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Quantitative Easing is Nothing New

The term 'quantitative easing' is just the newest term to describe the on-going central bank policy of increasing money supply.

Greetings. There has been an increasing amount of news covering the activities of The US Federal Reserve and other central banks. The newest expression being bantered about is "quantitative easing".

Simply put, quantitative easing is a phrase, more a euphemism really, to describe the process of increasing the monetary supply - printing money so to speak. It is a continuation of actions that central banks have been engaged with ever since their creation.

I would like to show a chart of monetary expansion since 1971 to the present. We will begin with what people most typically think of when they think of money - that being banknotes and coins in public circulation. Economists call this M0.

Here is a chart showing a timeline from 1971 to the end of 2010. Along the vertical axis is a dollar figure.

Global currencies in circulation

The first currency shown is the US dollar. By the end of 2010 there was 920 billion in US dollars. It is estimated that perhaps up to two-thirds of this circulates outside the borders of the United States.

Our next currency is the Japanese yen. Over 86 trillion yen circulates among the public. This represents an amount equivalent to more than US$1 trillion.

The euro is represented in blue. There is just fewer than 840 billion euros in circulation - equivalent to US$1.1 trillion. These three currencies represent nearly 60 percent of the value of all physical paper currency within the public domain.

The fourth most significant paper currency is the Chinese renminbi, also known as the Chinese yuan.

The remaining 131 currencies shown in this chart are represented in grey. Together, these 135 currencies amount to US$5.2 trillion.

At the end of August 1971, when the US dollar was taken off the last vestiges of the gold standard, the total amount of currency was equivalent to US$171 billion. This means, that over the last 40 years, the nominal valuation of all paper money has increased by more than thirty times.

But, there are also other types of money. Namely, demand deposits and savings accounts. Economists classify different types of money using the following convention.

Categories of money classification

This table shows the different types of money commonly defined by economists. The bottom represents the most liquid forms of money, which are used primarily as a means of exchange. The broadest measure of money defined here, is M3. This includes forms of money used as a store of value.

Let's now return to our first chart. We will re-label all of these circulating currencies as M0 and represent them in blue.

Now we will add the global estimates for all demand deposits in order to compute M1. As you can see, the amount of money held in demand deposits exceeds that of currency in circulation by nearly four times.

To this amount of money - equivalent to US$25 trillion - we will now add savings accounts and small time deposits. This is M2. The amount of money in M2 is even greater than that in M1.

Finally, we add in those monies captured under M3.This brings our estimate for the total amount of money to over US$75 trillion.

Global money supply

I hope these charts illustrate the magnitude of monetary expansion that has occurred over the last forty years. Every increase to the existing money supply dilutes the value of the currency already in existence. In other words, those people holding paper money lose purchasing power to create value for the new money. It is, in effect, a transfer of wealth to recipients of newly created money. Quite simply, it is theft.

Common usage of the word "inflation" is the phenomenon of rising prices. I hope that these charts have shown that this price inflation is not a natural process of the free market but, the result of deliberate policy, namely the central bank policy of ever increasing the money supply.

May you find these words helpful in preparing yourself. Thank-you for watching.

Global money supply data available at www.DollarDaze.org

_____

© 2011 DollarDaze

ABOUT THE AUTHOR

Mike Hewitt Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices. Mike can be emailed at mikehewitt@hotmail.com.
Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

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Inflation In History

Governments fund themselves through three ways. They can either - tax, borrow or inflate. The last option is preferred, as it is the method least likely to anger the public. However, inflation is associated with large-scale wars and great social and economic upheavals.

Greetings. Today, I would like to talk about why governments often choose to inflate their currency despite the risks of hyperinflation. There are three ways that governments can fund themselves. They are - to tax, to borrow, or to inflate the amount of currency. Taxation is very unpopular with the public because its effects are so direct.

Borrowing is not a true remedy as it merely delays payment. To some degree, governments can continue borrowing, but it is like a person using one credit card to pay off another card. This can only last so long. At some point, the government must either levy new taxes, begin inflating, or default.

Inflation is an insidious way that governments can raise funds. It is effectively a tax on those holding money. Instead of paying money to the government as with the case of a conventional tax, the government prints new money to spend. The value of this new money is siphoned off the value of the currency already in existence. This transfers wealth from the citizens to the government or at least to those controlling the issuance of currency.

