“But there is no inflation!” – Misconceptions about the debasement of money

Printed money

"But there is no inflation!" - Really? Photographer Graeme Weatherston.

“But there is no inflation!” – This is a statement I hear quite often, sometimes from people who are, in principle, sympathetic to my arguments, sometimes from people who are less so. In either case, those who state “but there is no inflation” consider it to be a statement of fact and one that they assume must pose a challenge for me. Should the man who argues that we are heading for the collapse of paper money, for some kind of hyperinflationary endgame, not be concerned that all this money printing by central banks around the world has not led to much higher inflation yet? Do present inflation statistics not provide comfort to those who believe in the practicability and even superiority of central-bank-managed fiat money, and do these statistics not allow them to discard my analysis as paranoid?

The short answer is, no.

The long answer I will provide below.

First of all, there is, of course, inflation, and quite a bit of it. In all major industrial countries official inflation is positive, and in some countries inflation has for years been persistently above the official inflation target (UK, Euro Zone). As I keep saying, the debasement of paper money continues. This is meaningful. Also, this inflation is harmful, even if it is not hyperinflation yet. That this inflation is nothing to worry about, or that it is even beneficial is a complete misconception.

Furthermore, I do expect inflation to get worse, if only marginally at first. Even more importantly, I do think that the risk of an inflationary endgame to our fiat money system has been increasing in recent years and is still increasing today, thanks to present policies and the future policies that seem presently most likely. I will explain this in more detail in a minute. Present inflation rates pose no problem for my analysis and my forecast. To see why, I need to first repeat my key premise.

Inflation in the context of the crisis

Please remember that my key statement in Paper Money Collapse is this: A monetary system like ours, which is a system of entirely elastic, unconstrained fiat money under central bank control, designed to constantly expand the supply of this fiat money so that its purchasing power keeps diminishing (controlled inflation), and that will be used periodically to ‘stimulate’ growth, is not, as the mainstream would have it, a guarantor of economic stability but, to the contrary, suboptimal compared to hard money, inherently unstable and indeed unsustainable. Such a system is fundamentally incompatible with functioning capitalism and a danger to economic stability and prosperity. If taken to its logical conclusion – which is what central banks seem determined to do at present – such a system must end in chaos.

Ongoing monetary expansion must cause the economy to accumulate imbalances over time and these imbalances will be an ever more powerful hindrance to proper growth. As I show in detail in Paper Money Collapse, money injections ALWAYS create dislocations, misallocations of capital, that will have to be liquidated in the future. Such imbalances are now abundant and certainly include excessive levels of debt, overstretched banks and inflated asset prices, i.e. distorted relative prices. As long as the mainstream maintains that ‘easy money’ is a necessary antidote to recession and as long as central banks continue to fight the present crisis with low interest rates and ongoing monetary expansion, these imbalances – that are the root cause of the current malaise and that logically have their origin in previous interludes of ‘necessary monetary stimulus’ – will not be allowed to dissolve or get liquidated but will instead be maintained, and new imbalances will get added to the old ones. The economic system moves further and further away from balance. The crisis is not ended but sustained.

Policy makers claim that without their intervention the crisis would be worse, which only means the liquidation of certain imbalances would now have occurred. Their policies have taken us further away from a proper solution of the crisis and have given us a fleeting but false impression of stability, for which we pay with yet more imbalances.

At this point, one of the reasons for the still ‘moderate’ headline inflation today in spite of the massive monetary stimulus from central banks already becomes apparent: As the imbalances – such as excessive levels of debt, overstretched banks and inflated asset prices – get bigger, the (market) forces that work towards their liquidation become stronger. These forces are deflationary in nature. Sustaining the imbalances – in order to keep the illusion of stability alive – requires ever more aggressive money printing on the part of the central banks, which is what we are seeing around the world today. New ‘base money’ – the type of money that central banks issue and that functions as the monetary system’s raw material – does at the moment not lead to higher headline inflation as quickly as it did in the past. Balance sheets are stretched, overall debt levels are high, and asset markets are distorted – all of this a result of previous monetary expansion. Consequently, banks are reluctant to lend, and the private sector is reluctant to borrow. Ongoing monetary accommodation is blunting its own effectiveness. There are other reasons for the presently still contained headline inflation figure, to which I will come soon.

