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Monday, April 28, 2014

FALLACY FRAUGHT FORBES TRIES TO STOKE FEARS OF HYPERINFLATION

Over at Forbes, in an article intended to stoke fears of hyperinflation, writer Mike Patton who touts himself as an ex-wire house worker and an investment adviser,  pens a piece fraught with fallacy. Patton's work is typical of many, having its basis on shop worn fallacies that never cease in causing mischief in the minds of many.





"Inflation may be defined as a general rise in prices" ~ Mike Patton

Anyone who claims that to be the true meaning of inflation would be wrong. 

In the fiduciary monetary system of centralized bank notes, inflation is merely the growth of the circulating media — cash, which is evidence of past deposits circulating in perpetuity and bank credit in the form of checkable deposits.

The damaging effect of inflation becomes revealed when the growth of credit outstrips the growth of output owing to credit being priced too cheap. 

The residential realty bubble of the 2000s is classic inflation. When enough became incapable of servicing their debt owed on credit extended, widespread bankruptcy erupted and inflation stopped. 

Writers from at least since 1810 through the early 1920s understood well what inflation means:


  • Reflections on the abundance of paper in circulation, and the scarcity of specie; Francis, Sir Philip; J. Ridgway, 1810
  • Currency inflation: how it has been produced and how it may profitably be reduced. Letters to the Hon. B.H. Bristow, secretary of the Treasury; Carey, Henry Charles; Collins, printer, 1874
  • The principles of currency, and the error of “inflation”: an abstract of the Oxford lectures, applicable to financial questions in the United States; Price, Bonamy; H.L. Hinton & co., 1875
  • Currency inflation and public debts: an historical sketch; Seligman, Edwin Robert Anderson; Equitable Trust Company of New York, 1921

"Why does the Fed want inflation? Because inflation is a signal of a growing economy." ~ Mike Patton
All prices conform to the one, true infrangible law of trade, the Law of Prices. The Law of Prices holds the winning bids of purchase and sale in the face of what is on offer sets the price.

During times of excess credit, which is inflation, prices of the same assets get evaluated ever higher precisely because bidders have more buying power in the form of credit.

Contrary to Patton's claim, inflation is not a signal of a growing economy and thus Fed Res central bankers do not seek inflation based on that false belief.

As credit is another product, the same as cars and food, Fed Res bankers seek to inhibit the dollar from increasing in buying power relative to output. If output rises faster than cash in circulation, cash would buy more goods, more services, and more credit. As merchants of credit, bankers would earn less buying power.


"[W]hen the Fed expands the money supply, money is more plentiful..." ~ Mike Patton

Money is coined metal by weight and fineness. The Romans said so. It's their word. Even the U.S. Constitution supports that concept. 

Thus, it is impossible for Federal Reserve bankers to increase the amount of money in circulation. No money circulates goods, services or credit.

Today, Americans have cash. Specifically, Americans have legal tender cash. So too do Canadians have legal tender cash, the Brits, all those of the Eurozone, the Japanese, and so on. 

Cash arises as an artifact of banking. Money, if it existed, could exist irrespective of banking or of politicians and government agency.

Legal tender cash is centralized bank notes circulating in perpetuity. Seemingly, legal tender cash does the work of money, but never is cash actual money. 

Legal tender means Congress has decreed Fed Res banknotes as the only acceptable payment for debts owed to Congress. Whether legal tender or not, cash is denominated bank notes circulating as evidence of deposits. Deposits are bank credits.  

Federal Reserve bankers can strive to only increase deposits, cash or a combination thereof through re-discounting and through debt monetization of government bonds, buying bonds outright through conjured checking account credits.


"[W]hen the Fed reduces bank reserve requirements ... banks have more money to lend." ~ Mike Patton

Not only do bankers not lend money since money doesn't exist, but even in the days of money, bankers never lent money.

A bank is a firm that seeks profit through the business of selling its own credit. Through banking, bankers exchange their credit for the credit of others. Thus, a banker is a trader who buys cash and debt by selling bank credits. 

Bankers transmutes property into a form, which can get traded. Bankers facilitate the trade of merchant credit for bank credit, the trade of cash for bank credit and the trade of property in future profit for bank credit by holding lien against extant property.

Banking stands as the medium of exchange by making credit negotiable from one holder to another so that credit might work the same as money once did and as cash does now. Thus, a bank is a refinery for credit.

As a refiner of credit, bankers transmute credit, bankers transmuting property into credit through coining less merchantable property into more merchantable property, which is credit of general acceptability. In so doing, bankers engage in alchemy earning metaphorical gold when bankers earn profit through transmuting property into credit.

Bankers don't lend their own capital. Rather, bankers transmute the credit of depositors. In so doing, the guaranty of bankers upon this transmuted credit lets depositors trade upon this guaranty.

Bankers facilitate trade for wanted goods through bank checks.


"Another consequence of a significant expansion in the money supply is the devaluation of the currency." ~ Mike Patton

It's impossible to devalue currency. Currency means bearer negotiability. Bearer negotiability means the property (right of ownership) goes with possession. No need exists to prove title. 

Currency doesn't mean cash. The word currency isn't a synonym for the word cash. 

Anyone either has an instrument of currency or that one does not. Cash has currency. When you buy milk at the Quik-E-Mart with cash, you don't first prove to the cashier that you own the cash. The cashier readily takes your cash and lets you walk out the store with the milk.


"In essence, when there is a substantial increase in the supply of an item, including currencies, its value declines." ~ Mike Patton

Nothing has value. To claim the value of something declines is to fall for the fallacy of intrinsic value. Value is not a quality, an aspect of a thing residing absolutely within it.

It takes two things to make a value. Value results from the expression of a ratio of importance between two commodities in exchange. When one of two things in a purchase and sale is cash or credit denominated in cash, we give value another name. We call it price.