Exposing the Ponzi scheme of fiat currency is necessary to better understand how it could facilitate the onset of a Kondratieff Winter. Most are unaware that the US dollar and in fact all major currencies are backed by nothing more than the full faith and credit of that sovereign nation.
What sustains its ability to serve as a store of value or to pay for goods and services is public confidence in the ability of each sovereign nation to honor their notes and maintain a level of money supply that preserves the relative purchasing power of each unit over time. The US has been able over the years to maintain that public confidence through clever and discreet policy actions that were portrayed in our Dollar Hegemony section. That confidence, however, is in jeopardy now that our Fed has its foot on the monetary inflation pedal and fiat currency as we know it may be an endangered specie, pardon the pun.
As you will see in the following papers, fiat currency comes about through fractional reserve banking and is inflationary by its very nature. It explains why a soda costs over one dollar now when it was only 5 cents not long ago. It accounts for the ability for consumers and governments to spend recklessly seemingly without consequence and could well account one day for the havoc wrought by all of the excesses it spawned. No fiat currency has ever survived long term, and the following material shows why.
1. MUST READ! Why Does Fiat Money Seemingly Work? – This narrative was selected for its amusing account the failed fiat schemes of the Romans, the medieval goldsmiths, Charles II and the Bank of England until today to underscore the long term limitations of currencies not backed by something of universal value.
2. MUST READ Gold and Economic Freedom – A very telling narrative written by the maestro himself long before he was a household name. In 1966 Alan Greenspan wrote in a newsletter exactly how the gold standard serves to reign in runaway deficit spending and how there is no way to protect savings from being confiscated if a gold standard were to be abolished. Seven years later it was, and ever since the purchasing power of the dollar has been steadily eroded.
3. Austrian Economic Theory – This account of Austrian School theory can be found at www.mises.org , the official site of Ludwig van Mises, one of the greatest economists of the 20th century. He was as brilliant and innovative as our comrade Kondratiev but wasn’t tied up in the Russian gulag during his prime and thus better able to further the free-market cyclical school than our beloved Kondratiev.
He absorbed the core Kondratieff theory of economic super- cycles together with other advanced models floating in Europe at that time to author a model that was the first ever to recognize the futility of modeling human behavior in economic decision-making. The central thesis of the Austrian school is that a free-market approach to public policy is superior to our Keynesian model that uses government intervention and debt as a crutch to every social problem it has ever faced- big or small. The mantra of
the Austrian school is that no government cannot dictate to a free market economy with any success. Sadly this approach was not adopted during the last Kondratieff Winter. Why? Because the elitist central bankers knew they couldn’t control and manipulate such a system because market forces would prevail over any concentrated control. I do believe one of the single greatest tragedies of the 20th century was the calculated repression of the burgeoning Austrian School in favor of the flawed Keynesian model of fiscal monetarism that has proven since inception to be the source of so much systemic dysfunction.
During this crucial period in the early 1930’s, our beloved Kondratieff was jailed by Stalin but his work and the nature of that period did live on. It inspired a very special group of economic thinkers- real innovators- that we choose to celebrate on this site for their sheer brilliance and guts to advance economic models that conflicted with the model advanced by these egalitarians. These wonderful bandits- Kondratieff, Schumpeter, Cayce, von Mises, Dewey, et al, did lose out to the elitist sponsored Keynesian model at that time, but the veracity of their theorems never died. Their time has arrived now however, and this is why I strongly encourage our readers to read all about this Austrian school of economics and the impact Ludwig von Mises had in shaping that model into a credible construct.
4. The Greenspan Legacy of Hyperinflation – Adrian Douglas does a fine job explaining the artificial stimulation of the economy by the Fed and how the Fed may attempt to override a Kondratieff Winter through repeated lowering of interest rates. He concludes that the Greenspan legacy will indeed be the worst of all fears- hyperinflation.
A classic Kondtratieff Winter is noted for purging enormous accumulated debt in brutal and expedient fashion. Staggering asset deflation destroys wealth across the board due to a vacuum of purchasing power caused by severe credit restriction and disclocation in the capital markets. The fallout enables a new economic cycle of growth to begin again as asset prices adjust down to realistic and sustainable levels. However, as the following material suggest, the next Kondratieff Winter may mutate into a different beast altogether, one whose fallout is just as severe but wrought in a different way. How it plays out will be directly attributed to the policies and actions of our Federal Reserve (Fed), headed by one Ben Bernanke
He was dubbed “Helicopter Ben” shortly after a 2002 speech endorsing a protracted monetary stimulus plan as being the equivalent of noted economist Milton Friedman’s “helicopter drop” of money. His sudden and steep rate cuts of September 2007 may enable that moniker to stick for some time to come.
Here’s the dilemma the Fed is now beginning to face as we head into a recession or worse: do they restrict credit to contain inflation and preserve the sanctity of the dollar and in so doing allow the capital markets re-price assets downward or do they attempt to stave off the inevitable asset deflation by flooding more liquidity into the system to prop up asset prices and stave off a recession? I would argue the most prudent move is to reign in liquidity so that the resulting wealth destruction from the asset deflation, while painful, would at least enable the economy to sooner emerge from the downturn in a position to begin the next cycle of growth with modest inflation and a currency secure from being devalued. Given that this downturn may indeed be far worse than imagined it is worth considering whether the Fed, knowing this, might instead perversely attempt to hyper-inflate the economy to insure an ongoing stimulus to the economy. This would represent the flipside of the Kondratieff Winter scenario-unprecedented hyper-inflation.
Such a path would entail draconian consequences for our economy and way of life but would benefit the wealthy far more than the middle and lower class of our country which comprise over 90% of its citizens. This is because the wealthy are inelastic to the inflation of basic goods and services of day to day life because they comprise such a small percentage of their overall wealth and they can absorb hyper-inflation much better than the rest who would struggle or succumb to ever-rising prices because their wages gains would not keep pace with the inflation. There is a precedent for us to ponder in the hyper-inflation seen by Germany in the 1920’s as the mark inflated to the point that price inflation reached over 1000% ! We know what happened next. Which path will the Fed choose? If history is any guide the sure answer is they will try to print their way out of the mess simply because it’s what they are hard wired to do. Lead by Alan Greenspan, the Fed has been pumping excessive liquidity into our markets in both expanding and contracting economies for decades to induce the dot com and real estate bubbles and flood the world with dollars. Ever the demagogue, Chairman Greenspan championed such irresponsible policies such as the 2001 tax cuts, unfair and onerous mortgage products and leverage through paper derivatives that have now all combined to flood the world awash with trillions of dollars unable to be adequately repatriated back because we don’t produce enough goods and services to offset the massive liabilities we have accrued. After such a long and protracted policy of expanding the monetary base why should we expect them now to make the hard choices between the sanctity of our currency and the value of our asset base? As they say, people tend to choose the devil they know best and the Fed has chosen the inflationary monetary easing devil for quite some time. My bet is you can expect this approach to continue unabated throughout this contagion.
The articles displayed herein are intended to frame the dilemma now facing the Fed and reveal many of the issues impacting past and future Fed policy. They will showcase specific policy speeches and follow Bernanke throughout his ascension in academia to reveal his passion for the Great Depression and his acumen of monetary policy in those deflationary periods. Does anyone find it rather peculiar that the one chosen to guide us through this particular period is someone so acquainted with the Great Depression and so outspoken about a particular approach to its aversion (money drop)? It’s no wonder why he was the perfect choice to succeed Greenspan- no Paul Volker types were wanted here.
Read Bernanke’s speech in late 2002 regarding deflation and money drops: