Daily Archives: January 29, 2011

Inflation Will Destroy the Dollar

Porter Stansberry is a noted financial advisor with a very good track record and a substantial worldwide following. The final part of this video is a pitch to subscribe to his advisory service, but the first part comprises an excellent analysis of the current situation and what I think is the most plausible prognosis. His argument is well developed and based on solid facts. I urge you to watch it: http://www.stansberryresearch.com/pro/1011PSIENDVD/WPSIM104/PR

If you close the browser window or tab while it is playing, you’ll have the option to go to the written transcript. In either case, pay close attention to the startling charts that make a strong case that hyper-inflation is looming on the horizon.

Some writers have been arguing that deflation, rather than inflation, is the more likely prospect, but that case us built upon a misapplication of term “deflation” and an incomplete consideration of the pertinent factors. In reality, it is not an either-or situation.

Strictly speaking, both inflation and deflation are monetary phenomena. As I’ve said before, when speaking about inflation, one must distinguish between currency inflation and price inflation. Price inflation or the cost of living can be affected by a number of causes, but the usual and primary cause is currency inflation, that is the debasement of a currency by the monetary authorities by creating money on an unsound basis, notably, the monetization of government debt. Deflation is the opposite of inflation; it is the contraction of the overall money supply by the banking system.

That’s not what we’ve been seeing. The overall money supply has been increasing—inflation. However, the money has not been going to the private productive sector but to the public sector (government) to use for bank bailouts, weapons and wars, expansion of the national security state, and extension of imperial dominance around the world, all of which are wasteful and useless. The bad debts that were created during the latest (real estate) bubble have not been written off, they have for the most part simply been taken over by the government. People who serve within those realms benefit from the inflation, they have plenty of money to spend, but the productive sector is being starved for money and credit.

Businesses often depend upon bank financing for working capital. When banks are unwilling to provide it, they are bankrupted and workers lose their jobs. Hence we have both currency inflation and depression at the same time. It’s as if there were a huge counterfeiting ring using bogus money to gobble up a large proportion of the available goods and services from the market. Counterfeiters only take; they do not put anything of value into the market. Hence, as real value is drained from the economy, sellers raise prices in order to compensate for the increased supply of money. Meanwhile, those who find themselves among the army of the unemployed are willing to take less pay for whatever work they can find in order to acquire basic necessities of life.

As the government and monetary authorities continue with their wrong-headed “stimulus” measures, they simply make matters worse, assuring the eventual destruction of the dollar as a reliable measure of value and US government bonds as a safe store of value.

None of the proposals now on the table in Congress or the financial press will solve the dilemma. As I argued in my recent article, The World’s Ominous Reckoning, that appeared in Reality Sandwich, The problem is structural and systemic. The system is designed to create debt, and ever more of it. Like a pernicious cancer, debt is a parasite that is killing us, and in the end a parasite will die along with its host…. interest must be eliminated from the money system to put an end to the growth imperative.

[For more evidence of inflation and its effects in today’s economy, see also my previous blog post about inflation, Chris Martenson: Inflation Is So Much Worse Than We’re Told].