But remember, in our system of entirely unconstrained fiat money, ever more money can be injected ever faster – and in fact ever more money will have to be injected ever faster for the central banks to keep achieving their near-term policy goals, which are to obstruct any liquidation of capital misallocations and excess debt, and to keep debasing money’s purchasing power. The tipping point – and the trigger for much higher inflation – will be reached when the public loses confidence in this charade. When the public reduces its money balances out of fear of future inflation, money’s velocity will shoot up and inflation will accelerate. Persistent moderate inflation or even slightly accelerating inflation could play a role in taking us to this tipping point. In this respect, current inflation developments are not unimportant. But we have to analyse them in the context of the theory here presented.

My forecasts

For those who have read Paper Money Collapse carefully and fully understood it, none of this is new, and I do apologize for the repetition. But let me stress again, my forecast in recent years has not been that by 2012 or 2013 we will already have much higher inflation or even hyperinflation. Of course, I would not and could not have excluded the possibility that we had much higher inflation or even hyperinflation by now. Nobody can. If and when confidence wanes, the inflation dynamic changes quickly. The system is on thin ice, and central banks are betting every day that this ice will not break. But it was not and still is not my central forecast, at least for the immediate future. My forecast has been and continues to be this, which flows directly from the analysis above: The present super-easy monetary policy does not solve the crisis. This policy does not lead to self-sustaining growth of the kind that would allow central banks to withdraw ‘stimulus’ and normalize interest rates and other policy parameters – something that has been promised in recent years but never happened, nowhere in the world. There is no end to ‘quantitative easing’. It will have to continue forever. QE-policies will even have to be expanded and intensified. There is no ‘exit strategy’. The central banks are digging themselves – and all of us – an ever deeper hole.

These forecasts have been accurate so far and they continue to be my forecast for the future. And here is another forecast: The present measures will over time be seconded with others that in my book I label ‘nationalization of money and credit’, that is, institutional investors will be coerced via legislation and regulation to remain invested in certain asset classes, the war on cash and the war on off-shore will continue and intensify, ultimately we will see capital controls.

Back to inflation

I also expect inflation to remain elevated and even increase over time. Despite the massive imbalances which increasingly clutter the normal transmission mechanisms of easy money, enough of the new money will find its way into the wider monetary aggregates and the wider economy, and this will make sure that our paper money continues to lose purchasing power as is indeed one of the main goals of the central banks. Remember, central banks now de facto fund the public sector through money printing. The central banks are the lenders of last resort and the public sector is the borrower of last resort (the private sector is reluctant, for good reasons, as I explained above). In the US, almost 80 percent of new government debt goes straight to the central bank. The ECB is ready to buy government debt directly, rather than fund European governments indirectly as the ECB has done for years and on a large scale by funding all European banks generously against the collateral of government debt. The Bank of England is, of course, the Queen of QE.

Investors will not accept negative real interest rates forever – not even with the ‘encouragement’ of repression through the state and its agencies – and they will demand higher yields at some point. Again, when the public ‘gets it’, when the public realizes that this charade will have to go on forever and on an ever larger scale, that there is no ‘natural’ end point to this policy of continuous debasement, and that this policy involves ever more fiat money creation and indeed substantial debt accumulation, the public will ditch bonds and paper money. At that point inflation will go up, and it won’t go up just a bit.

Today’s inflation is already harmful

Last week, it was reported that official consumer price inflation in the UK had receded and was now closer, although still above, the Bank of England’s target. One newspaper commented that this was good news for British families, and I fully agree. In particular at difficult times for the economy, when many people are unemployed and have to rely on their savings or on reduced income, it is helpful when stuff gets more expensive at least at a somewhat slower pace, which is what is presently happening in the UK. But would it not even be more helpful if stuff actually got cheaper? What if prices would not rise by about 2.6 percent on average but would fall by 2.6 percent? What if every pound in your pocket got you that much further? Would that not even be better news for the British family?

