Comparing Deflationary and Inflationary Collapse

Both mainstream and dissident observers are coming up with "biflation" as an explanatory term to describe where we are as a planetary economy. That is a signal we're in a conceptual dead end (considering biflation has always been with us for the past half a century at least).



Some reactionary factions in the Western world desire a global return to a system of deflationary non-fiat industrial capitalism. I've began to write how "sound money" advocates are actually biting more than they can chew since deflation leads to collapse of capitalism a lot quicker than inflationary fiat funny money system. There's other very serious structural problems with the current world production and distribution system (such as machine efficiency rising faster than demand for workers) but lets focus on inflation and deflation first to see why there isn't a simple escape from current international fiat casino.


DEFLATIONARY COLLAPSE-
Caused by: Wage prices falling less fast than prices of goods
Result: Crisis of overproduction and profit collapse leading to shut downs of industry due to insufficient funds to run it, bringing corresponding misery.
Illustration of Industry versus "Consumer"/Worker deflationary cycle: 
                                                              

Industry makes KitchenBots (representing needed durable goods in general) and exchanges them for "sound" commodity backed currency. Consumers benefit in the mid stage of the cycle until overproduction leads to insufficient capital accumulation and horrendous social disturbance                                




 
1) Industry cycle begins


Pricey and new KitchenBot exchanged  >>>>>>>>>>>>>>
                                                    <<<<<<<<<<<<<< for 100 SoundBucks

Trickle in supply of KitchenBots begins some profit generation,  "consumers"/workers on average spend 2/3 of their total money on needed goods. Wealthier people/ early adopters create trickle of demand for the pricey good


2) Midstage of the industry cycle

Affordable and well known KitchenBot exchanged  >>>>>>>>>>>>>>
                                                            <<<<<<<<<<<<<< for 50 SoundBucks

Lots of supply as mass production slashes the price of the useful and desired KitchenBots yet profits increase on volume, workers on average spend 1/3 of their total money on goods (since their annual salary cuts are less drastic than cuts in the price of goods)


3) Final destructive stage of the industry cycle

Old and busted stamped out KitchenBot exchanged  >>>>>>>>>>>>>>
                                                            <<<<<<<<<<<<<< for 10 SoundBucks

Super supply and insufficient demand leads to inability of industry to make razor thin margins profitable. Profit collapses, capitalists cant afford to run factories and close them, laying off workers/"consumers". Workers on average spend 1/10th salary on goods yet they are now without income stream to afford the oversupply of goods all around them

Conclusion/Possible Solutions: We start out great on at least the light industry level and end up in a brutish destitute 1930s style depression (think of overproduced livestock being butchered instead of sold/given away to keep some profits). Everything grinds to a halt just as post-scarcity is within reach. One must keep in mind that life cycles of various goods overlap yet the general cumulative tendency is what is illustrated above. Possible remedies include introducing fiat inflation (see below) with serious state provided safety nets, war to destroy surplus goods/industry, and the state taking over some production to run factories without a profit motive (see 1930s-1970s socioeconomic experimentation in Europe)

And now lets turn to our current problem,

INFLATIONARY COLLAPSE-
Caused by: Wage prices rising slower than prices of goods
Result: Crisis of overproduction and profit collapse leading to shut downs of industry due to insufficient funds to run it bringing corresponding misery.
Illustration of Industry versus "Consumer"/Worker inflationary cycle:
                                                            

Industry makes KitchenBots  (representing needed durable good) and exchanges them for "fiat" faith backed currency. Consumers don't really benefit at any stage of the cycle until overproduction leads to insufficient capital accumulation and horrendous social disturbance 





                                
1) Industry cycle begins

Pricey and new KitchenBot exchanged  >>>>>>>>>>>>>>
                                                              <<<<<<<<<<<<< for 100 FiatBucks
Trickle in supply of KitchenBots begins some profit generation,  "consumers"/workers on average spend 2/3 of their total money on needed goods. Wealthier people/ early adopters create trickle of demand for the pricey good

2) Midstage of the industry cycle


Well known, yet still pricey KitchenBot exchanged >>>>>>>>>>
                                                              <<<<<<<<<<<<<< for 200 FiatBucks

Industry greatly increases supply of KitchenBots and KB price even briefly dips to 80-90 FiatBuck range. Yet soon enough new KitchenBots appear for 400 FiatBucks while the older generation ones are sold for 200. Industry is now trying to plan production in batches to prevent strong technology generated deflationary trends from surfacing even now. For the average "consumer", industry also designs shoddy goods that need constant replacement. Profit remains precarious yet stable with proper application of monopoly, cartel, and state ties. Workers meanwhile now spend 9/10th of their income on goods