This sordid tale has been retold many times. In medieval Europe, monarchs would clip coins. Clipping is a process whereby very thin shavings of metal are taken off the edges of many coins to produce a new one. Laws are then imposed, forcing people to accept the underweight coins at their face value.

In ancient Rome, from the time of Nero and after, the precious metal content of the denarius steadily declined, from being a nearly pure silver coin to one containing only two percent.

Genghis Khan created what was to be the largest continuous empire in the world. The paper money that only he, and his highest ranking officials could create, concentrated his power, but through successive periods of over-issuance, the economy suffered and the eventually the empire fragmented. Paper money was abandoned in the East until it was reintroduced by the Europeans, some 350 years later.

The printing of money allows for the sustainment of large-scale wars. These simply would not be possible under commodity-based money, as only a finite amount of money could be created.

Hyperinflation predated the rise of Mao in China and the National Socialist movement in Germany. Greatly devalued currencies are associated with both the pre- and post-break-ups of the Soviet Union and Yugoslavia.

Time and time again, the masses suffer the theft of their wealth through a debasement of the money. This process transfers wealth from the existing holders of money to those who have the power to create it.

Prices begin to increase as the early recipients of this new money purchase greater amounts of goods. Those who are unable to participate in this money game, only face higher living costs on relatively stagnant levels of income. Civil unrest resulting from decreased standards of living is blamed on the wickedness and dishonesty of the people. Authorities enact laws to suppress this behaviour, such as price and wage controls. The first well known example of this is the Code of Hammurabi during the time of ancient Babylon. In every case all throughout history, these edicts are passed under the guise of fairness, but they are in fact merely measures to conceal and perpetuate the parasitic burden of the privileged elite class upon the rest of society.

There is a monetary pattern that closely parallels the rise of republics and fall of empires. Initially, money is a tangible commodity. That commodity is then concentrated by those who issue paper receipts merely representative of the underlying commodity. The reason for doing this is to lend out more in paper receipts than what can be legitimately backed. In modern parlance, this is referred to as fractional reserve banking. It permits banks to lend out a multiple compared to what they hold in the vault. This greatly leverages the amount of interest revenue that can be obtained. Occasionally, this leads to public panics when people rush en masse to cash in their paper receipts for something tangible once they realize the scheme for the fraud it actually is.

We live amidst the most modern version of this story. Through a long and steady process, we now regard the paper as not being a receipt for money, but as the actual money itself. Banks lend out enormous amounts of credit based on paper reserves. Central banks stand ready to create whatever new amount of money is required to prevent the spread of panics.

This can only end with the complete debasement of the currency as it is printed into oblivion. In the twentieth century, many currencies have experienced this fate.

Currency Year
Austian krone 1923
Russian ruble 1922
German mark 1923
Polish marka 1923
Austian krone 1923
Hungarian korona 1926
Brazilian real 1942
Greek drachma 1944
Hungarian pengo 1946
Romanian leu 1947
Chinese yuan 1948
Taiwan yuan 1949
Chinese renminbi 1955
Brazilian cruzeiro 1967
Chilean escudo 1973
Argentine peso 1983
Israeli shekel 1984
Bolivian peso bolivianos 1984
Peruvian soles de oro 1984
Brazilian cruzeiro novo 1986
Brazilian cruzado 1989
Nicaraguan cordoba 1990
Peruvian inti 1990
Yugoslav dinar 1990
Angola kwanza 1995
Argentine australes 1992
Soviet ruble 1992
Polish zloty 1993
Yugoslav dinar 1993
Zaire zaires 1993
Bosnia and Herzegovina dinar 1993
Brazilian cruzado novo 1993
Georgian kupon 1993
Yugoslav dinar 1994
Belarus ruble 1994
Ukrainian karbovanet 1995
Bulgarian lev 1997
Zaire zaires 1998

Hyperinflation is not a bizarre event without cause. It is the ultimate end state of policy involving the continual printing of currency.

"The most important thing to remember is that inflation is not an act of God; inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy." (Ludwig von Mises, "Economic Policy")

May you find these words helpful in preparing yourself. Thank-you, for watching.

