The Phaserl


Monetary Liquification, Gold And The Time Of The Vulture

from Gold and Liberty:

In 1971, when the US ended the convertibility of the US dollar to gold, the only limit on the bankers’ ability to print money ad infinitum—monetary gold reserves—was removed. This led to an immediate spike in inflation ending in an inflationary surge—from 3.3% in 1971 to 14.4% in 1980, a 436% increase. Economists called it the Great Inflation.

Paul Volker, who along with Milton Friedman advised Nixon to cut the ties between the US dollar and gold in 1971, was forced as Fed chairman to end the inflationary surge by raising interest rates to a draconian 21.5 %, in 1980.

After Volker’s deflationary interest rate hike, inflation would not again be an issue despite the still expanding money supply. This anomalous absence of inflation would give rise to the erroneous conclusion that the Fed had somehow engineered a monetary miracle, a never-before-seen phenomena where continuing money growth did not lead to inflation but to a period of relative stability that economists called the Great Moderation.

The Great Moderation from the mid-1980s to 2007 was a welcome period of relative calm after the volatility of the Great Inflation. Under the chairmanships of Volcker (ending in 1987), Greenspan (1987-2006) and Bernanke (starting in 2006), inflation was low and relatively stable, while the period contained the longest economic expansion since World War II. Looking back, economists may differ on what roles were played by the different factors in contributing to the Great Moderation, but one thing is sure: Better monetary policy was key.

‘The Great Moderation’ was, in fact, merely ‘The Great Delusion’. The absence of inflation was not due to “better monetary policy”, but to a series of cataclysmic deflationary events i.e. Volker’s 21.5% interest rates followed by the collapse of massive speculative bubbles which unleashed powerful deflationary forces offsetting the inflationary rise in prices that would have otherwise occurred with excessive money printing.

In 1971, global monetary aggregates, MO, totaled $8 billion; by January 2016, global MO totaled $80.9 trillion, an astounding increase of 1,000,000 %. Such an exponential growth of the global money supply would have either ended in extreme inflation or hyperinflation were it not for powerful contravening deflationary forces.

After Volker’s 21.5% deflationary interest rates in 1980, the next major deflationary event was the bursting of the Japanese stock bubble on December 31, 1989. The Japanese Nikkei fell from a high of 38,957 down to 7,607; its collapse awakening deflationary forces not seen since 1929 crash which caused the Great Depression of the 1930s. Today, Japan is still trapped in a moribund downward deflationary spiral.

It has been over two decades since the popping of Japan’s economic bubble and the country is still actively battling with deflationary forces that are so powerful that near-zero interest rates (zero-interest rate policy or ZIRP), repeated bouts of quantitative easing (some call it “money printing”) and constant Yen-weakening currency interventions have barely made a dent.

After the Nikkei’s collapse, the US bubble burst in March 2000. Next, came the US real estate bubble whose collapse in 2007 lead to the Wall Street crisis of 2008; and, in August 2011, global markets plunged when the European sovereign debt crisis erupted.

With each bursting bubble, demand collapsed and deflation gained additional momentum which central bankers attempted to overcome with more credit, more monetary stimulus, e.g. QE1, QE2,QE3, and more money printing; but despite central bank efforts to artificially induce inflation-indexed growth with monetary policy, deflation—capitalism’s fatal wasting disease—triumphed.


On February 1, 2016, Professor R. Taggert Murphy, co-author with Akio Mikuni of Japan’s Policy Trapnoted the global significance of Japan’s 26-year losing battle with deflation:

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