3) Final destructive stage of the industry cycle

Old and busted KitchenBot exchanged >>>>>>>>>>
                                                              <<<<<<<<<<<<< for 1000 FiatBucks

At this stage we see normal consumer market destroyed, leaving only the luxury consumer market left standing. To overcome relentless international competition and fiat related higher prices on building materials, Industry goes all out to create super supply for ordinary people and hope to make money on mass production (whether technologically induced or using outsourced wage slave labor). These efforts fail as total mass production for KitchenBots was never fully developed due to sneaky attempts to prevent overproduction in the mid stage of the cycle. Workers now spend 10+/10 of their income on goods and increasingly only buy essential goods before gradually beginning to run out of those as well. Run away commodity inflation is the final straw of the fiat cycle. Since the rich do not need too many KitchenBots and since the rest of the workers prefer food and fuel instead, Industry begins to shut down factories and lay off people due to inability to fund further operations.

Conclusion/Possible Solutions:

We start out not that great and end up in the same poverty amongst plentiful resources scenario just as we do in the final stage of the deflationary cycle. We have witnessed what happens to a global system and its peoples under shocks from deflationary financial capitalism in the first half of the 20th century (historically, international financial cartels appear to take over the international industrial cartels regardless of fiat or sound status of the currencies).

We have not yet seen a planet wide inflationary fiat chain of collapse yet. This would imply all major currencies on the planet being affected relatively simultaneously via some failure on the part of Bank for International Settlements strategists to react quickly enough to systemic shocks. In many ways, inflationary monetarism allows Industry a variety of tools and more breathing room to play around with prices and thus survive a while longer. Inevitably, prices rising faster than wages destabilizes the whole system as surely as wages rising faster than prices.

Implications and alternatives

It appears that BOTH paths described above eventually lead real industry into a profit collapse and corresponding large scale social crisis (factory management not having the funds to keep production and distribution running and paying the workers). This would occur even if we minimized the influence of capital allocation industry (global banking cartels) on global industrial cartels. Symbiosis and convergence of finance and industry is as organic and essential to the system as is symbiosis between industry and state, banks and state, etc.

Austrian economists have done a good job continuing where original old school Marxist economists left off (when it comes to expanding a critique of capitalism in general). Namely, they ripped into the disastrous consequences of credit growing faster than real productive economy and the "statism" that often allows this. It is rather hilarious that both Marxists and Austrian economists really rely on victory by default. That is, the former group gets legitimacy by saying the planetary capital accumulating system we had for the past few hundred years is unstable, inefficient, and ultimately unworkable even with mass state subsidies. The latter group get their legitimacy on saying the fiat version of the same planetary system is unworkable due to statist interference. "If only we could purge statism from the world system!" This absurd cry rings forth from various corners of the Western dissident movement.

One way to proceed would be to expand the credit supply at exactly the rate at which expansion of the real physical economy occurs. Some dissident thinkers believe we can bypass the inflation/deflation debate by having the state provide credit for high technology infrastructure (thus creating real economic growth). Another way to proceed would be to overlap the dying capitalist system (whatever form it'll take in the next 10 years) with energy accounting. Both can easily function in parallel for a time. Indeed, if we think of the global socioeconomic transition and experimental period in the decades ahead, overlaps and diverse systems running in parallel will be a must. Which of these experimental sandboxes will expand to swallow the imagination of the whole globe will be left for us to determine.

Sound Money and Deflation

"With the enormous leaps in industrial productivity over the 20th century, shouldn't a penny now buy me at least 10 Snickers bars instead of nothing?" 

(Or how fiat money serves to prolong the life of capitalism while libertarians are ironically fighting to make capitalism disappear)


A great question, considering world's population rose 4.2 times from 1900-2010, annual copper mining output rose 30 times in same time period, and industrial/agricultural mass production technology (for making candy) has made exponential efficiency leaps. To investigate this serious matter lets look beyond the screams of "federal reserve and fractional lending robbed us all with depreciating overprinted fiat currency!" and delve into the underlining physical dynamics.

A one ounce Hershey's bar cost 3 cents (9 grams of copper) in 1918 whereas a 1.45 oz Hershey's bar in 1982 (last year to have 95% copper pennies) was 20.6 cents/62 copper grams per chocolate ounce. As of 2010, the Hershey's bar approximates 65 fiat cents an ounce but since the imperial authorities diluted the penny with mostly zinc (making current pennies a harder to quantify mix of zinc and copper), I'll use the 1918-1982 period for simplicity.

