Darryl Robert Schoon Blog | Monetary Liquifaction, Gold And The Time Of The Vulture | Talkmarkets
Economic analyst

I have a BA in Political Science (University of California at Davis, 1966) was a focus on East Asia. In March 2007, I presented a 148 page paper to a group of out-of-the-box thinkers, The Positive Deviant Network, and predicted an economic collapse was imminent. The paper, published in book ... more

Monetary Liquifaction, Gold And The Time Of The Vulture

Date: Tuesday, May 10, 2016 6:57 PM EDT

Liquefaction: … 3: conversion of soil into a fluid like mass during an earthquake or other seismic event, 4: inability of flooded capital markets to absorb additional capital without destabilizing paper assets, e.g.  stocks, bonds, currencies, etc., 5. a monetary phenomena associated with the collapse of capital markets.

Liquefaction After 1964 Alaskan Earthquake

Inflation is always and everywhere a monetary phenomena caused by an increase in the money supply, the greater the increase, the greater the inflation. If the money supply expands with sufficient rapidity, inflation becomes hyperinflation and paper money loses all value.


What you don’t know explains what you don’t understand

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.

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.  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. 

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. 

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