Worshiping at the Altar of the Inflationary God

“Bow down before the one you serve. You’re going to get what you deserve.”

– Trent Reznor

I listen to Peter Schiff’s weekly podcast “Wall Street Unspun.” He said something in a recent edition that stuck with me. He said that his father, Irwin Schiff (who was also a prominent opponent of the inflationary policies of the US Government) denounced the politicians and central bankers of the world in books such as The Biggest Con: How the Government Is Fleecing You. Peter said that his father described inflation as a “god that they worshiped.” These days it would seem there’s hardly any room left at the altar. 

The power of the ability to create money from nothing was marveled at when it was first discovered. Critics were sure that no one would accept Lincoln’s Greenbacks when they were first issued to help pay for the civil war. The notion that people would accept a paper money that had no backing just because the government told them to seemed rather dubious at the time, but the general public did accept them. The possibilities were not lost on the thinkers at the time.  If fiat money could be created with a printing press and accepted by the general public, then why not use the printing presses to make us all rich?

Murray Rothbard’s book A History of Money and Banking in the United States details how a new political party, The Greenback Party, came onto the scene with just such a plan. Of course, they understood that newly created paper money lose its potency if it was merely given to people, so they instead proposed using it to complete all manner of projects. The most ambitious was by stock speculator turned Congressman Richard Schell who proposed that the United States build a canal from New York to San Francisco funded entirely by greenbacks. Fellow greenback enthusiast George Francis Train thundered:

Give us greenbacks we say, and build cities, plant corn, open coal mines, control railways, launch ships, grow cotton, establish factories, open gold and silver mines, erect rolling mills… Carry my resolution and there is sunshine in the sky. 

These days paper money advocates still maintain all kinds of kooky schemes. Rodger Malcolm Mitchell’s book Free Money: Plan for Prosperity says much the same thing: have the government print all the money it wants and pay for medicare, social security, the space program, etc. Mitchell’s argument is exactly the same as those of the greenbackers over 100 years prior; inflationary policies will bring about a great general welfare to society despite as more money is added to society. In fact, Mitchell argues that the notion that a society might have too much money is ludicrous. 

If the inflationists were merely annoying kooks who proposed outlandish theories on the fringe of our society, I’d be happy. Unfortunately, these days inflationists are the ones running our society and hard money advocates, such as myself, are the ones who have been reduced to voices on the fringe. One headline in Bloomberg today tells us that “BOE’s King ‘Groping in the Dark’ as U.K. Prints Money.” The balance sheets of the European banks are looking cataclysmic and virtually the entire European banking system will be rendered insolvent if something isn’t done. What else can be done but to inflate? In this case, $200 billion pounds or so. The article says that there’s general disagreement about whether it will solve the problem, but things seem desperate enough that they have been reduced to trying anything.

Of course, with trillions in liabilities looking to take the banking system down, we’re not talking about run of the mill inflation. To get us out of this mess the bankers are looking to inflate so much that trillions of dollars of loses can be absorbed. That means massive inflation. The $200 billion that the Bank of England is going to print up and inject into the system will, they hope, become $2 trillion or so in a fractional reserve banking system. That’s how the math works out if the new money introduced is loaned out over and over again. That’s why there’s so much talk about banks needing to lend and consumers needing to borrow; if they don’t, then the $200 billion might render considerably less inflation. 

The crux of the argument that blog reader Roger recently made is that with trillions of dollars in potential loses and a banking system unwilling to lend, that the billions of dollars and euros currently being printed won’t make a dent in the loses. My reply was that that may possibly be true, but if it is, they’ll just print more. Billions of dollars in inflation is so last century. We’re going to need trillions of dollars for it to really count this time around, and the monetary authorities of the world are well aware of that. And so, they gather together to worship yet again at the altar of their inflationary god. The central bankers of the world are all gathering together in conferences and meetings. They all know what’s going on, and they all know how they plan to fix it. Inflation must come and make these loses comparatively tolerable. To do that, they need to print. And hope. And pray.