If one adjusts for inflation, 3 cents in 1918 is 19 cents in 1982 (539% depreciation in purchasing power). An 80 year old, lets call him Bob, getting his favorite childhood candy treat would have seen his under the mattress savings buy 6.3 less Hershey's chocolate. Now this may not seem too bad IF Bob was in a theoretical situation where his real income growth was pegged to inflation the entire life and his fiat currency grew in a bank under inflation pegged interest throughout the 20th century. Considering the candy's probable mild price buoyancy due to brand recognition, on the surface it looks like the company is only charging Bob 8% more than they did in 1918 (20.6 cents to 19).

Looking through an Austrian economics lens of inflation being an increase in the money supply, since most people do not have their finances perfectly adjusted to inflation, Bob is being continuously ripped off and impoverished via inflation tax. He may not get exactly 6.3 times less chocolate but even 2-3 less Hershey's towards the end of life is a criminal swindle.

A defender of the socioeconomic status quo in 1982 may partially agree but counter this via a pseudo-Austrian angle, "If anything Bob is lucky to only be paying 62 grams of copper per ounce instead of 9 grams in 1918 since copper is mined faster than people are breeding. He looks like he is getting a deal when using this depreciating physical metal! Copper is as fiat as paper!" (Authorities saw the copper content in penny spike more than a fiat cent in 1980-1981 period and thus changed the content, the price of copper in penny then collapsed to just under 1 fiat cent again in 1982-1984).

This is an interesting response and lets take a look at it without distracting ourselves with multitudes of other serious issues such as the government ending the use of silver in currency, going off the gold standard, stagnation of real incomes, etc. Some of these issues will begin to be resolved indirectly by the end of the article.

If one tries to look at Bob's situation via Marxist economics lens of commodity exchange, then we see that the poor fellow is being swindled in another way. This investigation is a little trickier considering technological productivity cannot be readily quantified and since the concept of productivity itself is culturally determined. What is very safe to say is that mechanical efficiency in producing an ounce of Hershey's has risen a lot more between 1918 and 1982 than the 260% rise of human population in same time period. That is, if copper production/demand magically froze in place, a 1982 Hershey's chocolate ounce should cost not 9 grams but substantially less. Surely, they've figured out ways to stamp out these chocolate treats by the millions in ways not dreamed of before (even taking into account employee salary operating expenses).

Of course copper dynamics were not frozen but they also end up benefiting Bob. If you consider the borderline exponential and evolving industrial demand for copper for electrical/water purposes throughout the 20th century, then it is clear that the 530% rise in copper production in 1918-1982 does NOT devalue 62 grams (needed to buy one 1982 Hershey's ounce) by half.

In other words, even though the copper money supply rose at twice the rate of human population, we did not see 100% inflation of the penny since the industrial demand for copper kept up pace with the human population at the very minimum. Therefore, a Hershey's bar ounce in 1982 should have cost at most 6 cents (1918 price * population growth) instead of 20.6 cents. Therefore, Bob doesn't just get ripped off through expansion of the fiat money supply but by value of goods not reflecting the breakneck pace in development of production and distribution of Hershey's bar. Considering a pre-1982 copper penny is approaching 3 fiat pennies in worth at the end of 2010 (and many countries having pulled copper from their currency in last 30 years), it may well be that a Hershey's bar should cost a lot less than a copper cent today. This makes more sense if one remembers that a silver dime from 1964 is worth over 2 dollars presently (even though annual silver output expanded 35 times in 1900-2010 period).

It appears safe to say that fiat currency was haphazardly introduced by business leaders in first half of the 20th century (via their political appointees) to prolong the life of capitalism via inflation. Ironically, the financial robber barons ended up doing the same thing that rural agricultural interests wanted in late 19th century America. 19th century saw various deflationary collapses and farmers wanted silver/gold bimetallism since rapid mining of silver would have introduced inflationary pressure on the dollar and thus prevented profit loss. Banksters 100 years ago were gold bugs since they made money from loans and deflation benefited the loan sharks. Since financial capitalist take over of industrial/agricultural capitalism was mostly complete by 1900, bankers tended to win political arguments.

During the great depression, there developed a compromise and some convergence of thought between financial, agricultural, and industrial interests concerning the benefits of inflation. Biggest bankers by that time, found a way to profit while expanding the money supply via modern money mechanics and farmers ended up getting governments to pay them to not produce too much and thus prevent deflationary profit loss. FDR managed to reconcile the key parasites, preserve capitalism, and artificially prolong the profit taking of major monopoly industries at the long term expense of the consumer (in a very humane developmental manner). Yes, he also did a lot of great things and is one of the kindest masters people saw in the last century (no sarcasm).

