fairly certain, however, and that is that deflation does not destroy a currency or economy, it pulls it asunder and renders great pain and suffering, but death does not come.

Only the pale horse of hyperinflation, whose rider's name is death, can send a currency to Hades. So has the monetary history of the world thus far recorded. As Edward A. J. George, Governor of the Bank of England and a director of the BIS said:

"We looked into the abyss if the gold price rose further."

The puppet-masters do not want to see their perpetual interest rate stream fall into the abyss. They would prefer to see another round of the boom and bust cycle repeat in paper fiat land, so their game of wealth confiscation can continue in perpetuity.

But does this mean the puppeteers would literally choose deflation? No, in all probability, but yes it could still occur - be it intended or not. There are no guarantees, either way.

Does this mean the powers that be will choose hyperinflation? No, not likely, but still quite possible, especially with helicopter specialist Ben Bernanke flying around on the loose. And since hyperinflation destroys the currency, deflation can not follow it, as there is nothing left to follow. A new currency must be issued.

But hyperinflation can follow deflation, especially when viewed for what it is - a reaction to a monetary system already run amuck. If the beast of deflation were to rear its ugly head, the Fed would most likely attempt to stop it by opening the floodgates of monetary liquidity, thereby sowing the seeds of run away inflation - hyperinflation.

So which will it be? No one knows for sure, it's one of those either or maybe neither situations. Keep your eyes to the horizon for the gathering clouds of the Perfect Storm, and listen for the sounds of a rider approaching, as then it will be time to:

"Behold, a pale horse, and its rider's name was Death,and Hell followed him."

To be continued in part five, the final conclusion:

Behold A White Horse

~ including discussion of the short dollar thesis and present goods versus future goods ~

"The illusion of freedom will continue as long as it's profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way, and you will see a brick wall at the back of the theater." [Frank Zappa]


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