But ironically, that would be that dreadful deflation that mainstream economists never tire of warning us about. We are constantly told that, although incomes hardly rise and many people have to spend some of their savings to make ends meet, we should still be thanking the central bankers for making sure that our money’s purchasing power keeps dwindling.

It used to be the case that the inflationary boom was followed by the deflationary bust. The tendency for prices to fall in a recession was an important factor in stabilizing things again and doing so quite naturally. Lower prices supported those on lower income, and at some stage lower prices lured those with money on the sidelines back into the economy and back to spending and investing it.

Today, policymakers also try to entice people to spend their money balances by artificially depressing interest rates to zero and by debasing money’s purchasing power. Inflationist policies are, in their view, a tool to encourage spending and investing. Money is supposed to become an unwanted asset. They ignore that what is required to keep lowering money’s purchasing power, namely super-low interest rates and injections of new money, simultaneously props up asset prices artificially and obstructs the deleveraging of the economy. This is a persistent disincentive to invest. Those who have money to spend are reluctant to do as long as asset prices are inflated through easy money and cheap credit. They know, of course, that these are not true market prices. Nobody wants to invest in a manipulated market.

It would undoubtedly be much better to stop printing new money, stop manipulating interest rates and stop debasing money, that is, to end inflationary policies. The market would then go through a much needed cleansing, a liquidation of imbalances. The clear advantage would be that interest rates would reflect the availability of true savings again, and prices would reflect true demand for assets. Prices would be lower but would once again be real market prices. Those with money to spend would feel more comfortable investing their funds. This would truly kick-start the economy.

The beneficiaries of inflationism

But those who defend present inflationist policies maintain we cannot allow the market to trade ‘proper’ prices and certainly not to cleanse anything. Falling prices now would lead to a dreadful debt deflation, a deflationary spiral that would cause substantial collateral damage. I do believe that fears of a deflationary spiral are overblown. As the purchasing power of money increases in a deflation, the opportunity costs of holding wealth in the form of money increase and incentives rise to spend money again. The notion that nobody who expects prices to fall in the future would spend money today is nonsense. It ignores entirely the concept of time preference, and we can see that this is not the case every day in the market for computers or smart phones. These products get cheaper and better every year, yet demand for them is strong and people spend considerable amounts of money on them today.

Allowing the market to correct and to liquidate imbalances and excess debt would not mean the end of borrowing and lending. However, it would certainly hurt those who overreached during the previous boom. Those who borrowed excessively and leveraged their balance sheets too much during the last period of easy money are the ones that would struggle in a deflationary correction, and they are now to be saved by means of a policy of ever easier money. Among them are, importantly, the banks and the states, both are, of course, systematic beneficiaries of the privilege to issue unconstrained fiat money, and both were certainly beneficiaries of the cheap credit boom that led us into this crisis. They are now the chief beneficiaries of the present policy of ongoing inflationism. Those who were most reckless in the boom are to be bailed out with easy money, while those who were prudent, who were not lured by cheap credit into dangerous balance sheet extension and who saved are now the victims of this policy, as present policies prohibit them from buying assets at depressed prices (i.e. true market prices) and in fact secretly confiscate their savings via ongoing money debasement.

Those who defend this policy will argue that collapsing banks and a bankrupt state are also not in the interest of the average British family. That may be so, but it only shows how far all of society has now been contaminated by the consequences of persistently easy money. On some level we have all been made addicts to the crack cocaine of endless cheap cash. But what is the alternative to liquidation? Is it really feasible to declare many prices to be free of the risk of decline and large sections of the economy to be free of the risk of default – regardless of the extent to which these entities issued claims against themselves during the good times? How much money do we have to print to make this anti-capitalist fantasy come true?

The fact that this policy has a targeted group of beneficiaries is also one of the reasons why inflation is not higher yet. Central banks create base money, that is, deposit money that sits on account at the central bank. This money functions as bank reserves. Since 2008, central banks around the world have flooded their banking systems with such bank reserves but this has not led to a similar expansion in broader monetary aggregates (although it has certainly encouraged further expansion of wider aggregates and is thus responsible for ongoing, harmful inflation, just not on the scale that the massive expansion of base money would normally suggest). As I said, a lot of this is due to the vast imbalances: banks are too scared to lend (and rather hold excess reserves) and the private sector too scared to borrow – and for good reason as pretty much all prices around us are distorted. However, the central banks have not really targeted the wider aggregates, yet. The US Federal Reserves even pays the banks interest on their risk-fee deposits at the Fed. It thus encourages them to keep excess reserves and not increase lending.

Remember, QE1 was designed to save the banks. The Fed gave the banks more than $1 trillion in new reserves and did so by taking one of the most toxic asset classes off their balance sheets in exchange for the new cash: mortgages. QE2 was designed to manipulate asset prices as Bernanke admitted here. Again, the main objective was not to have banks go out and create vast amounts of new deposit money via fractional-reserve banking and thus give a stronger boost to M2 (and to inflation) but to prop up the prices of ‘risk assets’.

But the economy has not entered a self-sustained recovery thanks to these measures – Surprise! Surprise! Of course, it has not. I explained this in detail above. These policies are simply geared towards avoiding the much-needed liquidation of imbalances. But QE3 is already an indication that patience with the pseudo-recovery among policymakers is running out. QE3 is, more than its predecessors, targeted at ‘lowering unemployment’ or ‘boosting aggregate demand’.

The newspapers are now full of ever more harebrained schemes of how to push more newly printed fiat money down the throat of the economy. Here are some more predictions from me:

Pretty soon, the Fed will stop paying interest on bank reserves. Interest rates will be taken to zero everywhere. We will, at some point, see negative interest rates everywhere. Cash holdings will ultimately get taxed. ‘Hoarders’ of cash will face the death penalty. (As to the last point, I am only half joking.)

I conclude: Still contained inflation readings at present are no reason to relax. It is no surprise that at the current stage of the crisis CPI inflation is not higher. More importantly, there is no reason to assume that present policy is without consequences. Present policy is making it ever more difficult to stop printing fiat money in the future, or to even stop accelerating the creation of fiat money in the future. That is why, if we keep pursuing current policies, we are heading towards paper money collapse. Present inflation readings do not change that.

If you are still wondering when inflation will go up, the answer is: when more people realize where policymakers are taking us.

This will end badly.



Print Friendly
Share on LinkedInShare on TwitterSubmit to StumbleUponhttp://detlevschlichter.com/wp-content/uploads/2011/03/papermoney-20s-150x150.jpgSubmit to redditShare via email
All power to the state! – Money madness at the IMF
Paper Money Collapse: Winner of the getAbstract 2012 International Book Award


  1. says

    I am still a bit surprised at the headline inflation numbers (I expected them to be higher), but I agree with your overall point. The question is how fast the process will unfold.

    Generally, the way we measure inflation has some insidious effects on how we think about it. By measuring effects on prices instead looking at the money supply, there is a tendency to assume a baseline of zero (stable price “level”).
    But the price level would probably be falling if it were not for the money injection (as you say “These forces are deflationary in nature”).

    For example, maybe prices would have fallen 5%, then the money printing contributed to prices rising 6% (with a resultant of 1% rise in price indices). You’d have a 6% distortion, not just a 1% distortion (sounds harmless).
    So the metric tends to hide the full intensity and effect, because we don’t know the baseline (counter-factual).

    Also, excessively coarse macro theory does not teach people about the effects of inflation: the Cantillon effect (effect on relative prices and early/late recipients) and the resulting rent-seeking (trying to get hands on this fresh money early to gain advantage).

    Taken together a 1% rise in prices can be the tip of a dangerous iceberg. Looking at the money supply and credit expansion policy may be a better view of the iceberg.

    • ChrisBR says

      I am a novice in macro-economics but I have always felt that using the term inflation is very confusing as to some it means price increases and to others monetary expansion (“money printing”…), with the latter having an effect on the former, but not vice versa. Also, the latter ought to be an easy statistic to track (one dollar created is exactly one more dollar) while the former is subject to so much tampering (adjustments for product quality improvements, certain products excluded, etc).

      I am therefore highly interested in better understanding the drivers of monetary expansion and how to track it, but I have not yet come across helpful data on the topic.

      Taking the example of the US Dollar I presume the FED knows exactly who is printing it and how much on a daily basis. For instance, private banks for lending purposes (fractional reserve banking…), the Treasury or FED for currency operations (maybe not the US but say the Swiss would do so to protect their currency competitiveness), the FED to cover the government spending (net of tax revenues), the FED for any asset purchase programs, etc. Perhaps there are other ways of creating money… any idea where I could find more information on the topic? Hard to find.

      In other words, I would love a break-down of the 6% mentioned in the comment above.

      Would anybody please suggest me some helpful links on the topic?

      Many thanks

  2. Rod says


    I fully agree with your posts and see what you are getting at, but I don’t know what action I should take with my money to protect myself (to the extent that’s even possible). I know giving investment advice is not necessarily your game, but if you could give some ideas on how a middle class person of average income and savings can best ride this out, I think many would greatly appreciate it.

    Thanks for the posts, keep up the great work!

    • says

      Rod, many thanks. I do get that question often and I have been promising a blog about it. I don’t want to get anybody’s hopes up too much. There are no easy answers or ready “here-is-what-to-do” lists. But I am working on a blog on this topic and I hope to publish it soon. Stay tuned.

  3. jt says

    littledog94–Your pithy one-liner,

    Ending badly, is an understatement that is impossible to clarify

    IMO probably expresses as well as any how many of us feel who have watched and warned about these consequences for many years now. I say “warned,” but the fact is that no matter how much we “know” about what is wrong and worsening, we still don’t know how exactly “it” is going to look, how bad it is going to be, where exactly to run, or hide, or stay, or really how to prepare, though most of us have prepared some.

    And what exactly would we be running from?…and how far would we have to run to “outrun” “it” or be free from its grasp? Or would “it” be wherever we ended up running to, too?

    It feels as though we’re sitting on top of a nuclear mega-bomb, and we’d like to be out of range somewhere safe, but it’s the largest most powerful nuclear bomb ever and noone knows exactly WHAT the radius of the blast or after-shocks / radiation damage is going to be…will it affect everywhere?…maybe the Western world the worst?…or perhaps b/c we already have infrastructure, aging though it may be, we’ll still be better off than present third-world that has been raped by the US petro-dollar and the banksters even worse than we? BRIC countries perhaps?…or in the end would the socialist / elitist genes inherent in most of them destroy whatever stability they might have otherwise?

    What systems now in affect that we take for granted will continue to function? Should we assume none?? Will chief means of exchange of goods be thru barter?…probably some. Cash?…maybe for a while…how long? Gold?…maybe for large items, but who would pay and who would say what it would be “worth” and in what currency?…cans of corn??? What would a can of corn be worth. Silver?…again, how to determine its worth?…and who all would have the money to pay its worth? How to find these people without getting killed?

    And what is really so hard, and going to continue to be hard, about preparing for “ending badly” is that there is SO little truthful information given to the people. Lies, lies, and damned lies make up all courses of the pabulum fed to the sheeple by the govt and its controllers thru the Ministry of Truth, the MSM, et al. And who all has contacts behind the curtains of TPTB’s backrooms to know what they’ll be pulling off or trying to pull off? Or of those opposing these monsters, for that matter, if they exist or are powerful enough to stop them?

    Thankfully, I am not as hopeless as I sound, not b/c I know the answers to all these questions, but b/c I trust the One who does to still care about me and us and this world. Thank God, because o/w the darkness would appear to be closing in fast.

  4. Martin Hickling says

    Detlev, Thanks for another well written article. I’ve also been thinking about how to explain the inflationary risks. I had the same “there is no inflation” comment put to me a few weeks ago. Something, however, that most Australians can relate to is the price of a cup of coffee. I came across a website http://www.coffee-prices.com that has a 10-year history of the average price of a cup of coffee in the six major cities of Australia. The price series is called the Gilkatho Cappuccino Price Index. In 2002 a cappuccino cost A$2.58, and it now costs A$3.47 – a rise of 3.0% pa. The cost of the coffee beans is only about 20-30 cents per cup, so the rise in the price of a cup of coffee can’t be significantly contributed to volatile coffee prices. The 89 cent price rise over the past 10 years seems quite significant in relation to the 2002 price of A$2.58 per cup. It just goes to show how insidious is even a ‘low’ 3.0% pa inflation rate (which just happens to be the top end of the RBA’s target range).