If the price of an 1982 Hershey's bar reflected the real amounts of hard money (commodity) availability PLUS availability of Hershey's ingredients (commodities) PLUS the cutting edge technological ability to produce and distribute the Hershey, then we'd see the company experience the periodic deflation born crisis of overproduction that the communist manifesto summarized. One can imagine what will happen to corporate bottom line if a copper/silver/gold/rare earth metal commodity money coin buys more consumer goods every year than the previous one. On paper, Austrian utopian capitalism is too efficient and benefits the consumer too much (so much in fact that it quickly implodes in deflationary collapse horror show, massive unemployment, and technologically driven socioeconomic evolutionary leap towards post-scarcity society).

It is little wonder that Trotsky sided with Austrian economists when he wrote of pre-requisites of United States going communist. They being commodity backed hard money utilized to barter for consumer goods. This is especially true for gold since gold production only rose 5.5 times in the 1900-2010 period, barely above population growth. Ironically, the current wave of libertarians are fighting to make capitalism disappear (since non-fiat currency would fully unleash the post-scarcity potential of means of production and distribution that have existed around us since at least the 1950s and that Buckminster Fuller and King Hubbert described in detail). I will leave with a few 1934 quotes from Leon Trotsky regarding the absolute necessity of ending the federal reserve. ;)



"-This system will be made to work not by bureaucracy and not by policemen but by cold, hard cash. 
-Your almighty dollar will play a principal part in making your new soviet system work. It is a great mistake to try to mix a “planned economy” with a “managed currency.” 
-Your money must act as regulator with which to measure the success or failure of your planning. 
-Your “radical” professors are dead wrong in their devotion to “managed money.” It is an academic idea that could easily wreck your entire system of distribution and production. That is the great lesson to be derived from the Soviet Union, where bitter necessity has been converted into official virtue in the monetary realm. There the lack of a stable gold ruble is one of the main causes of our many economic troubles and catastrophes. It is impossible to regulate wages, prices and quality of goods without a firm monetary system. An unstable ruble in a Soviet system is like having variable molds in a conveyor-belt factory. It won’t work."

Economic Collapse: Debtors Benefiting from Severe Inflation, Government Helping Forgive Debts to Avoid Brain Drain, and Gold Triumphant

1970s-1990s transfer from industrial to financial capitalism created an economic system that is increasingly incapable of meeting demands of all segments of the population. Solid possibility of unsustainable inflation can be countered with buying gold.





Military elites do not wish a massive brain drain of professionals fleeing this country to avoid 21st century indentured servitude of debt repayment (since ability of the military to exercise power abroad slackens). In the coming years, there will be increased intra-elite infighting concerning massive debt forgiveness for 20% of population who fancy themselves as middle class. There will also be a silver lining for those Americans who use their remaining currency to buy mass amounts of precious metals rather than pay off their debts.

Lets do a cost-benefit analysis of a student loan repayment scenario and see if any life gains can be made from devaluation of the dollar. Lets say you have a couple thousand dollars. Lets say you happen to have acquired 10,000 dollars in student loan debt through financial aid/Stafford. Whether you have the subsidized or need based unsubsidized fixed interest rate is immaterial for this scenario. The point is that you have a fixed rate for a loan to repay over a decade or so. Lets use the locked rate of 5%. What should one do in a country where: 1) the national debt burden is 2.5 as heavy as before Great Depression 2) 3 of the 5 oldest financial pillars (like Merrill Lynch) have collapsed within months and 3) the government decided to sharply increase the debt to start gradually escalating restructuring efforts?

There's 2 big options:

Option A:

Pay a minimum every month ($106 for standard repayment or $70 graduated) for a few years and then repay the whole thing rapidly in chunks. Since doing minimum payment for 10 years would be $2,730 in interest for standard or $3,250 in graduated, one thus saves a few thousand dollars. However rapid repayment involves losing thousands of dollars early on in one's life that can be invested elsewhere.

Option B:

Put the loan repayment on automatic billing and treat it like a utility for 10 years and in the end pay $12,730 for standard repayment or $13,250 for graduated.

Which is better?

For answer lets take "normal" American inflation rates into account. If you had $10,000 in 1999 and kept them under the mattress for 10 years you'd lose 25% of their value by the end of 2007. You can play around with various online inflation calculators and see. In other words, same product that cost $10,000 dollars in 1999 would cost $12,500 dollars in 2007. Of course that's assuming the product is not afflicted by deflationary effects of technological breakthroughs in production as occurs with computer hardware. American college education definitely doesn't fit into that product category after the 1970s-1990s transition from industrial state capitalism to financial state capitalism. Demand for better quality of life through increase in both quality and quantity of education, medical care, transport, safety nets is prevented from being met by the architectural design of the current political-economic system. In 2006 to 2007 for example, the average cost of tuition for public college has risen 5.6%, whereas 10 dollars today buys exponentially more computing power than 10 dollars a decade ago.

The full cost of the Stafford loan over a 10 year monthly minimum repayment is historically the same as paying it out all at once. There is a strong possibility that the dollar will lose 15% of its value or more by the end of 2009. Potential of even greater inflationary trends in the future are great for anybody who owns debt as long as they can restructure their interests. There is no logical reason whatsoever to give more money than you have to to banks working with financial aid organs. There is a solid chance that the near future US government will not only help restructure interest payments on many house mortgages/college loans but that it will make financial sector forgive all the loans completely.

Government assisted debt forgiveness makes strategic sense to preserve social stability. The Americans who fall into the 20% of population that are sufficiently educated and wealthy to call themselves "middle class" (but not wealthy enough to be in the 2% politically connected oligarch class ) pose the highest risk of emigration, mass capital outflow, and brain drain to Europe. Politically unconnected homeowners who lose not just their life savings but their shelter and neighborhoods are a huge threat to federal control. It'd make post-default recovery efforts towards German style industrial capitalism much more difficult. Obama administration must gradually nationalize the finance sector through making some finance oligarchs believe he is just collaborating with them. That will allow mass national debt forgiveness when the time comes for dollar default. The looting and capital outflows done by top 1% cannot be avoided but social stability and political support from homeowners can be preserved to allow greater restructuring in the future. Whatever micro and macro level political-economic architecture US will have by 2020, thousands of gated communities, suburbs, towns, and small cities must not be allowed to disappear over night. Proper handling of debt forgiveness will allow their disappearance to be gradual as brain drain to Europe will be reduced and redirected a bit towards major US cities.

Best way of investing one's cash right now is buying as much physical precious metal as possible. Under inflation of the last decade 10 thousand dollars now buys 25% less while an ounce of gold buys a bit more. As a hypothetical example lets use the unusually high annual inflation rate (since it occurs during a major economic crisis) range of 20-40% over 3 years. If the price of acquiring the same model bicycle for urban transport,goes from 200 dollars in 2009 to $345-$548 dollars in 2011, then an ounce of gold will allow one buy the bike for a profit. Of course we see how an ounce of gold also allows to buy 2-3 bikes simultaneously so extra bikes can be exchanged for bulk food and other objects. Financial organizations like TD bank are already encouraging people to exchange their coins for cash without fees. If large players are already undertaking copper hoarding (to exchange for Euros in the future and maintain status as a "bank"), then small players should get on the act while sucker's rallies keep gold/metals price within reach.

The uncharacteristically political and obvious recent suppression of gold advocates like Ron Paul ( as well as federal raiding of liberty dollar makers and similar precious metal organizations ) demonstrates a couple of things. The decades long mass oligarchic looting and exploitation of bottlenecks created by post-industrial capitalist structure was meant to accelerate in 2008. It also shows that oligarchs are split into the rooted domestic faction and cosmopolitan mobile one. The domestic ones (with their company infrastructure rooted/reliant on being within national borders) hope to collaborate with and use the might of the federal government for further enrichment as before. The international ones, the ones that will emigrate to Western Europe, plan on making money on the collapse of US itself by properly timing mass transfer of resources. It's in international faction's interest to properly time bulk metal buys while they join forces with the feds in draining national faction's wealth in a few bursts.

US industrial peak has been passed long ago but financial capitalism kept the appearance of GDP growth and psychological associations of that with material and quality of life improvements. The focus on stock maximization rather than fine tuning industrial capitalism to improve population's quality of life has created infrastructure that cannot qualitatively materially improve the needs of the entire population. CIA analysts have shown that growth of a certain industry doesn't necessarily mean efficient proper allocation of resources and social stability. Oligarchs who pressured the federal government to borrow from China and maintain the illusion of prosperity know full well that one can borrow, not necessarily repay, and be well off. Chinese leadership knew this perfectly as well but didn't care since it allowed them to rapidly expand real industry. Chinese government has done what Lenin wanted, have the capitalists sell the rope with which Chinese can hang them.

Every dollar that can practically be used to buy tangibles (like precious metals) should be used for that purpose instead of further payments to macro parasites and middlemen. The realization that having a perfect credit history is not the most important thing in the world will be reached by US government soon. Americans need to start realizing that too considering the seriousness of the economic paradigm shift.