_____

© 2010 DollarDaze

ABOUT THE AUTHOR

Mike Hewitt Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices. Mike can be emailed at mikehewitt@hotmail.com.
Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

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Can Paper Bring Prosperity?

A short description of money and historical examples where forms of which were not a good store of value ended in economic disaster.

JULIA: Welcome to tonight's show. I'm Julia Sanders. We have with us Mr. Thomas Hughes. It's great to have you here with us tonight.

THOMAS: Thank you Julia. Pleasure to be here.

JULIA: OK. So, today we are going to discuss money.

THOMAS: Yes, it is a very interesting subject. Originally, there were only commodities and people exchanged them according to their wants and needs with one another. At its most basic level, money is a medium of exchange. Something that is desirable to use as money, is also a good store of value and can serve as a unit of account.

JULIA: So what has been used as money?

THOMAS: All over the world, different commodities emerged to play a role, as an acceptable medium of exchange. Cowry shells, wampum, and tobacco, have been used. The word salary actually derives its meaning from the Latin word 'salarium' which means salt.

JULIA: Interesting piece of trivia.

THOMAS: Yes, salt was used in pre-coinage Mediterranean societies. On a small group of South Pacific islands, large stones were used as money.

JULIA: They used rocks as money?

THOMAS: Yes, on the Yap Islands a type of limestone was used. These stones were very rare and were quarried on Palau, some 250 miles to the southwest. New stones were acquired at great peril, perhaps even loss of life. They were valued most highly by the islanders. Here is a picture.

Countries included in analysis

The stone money of the Yap Islands.

JULIA: And what happened?

THOMAS: An enterprising Irish-American was shipwrecked there in 1874. He learned of the unique economy of the island. Sensing a profitable business opportunity he returned a year later, aboard a vessel carrying limestone. He exchanged these stones for goods produced by the islanders.

JULIA: That sounds funny.

THOMAS: Well, perhaps a humorous tale to us today. But to the people of the Yap islands, their economy was destroyed. The stones became so numerous that they lost all their value. The people discovered that they had much less in terms of goods than they previously enjoyed, as they had traded these things away for the stones. They were in effect poorer, although they had much more money than they ever had before. Perhaps there is a lesson in this. Today we trade pieces of paper, a material abundant like the limestone rocks of the Yap islands.

JULIA: So are you suggesting that we may find ourselves amongst piles of paper, and no goods?

THOMAS: That is a possibility, and one not completely unknown to the history books. This highlights why it is desirable for money to also be a store of value. As the people of the Yap islands found out, rocks are a terrible store of value. And to be honest, paper isn't much better.

JULIA: I remember reading about hyperinflation in Germany. A wheelbarrow of money required to buy a loaf of bread. People filling up their wood stoves with paper money.

Countries included in analysis

A German woman feeding a stove with currency notes, which burn longer than the amount of firewood they can buy.

THOMAS: Weimer Germany in the early 1920's, is perhaps the most well-known example of hyperinflation. China was the first country to use paper money. That occurred in the early 9th century. When Marco Polo returned to Europe in 1295, he detailed how the Chinese emperor created paper money through a very official process. His claims of paper being used as money were met with ridicule and disbelief by his fellow Europeans. Unknown to Marco Polo, China was being ravaged by hyperinflation after he left. So what Marco Polo saw, as being the immense wealth of China, was merely an inflationary boom caused by money creation. China stopped using paper money in the middle of the 15th century and did not return until the arrival of the Europeans in the 19th century. As it turned out, China once again experienced hyperinflation with paper money in the late 1940's.

JULIA: Any others?

THOMAS: Many. The United States experienced two hyperinflationary episodes - the continental money during the War of Independence, and the Confederation paper during the U.S. Civil War. France experienced terrible hyperinflation during the French Revolution. France also experienced economic turmoil in the early 1720's, when John Law proposed printing paper notes as a means to alleviate France's debt. Law proposed stimulating industry by replacing gold with paper credit, and then planned to increase the supply of credit through low-interest rate loans. To reduce the national debt he proposed replacing it with shares in economic ventures - this policy directly contributed to the disastrous Mississippi Company bubble. That scheme fell apart in 1722, when the public en masse attempted to redeem their paper notes into gold. There was simply not enough gold to honour all redemptions.