  5. Daniloux Libertarian says

    A super David Stockman, in “the forgotten cause of sound money”
    makes clear where economies are at the present stadium. He founded that the ratio between total Credit Market Debt Outstanding and Nominal GDP in the Us has been relatively stable, at 1.5 ratio, until 1971. After that date, he explains, it has now reached the ratio of 3.6. It means that the economy needed progressively far more debt for producing almost the “same” wealth of last year. It is like a merchant progressively extended by the triple the time for paying its own suppliers. There is no doubt, the bankrupt of Usa is very close.

    You can track the video here http://www.youtube.com/watch?v=CAkdB-2qFHY and the debt figures here http://www.federalreserve.gov/releases/z1/current/z1.pdf.

  6. KevinR says

    Detlev, thankyou for an essay which explains some of the most complicated issues in language that ordinary folks like me can understand and piece together like a jigsaw. I can now see why the central banks and political elites have embarked on a journey that cannot end: printing money…and the more they print, the more they need to print to stand still, and this will continue until we are inevitably drowned in worthless paper money. And the more catastrophic any return to sanity becomes. I cannot say when or where this governmental madness will end but it sure explains why the US and others are ratcheting up the anti-liberty laws/regulations and giving law enforcement agencies ever more powers of detainment. Civil unrest is surely on the way…That will be in addition to war.

    • KevinR says

      Thanks for the link to your blog Vincent…

      I’m tempted to add that another definition of hyperinflation is “the period of time between jumping off the cliff and hitting the rocks 500 metres below” ;-)

  7. Kingbingo says

    I find the other side of this coin incredibly frustrating. That is the whole ‘growth’ debate.

    So the economy apparently ‘grew’ by 1% and we are out of recession. But what utter baloney. If you strip away the effect of nominal price increases we did not grow at all. Yet politicians either pretend not to, or can’t understand the distinction (I genuinely don’t know which of the two is the case). It seems the role of the central bank is now to provide the illusion of growth, even if that growth is purely nominal.

    Furthermore I find the whole idea of GDP nonsensical as well. If I spend £2bn building half a bridge to nowhere, then I have just added £2bn to GDP, yet absolutely nothing of any value, indeed I have actually consumed a stock of wealth on a pointless project and actually made the nation poorer overall. But we seem to have in the modern economy no concept of value, or a national balance sheet. We merely look at the top-line of the national profit and loss account, i.e. turnover and leave it at that. But as any fund manager will tell you it is very easy to boost the turnover figure if you’re prepared to destroy your balance sheet in the process. Or to put it another way, you could have a fantastic set of sales figures if your business sell £10 notes for £9 each.

    So GDP does not actually tell you anything worth knowing, because it is purely measuring the flow and not the stock of wealth. But actually that unit of measurement is being inflated by …..I don’t know maybe 6%pa??…. and because we have the free market trying to heal by purging mal-investment at only 5%pa we record a 1% ‘growth’ and everyone starts celebrating, yet what they are probably celebrating is the continued destruction of national value …pah!

  8. says

    Have you considered the possibility of negative interest stamp money?

    If the US Treasury were to issue $1T and mail it to student loan debtors it would gain an income of $10B/month for 100 months, which would reduce the public debt from $16T to $15T.

    It could do the same for credit card debtors and reduce the public debt from $15T to $14T and so on.

    The more negative interest money the Treasury printed and gave away to the people, the faster the public debt would be reduced, wouldn’t it?

    Also, prices would fall rather than rise as the effect of this hot money is deflationary rather than inflationary.

    Do you have a dynamic model?