 Of course the real irony is that if they do succeed, they will simply make a bigger monster. Inflation was how we got into the mess in the first place. If we really do inflate away the loses of the past couple of decades, it will only be by readying the system for the even bigger loses of the next couple. Inflation is like the piper. He must be paid at the end of the dance. Of course, politicians and bankers are perfectly fine with that. The want the inflationary good times on their watch and the crash on the next guys. That’s what they are praying to bring about one more time. 

The only sane move we can make as individual investors is to put our money some place where it can withstand the waves of inflation that are about to overtake us. Gold anyone?

3 thoughts on “Worshiping at the Altar of the Inflationary God”

  1. Speaking of Peter Schiff and gold, I, too, listen to his weekly podcasts. There’s a sound byte at the beginning of each show that goes something like this “When you hear those guys on the financial shows giving advice, it’s not advice, it’s propaganda. They’re trying to sell you something.”

    Yet Schiff’s ‘advice’ for gold is to buy unallocated certificates from the Perth Mint in Australia (which earns him big commissions) despite the fact that unallocated (paper) gold is probably the least desirable way to invest in gold. Add to that the high costs associated with purchasing unallocated gold at the Perth Mint (2.5% going in and 1.25% going out) making it way more expensive than bullionvault.com which charges fractions of that for true ownership.

    Peter Schiff is all about Peter Schiff and making big commissions for his firm. When I saw the video of him in Saudi Arabia advising the sheiks to dump the dollar I got a feeling that he was being unpatriotic at best and treasonous at worst.

  2. Well I’m not much of a patriot myself. The Perth Mint seems a good program. Gold that can’t be confiscated. For me it ranks after physical ownership of the gold, or just owning the ETFs, but I don’t feel he’s doing a disservice to his clients.

    You are correct in saying that he is out for Peter Schiff, but I’m OK with that. I’ve been listening a lot of Andrew Gauss lately and I enjoy listening to him, but I feel he’s made a few key mistakes. I’m going to post about that this week.

    Good to see you again,

  3. Preston,
    Why pay more for less? The Perth mint certificate program that Peter Schiff is pushing places his clients in the position of being creditors (not owners) while paying extremely high commissions for the privilege. While confiscation may be covered, a default by the mint (despite it being ‘guaranteed’ by the State of Western Australia – what if they go under, too?) would be a disaster for Schiff’s gold clients. The result would be that certificate holders would be left standing in line hoping to get a portion of their investments back. Same goes for investors in GLD. At 0.4%/yr GLD is also too expensive, especially since you do not own the gold.

    Gold ownership is the key. That does not necessarily mean holding it physically. I sleep very well knowing MY gold is safe in a professional Swiss vault. If bullionvault, Lloyds, and ViaMat all go under the bullionvault clients’ gold is still their property. Same goes for goldmoney.com but, again, why pay more? Goldmoney, however, does offer vaulted silver and has a method of using ‘gold grams’ as currency, providing you’re doing commerce with other gold money clients. But they’re more expensive than bullionvault and not nearly as transparent.

    Re: Andrew Gauss. It’s clear that a major reason he does that show on oneradionetwork.com is to harvest customers for his nuministic coin business. On a recent show he was asked why he never comments in detail on how you go about protecting your rare coins from fire and theft. He ended up admitting that there was only one safe sold (that costs thousands of dollars) that insurance companies would approve when insuring rare gold and silver coins. I wonder how many of his clients own such a safe. Once those rare coins melt, of course, they’re only worth the gold or silver they’re made of. Seems pretty risky to me. After the recent firestorm in Australia, residents returned to their property to find the contents of their ‘fireproof’ safes were toast! When gold is vaulted in a professional bullion vault, insurance is dirt cheap because those places don’t often get robbed and gold bullion is indestructible.

    Andrew Gauss definitely has his biases when it comes to gold ownership. He even thought that GLD was preferable over actual gold ownership in a professional Swiss vault. Go figure!

    I listen to Andrew Gauss for his insight into the banking system and the Federal Reserve/US Treasury. He seems to think that ‘the boys’ are still in control. I really have doubts about that. If they were so smart we wouldn’t be in this mess. He also seems to think that Americans are still out there spending. He must be living in a different America than the one I’m in. I’m moving in the direction that things are going to get a lot worse and much quicker that Andrew Gauss is predicting.

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