A Review on Where We Stand with Regard to Deflation, Hyperinflation and Stagflation
Jesse’s Café Américain
Well, the good news for everyone is that nothing seems inevitable here, that there is almost always a choice, but it is often wrapped up in a nice looking rationale, with all the compulsion of a necessity, for the good of the people. Us versus them in a battle for survival and all that. And clever leaders on the extremes provide the ‘them’ to be dehumanized and objectified. The leftist wishes to murder the bankers, and the fascist the lower classes and outsiders. The extremes of both end up making life miserable for almost everybody except for a privileged few.
And so I reiterate that in a purely fiat currency, the money supply is indeed fiat, by command.
People like to make arguments about this or that, about how so and so has proved that the Fed does not or cannot do this or that, that banks really create money only by borrowing, that borrowing must precede this or that.
It’s mostly based on a fundamental misunderstanding of what money is all about, with a laser beam focus on hair-splitting technical definitions and loquacious arguments more confusing than illuminating, lost in details. In a simple word, rubbish.
Absent some external standard or compulsion, the only limiting factor on the creation of a fiat currency is the value at exchange of the issuers bonds and notes, and currency which is nothing more than a note of zero duration without coupon.
If I had control of the Fed, unless someone stopped me, I could deliver to you hyperinflation or deflation without all that much difficulty from a technical standpoint. The policy reaction of those who might be in a position to fire or lynch me is another matter. The Fed not only has the power to influence money creation in the private banking system. It has the ability to expand its balance sheet and take on existing debt of almost any type at will and at any price it chooses.
But that is the case as long as the Fed has at least one willing partner in the primary dealers, and the Treasury is in agreement. And even that requirement for a primary dealer is not all that much of an issue given the amounts of existing sovereign and private debts of which the Fed might avail itself for the forseeable future.