    • says

      Warren, is this a joke? – I can only hope you are not serious. – For starters and as a general comment to other readers as well, interest is not something that is somehow attached to money by the money-issuer, for example the banks or “the rich people who have the money” (yeah, I am talking to you, too, niphtrique). By holding money proper, be it gold or paper tickets issued by the Treasury or whoever, you do not earn ANY interest. In order to earn interest, you have to spend the money. Yes, that is right, you have to get rid of it and exchange it for something else, a loan to your friend, or a loan to your bank, which the bank has the audacity to call a “deposit” but which is really a claim on the bank, a loan, as the bank uses the money for as long as you don’t want it back and lends it to other people. RULE 1: ANY interest that is being paid is EARNED by somebody in the market place. (Sorry, guys, to break this harsh bit news to you.) So, Warren, in your example, the recipients of the “negative interest money” will try and get rid of it as quickly as they can (repay their debt, probably) because they don’t want to pay the interest to the government. They will send it to their creditors who will also try and get rid of it as fast as they can. In fact, NOBODY will want to hang on to this “negative interest money”. It will be the hottest of all hot potatoes. It is a tool of ongoing expropriation by the state. Of course, this will ensure its instant and complete collapse in purchasing power. (So much for the idea that the state can issue billions of money and it won’t be inflationary.) RULE 2: The purchasing power of ANY form of money is ALWAYS determined by the trading public, NOT by the issuer. If the government manages to collect any interest on this money at all, probably by forcing some people at gun point to hang on to this money and thus pay the interest on it to the government, and uses this income to reduce its debt, as you claim, Warren, this interest will have been EARNED by somebody in the market place first. What you suggest is a simple and straightforward process of confiscation of private income and private wealth by the state. So the government repays its debt via extra expropriation of the public (taxation) under threat of violence. Big news, here. Does not sound so revolutionary, does it?
      Guys, please get serious about this. Read some economics books first. All this talk about interest-free money or even negative interest money is complete and utter nonsense.

      • says

        Detlev – Thanks for your thoughtful answer. I would like to develop my points a little further:

        1. Currently our fiat money is created by the government selling treasury bonds (borrowing) and spending the proceeds on its programs. Because taxes are not raised to either pay interest or pay down the principal, the created debt grows. It is essentially a Ponzi scheme.

        2. The national government has the power to issue money without borrowing. The aggregate velocity of the money supply is currently very low indicating a preponderance of long term debt over short term lending.

        3. The only way to increase the aggregate velocity is to pay down the long term debt. I propose the government issue negative interest money (-1%/month) and use the proceeds to pay off the national debt. (The holder in due course of the money would purchase stamps from the treasury to keep the money current.) As the debt is paid down, the price level will decline, increasing the purchasing power of the money.

        4. Of course you are right that holders of the money would want to spend it as quickly as possible. Banks accepting this money would have to make available copious amounts of short term loans. The overall effect would stimulate large demand in the real economy.

        5. I remember the period 1979-83 when Volcker raised the Fed funds rate to nearly 20% to “squeeze out the inflation”, i.e. made money very tight. The result was that the aggregate velocity shot up to 3.6 Of course, since Congress kept creating new debt money, the velocity has been declining ever since. Today I believe the aggregate velocity is below 1.5

        Velocity, V = i/(1-u) where i is the interest rate and u is the ratio pv/fv where pv and fv are the present value an future value respectively. V and u are much too low to sustain a robust economy.


        And why do you suggest that people would be forced to accept this money at gunpoint? As a shopkeeper, if someone can in and bought $20 worth of Coca Cola, potato chips and CDs, why would I not accept it? And why would my supplier not accept it as well? I could always pay my monthly sales tax with it!

  9. says

    Detlev – Thanks for your thoughtful answer. I would like to develop my points a little further:

    1. Currently our fiat money is created by the government selling treasury bonds (borrowing) and spending the proceeds on its programs. Because taxes are not raised to either pay interest or pay down the principal, the created debt grows. It is essentially a Ponzi scheme.

    2. The national government has the power to issue money without borrowing. The aggregate velocity of the money supply is currently very low indicating a preponderance of long term debt over short term lending.