Countries included in analysis

Changing gold into paper money. Taken from the Arlequin Actionist (1720)

In the end, shares of the Mississippi Company were deemed worthless. This wiped out the wealth of many.

JULIA: This sounds a bit like today. The U.S. Federal Reserve has taken bad debt unto its balance sheet, and are they not printing money to purchase U.S. Treasuries so interest rates stay low?

THOMAS: As Mark Twain once said, "history doesn't repeat itself, but it often rhymes."

JULIA: Interesting. Thank-you for your explanation. We will now take a short commercial break.

_____

© 2010 DollarDaze

ABOUT THE AUTHOR

Mike Hewitt Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices. Mike can be emailed at mikehewitt@hotmail.com.
Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

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Confiscation Through Inflation

A monologue on currency devaluation through the process of inflation.

Greetings, I would like to talk about a subject of which I believe to be of great importance. It is to do with the devaluation of our currency.

The continual and increasing issuance of U.S. dollars has steadily eroded its value. This has been particularly pronounced since abandoning the final vestige of the Gold Standard some forty years ago.

John Maynard Keynes, perhaps the single most influential economist of the 20th century, said that, "by a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens."

The following chart shows the value of the U.S. dollar in terms of gold.

Countries included in analysis

As you can readily see, the dollar has depreciated over time. With the Coinage Act of 1792, the dollar was officially defined in terms of silver. The nominal gold price at this time was equal to $19.39.

The first devaluation occurred during the War of 1812. After hostilities ended the pre-war convertibility was restored. Following the Coinage Act of 1834, the dollar was revalued and one troy ounce of gold had the nominal price of $20.67. During the U.S. Civil War, convertibility of the U.S. dollar was suspended. But again, as with the War of 1812, the pre-war convertibility was eventually restored. The Gold Standard Act of 1900, officially defined the U.S. dollar in terms of gold, instead of silver.

The next drop in the value of the U.S. dollar came as a result of the Gold Reserve Act of 1934. This act was part of the measures put forth by the Franklin D. Roosevelt administration during the Great Depression. This act set the nominal price of gold at $35.

After the Second World War, the dollar continued to be convertible to gold at the pre-war rate, but was the only currency in the world to be so. Through the Bretton Woods Agreements of 1944 all other currencies were to be held within tight trading bands to the U.S. dollar.

In 1971, it was feared that the United States Treasury would be unable to continue its obligation of redeeming dollars brought in by foreigners for gold. On August 15th of that year the so called "gold window" was closed.

The severing of this last connection between gold and paper money meant that all the world's currencies now "floated" against one another. Gold soared from $35 to $195 an ounce by the end of 1974.

With some notable ups and downs, U.S. dollars have continued to buy less gold. As of December 2010 it now takes over $1400 to purchase one troy ounce of gold. This represents a 97.5% loss of purchasing power in just under 40 years.

The following chart, super-imposes the amount of currency in circulation.

Countries included in analysis

As we can see, there is an expected decline in the value of the U.S. dollar as greater amounts are produced. If this trend disturbs you, as much as it does me, then you would find it prudent to transfer a sizeable portion of your wealth into something that has a proven history of being a store of value - such as gold.

May you find these words helpful in preparing yourself. Thank-you for watching.

"The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value..." (Alan Greenspan, former Chairman of the Federal Reserve)

_____

© 2010 DollarDaze

ABOUT THE AUTHOR

Mike Hewitt Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices. Mike can be emailed at mikehewitt@hotmail.com.
Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

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The Diamond-Water Paradox

Julia Sanders discusses why diamonds are more valuable than water with economist John Tabbot.

JULIA: Welcome to tonight's show. I'm Julia Sanders. We have with us Mr. John Tabbot. It's great to have you here with us tonight.

TABBOT: Thank you for inviting me here today.

JULIA: OK. So, today we are going to discuss why diamonds are more valuable than water.

TABBOT: Yes, it is a very strange notion isn't it? After all, water not diamonds is essential for life. Classical economists puzzled over this question and named it the "value paradox".

JULIA: OK, so why are diamonds more valuable?

