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Goodbye Inflation – Hello Deflation

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I have been warning that the analysis portraying we were headed into hyperinflation was really nonsense. That entire idea was constructed only on the hyperinflation of Germany with old-school ideas of money. Much of those theories were antiquated in 1971 when we moved to the floating exchange rate system, yet the overwhelming majority failed to comprehend what truly took place.



The idea of debasement of a currency resulted in inflation was the lynch-pin of Gresham’s Law – bad money drives our good. Yet there was another aspect. It was not just that debased money caused people to hoard the old money, it also SHRUNK the money supply. The more you debased, the more you had to issue to fight against DEFLATION caused by the shortage of money.

Gresham was the economic adviser to Queen Elizabeth and he worked for Britain in the then financial center of the West held by the Dutch in Amsterdam. There was the first exchange. This is where people and nations gathered to sell their bonds and to buy insurance. Gresham represented Britain in that marketplace.


However, Henry VIII was a major debaser of the currency. He confiscated the property of the Catholic Church and cleverly played that up for religion, but in fact, he was desperate for money. The more he debased, the more the money supply shrunk. It became like a dog chasing its own tail. Consequently, Henry’s debasement was observed by Gresham for Britain would borrow coins at good silver and then repay with debased coinage. This resulted in the collapse of British credit in Amsterdam.


Nevertheless, such theories were predicated upon the simple fact that money was coinage. It was the difference in metal content that could be compared from one nation to another. The greater the debasement, the greater the hoarding, which simply contracted the money supply. Hence, the value of a currency issue was based upon CONFIDENCE. Since the debasement of Henry VIII brought out the collapse in credit (DEFLATION), what was overlooked here was actually the CONFIDENCE – not the mere metal content.

Bank Money became popular for once you deposited the coinage, it was preferable to pay by bank transfer. The coins did not have to be checked for debasement or clipping. Bank paper money actually rose as a premium.

Today, just follow the CONFIDENCE. That is the common-denominator. It is not whether or not money is gold, conch shells or slave girls as St Patrick reported to his shock upon arriving in Ireland. It is the oldest factor behind everything – do you trust the person you are dealing with.

Morgan All the Bonds in Chrisendom

JP Morgan’s famous reply before Congress is precisely on point. He would never lend money to anyone regardless of the collateral if he did not trust them. Simply stated, ” a man I do not trust could not get money from me on all the bonds in Chrisendom.” To this very day, that remains the cornerstone of the world economy.Some people would never buy a bond of Mexico or Argentina, or wherever based solely upon trust.

It is the collapse in trust in the Euro that is the undoing of Europe. This Brussels does not comprehend what it has done. All the suppression of elections, threats, and shenanigans will not save the day. Europe will collapse under the Euro because there is no trust left in Brussels. The dollar will rise going to a premium as bank money rose compared to coinage. It was simply more trustworthy. Of course, eventually banks began to lend out the money without the knowledge of the depositor who assumed they were paying for storage.