    3. The only way to increase the aggregate velocity is to pay down the long term debt. I propose the government issue negative interest money (-1%/month) and use the proceeds to pay off the national debt. (The holder in due course of the money would purchase stamps from the treasury to keep the money current.) As the debt is paid down, the price level will decline, increasing the purchasing power of the money.

    4. Of course you are right that holders of the money would want to spend it as quickly as possible. Banks accepting this money would have to make available copious amounts of short term loans. The overall effect would stimulate large demand in the real economy.

    5. I remember the period 1979-83 when Volcker raised the Fed funds rate to nearly 20% to “squeeze out the inflation”, i.e. made money very tight. The result was that the aggregate velocity shot up to 3.6 Of course, since Congress kept creating new debt money, the velocity has been declining ever since. Today I believe the aggregate velocity is below 1.5

    Velocity, V = i/(1-u) where i is the interest rate and u is the ratio pv/fv where pv and fv are the present value an future value respectively. V and u are much too low to sustain a robust economy.

  10. Nathan Griffiths says

    Hey Detlev

    I dont recall the work, but some time ago I read a study that showed on average inflation became an issue (read uncontrolled) 6yrs after money printing was first embarked upon. If we assume end 2008 that would take us to H2 2014. Note that in every instance of a central bank pursuing money printing, inflation was the outcome.

    Of course, each episode is different. Yet the fact that we have apparently sane and well-regarded economists arguing that the Federal Reserve should actively target an inflation rate of 4% makes me more, not less, confident that we are indeed set to follow the same inflationary path.

    That, however, so many still propound the notion that higher inflation is a positive outcome that should be targeted when all the evidence thus far highlights the deletorious effects on much of society of prices rising faster than incomes, truly makes me despair.

  11. says


    Inflation numbers are not higher: There are two reasons for this 1) The way the US measures inflation has changed, and 2) in hyper-inflation houses, buildings, stocks, and many other productive assets all drop in price.

    Imbalances: I know economists like to talk about imbalances, but it obscures the topic. Central banks are counterfeiting money. I guess counterfeiting money creates imbalances, but it would be more correct to state that it is stealing. Stealing/counterfeiting cannot create wealth. But when the proponents wrap their arguments in aggregate demand, maintaining asset prices and monetary stimulus, we miss the simple fact that the US FED is presently stealing $40B a month from the American people and giving it to banks. We ignore that when the FED buys government bonds it is stealing from the productive people in the US and giving it to unproductive government employees.

  12. Daniel Victor says

    Inflation is lower than it might be at the moment,because the banks,who are sitting on a great deal of money,are afraid to lend it out.Governments are encouraging them to lend it out,so there is the potential for inflation to take off were they to start to do so.
    In my country,the UK,the Government have just started a scheme for lending to house-buyers.However,the lead-time between demand for housing and house-availability is considerable,and in any case,there is a shortage of suitable land.So in the short term,all the scheme will lead to is house-price inflation.


  1. [...] http://detlevschlichter.com/2012/10/but-there-is-no-inflation-misconceptions-about-the-debasement-of…Related posts:Money Down a Rathole: College, Healthcare, Housing5 Issues That Prove Ron Paul is Ahead of His TimeCharles Goyette: Government vs. Prosperity (Chapter 1, Abridged)The Financial Case for Borrowing Money TodayA Brief History of False Flag Attacks: Or Why Government Loves State Sponsored TerrorAfter the Storm (Part 2 of 2)Why the Doctor Can’t See YouJohn Whitehead: ‘I am not a number. I am a free man!’Ron Paul and the Future – Llewellyn H. Rockwell, Jr.The Decline of Political ProtestJurisdictional Competition: Why the West Became Rich While Asia languishedRon Paul: A Republic, Not a DemocracyAsk James, Part II: How to Be a Millionaire, How To Be Ugly, How to Network, Back To School Reading …The Politics of Fear in America: A Nation at War with Itself1971: The Year That Nixon Chose Gold Over Paper This entry was posted in Essays and tagged Bankocracy, Investment, Money, Statism by admin. Bookmark the permalink. [...]

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>