TABBOT: Well, scarcity of goods is what causes humans to attribute value. If, we were surrounded by an unending abundance of both water and diamonds, we probably would not value either very much.

JULIA: That makes sense.

TABBOT: Scarcity is an important factor in how we value an economic good.

JULIA: What defines an economic good?

TABBOT: Economic goods have three attributes - first of all, there must be a human need or want. Secondly, there must be an opinion that the thing in question will satisfy that need or want. The last point is that there must be command or control over the ability to satisfy this want or need.

JULIA: So something, like good weather would not be an economic good?

TABBOT: Exactly, I may know that a nice sunny day would improve my mood. But, we do not have control over the weather. Therefore, it is not an economic good.

JULIA: So now you have defined what economic goods are and say that scarcity is how we value them?

TABBOT: Yes. We value an economic good only if there is an insufficient quantity to satisfy all human desires for that thing. Scarcity implies that we will rank our wants and this process results in economic activity.

JULIA: So something like, the air we breathe would not be economically valuable?

TABBOT: Under normal circumstances yes. In the case of a SCUBA diver it is very much an economic good with value.

JULIA: Right!

TABBOT: Consumers will use whatever resources they have at their disposal to satisfy their most important wants. Our value system is determined by our ranking of wants.

JULIA: Can you provide an example?

TABBOT: Yes. Assume you are a farmer with three horses and two cattle. Each of the horses is interchangeable with one another.

JULIA: So all horses are identical?

TABBOT: Yes, we have in a sense turned them into a commodity. And not only the horses, but each cow is interchangeable as well. Now let us assume that you rank the importance of the animals as follows - tilling the fields is the most important and you need a horse for that. Secondly, you need a horse to pull your wagon to town.

JULIA: This must be a historical example.

TABBOT: Seems to be, yes. So the two top needs are fulfilled both by horses. Now we proceed down our ranking of wants and see that we require one cow to produce milk. Then another cow is required for cheese and butter.

JULIA: So it goes horse, horse, cow, then cow?

TABBOT: Correct. The third horse, and final animal, is required for recreational riding. This is regarded as being the least important of the five wants. Okay. So now comes my question - which is the most valuable animal in this example?

JULIA: The horse.

TABBOT: Wrong.

JULIA: But the horse fulfills the most valuable want.

TABBOT: Yes, it does. But you see, you have fallen into the same trap as the classical economists.

JULIA: Please explain?

TABBOT: I will prove to you that the cow is the more valuable animal through the following scenario. Imagine that these animals are all inside a barn that is on fire and you can save only one of them. Which one would it be?

JULIA: It would be the horse of course.

TABBOT: Yes, if only one animal could be saved it would be the horse. If you could save two animals?

JULIA: I would save the second horse.

TABBOT: Yes. And now, if you had sufficient time what would be the third animal?

JULIA: The cow used for milk.

TABBOT: And the fourth animal?

JULIA: The second cow.

TABBOT: So, the remaining animal would be a horse? That is my point. As this example shows, the cow is more valuable than the horse. But, only if you have the third horse.

JULIA: So, if you only have two horses and two cows, than the horse is more valuable?

TABBOT: Yes. But since you have three horses, the value of a horse is less to you than a cow. This is what economists refer to as "marginal utility". We can say that the marginal utility of the cow is greater than that of the horse.

JULIA: But only because the farmer has more horses than cows.

TABBOT: Yes. But we must keep in mind our ranking of wants. If we had deemed the recreational riding as being more important than making cheese and butter, then the horse would be the more valuable animal, even though they outnumber the cows. So raw numbers alone do not determine which is more valuable.

JULIA: Okay. I understand that.

TABBOT: Now we have a framework to understand why diamonds are valued more than water even though water is ultimately the more important of the two.

JULIA: Which explains why a person in the desert dying of thirst would trade his diamonds for water?

TABBOT: Yes, and how under normal circumstances diamonds are much more valuable.

JULIA: Thank-you for your explanation. We will now take a short commercial break.

_____

© 2010 DollarDaze

ABOUT THE AUTHOR

Mike Hewitt Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices. Mike can be emailed at mikehewitt@hotmail.com.
Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

This article has received 0 comments | View comments | Leave a comment

Posted in Monetary Commentary, Videos, Gold, Mike Hewitt

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