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China, Gold, and the Dollar, Part 4: The Uses and Impacts of Inflation
Part 3 of the interview series ended with Craig R. Smith stating that hyperinflation is the US is a certainty. Part 4 in the series is below. James R. Gorrie, Managing Editor, Absolute Wealth
Craig: I really believe that the Federal Reserve has painted us into a corner. Now what do we do? There are several ways to deal with debt-to-GDP ratios like we have. You can grow your way out of it. You can also restructure your debt, make it longer term like operation twist.
Or, you can default on the debt. You can have a big bout of inflation, or you can do what I believe is going to happen. That is, we’re going to go ahead and use financial repression, which I believe started in 2010. Financial repression is when you keep interest rates artificially low against the current consumer price index.
Ultimately, financial repression will be followed with bouts of inflation. We saw this after the Second World War. From 1945 to 1980, interest rates were artificially low. By 1980, we were facing 15% interest rates. In 1981, Mr. Reagan took office. We had 22% interest rates and we were well into one of the worst recessions we’ve ever had.
But it (high interest rates) set the stage for future growth. There’s a lot of market distortion right now that needs to be corrected. There are a lot of prices that still need to recalibrate, like what we’re seeing in housing. We still need to see more deleveraging. The American consumer has deleveraged. Corporations have deleveraged. But the government has yet to deleverage. Once that happens, then you’ll set the stage for more growth. Until then, we have some pretty difficult times to get through.
James: You went right into my next question regarding interest rates. We have artificially low interest rates today, and nominally low CPI (Consumer Price Index) numbers. But the CPI itself is a trope, is it not? It doesn’t count food and fuel costs in its calculation, which is what matters to most Americans.
Craig: That’s the great lie; one of the great lies, absolutely. It’s one of the six ways that government deceives you. For us to tell people that inflation is running 3%, how do you square that with reality when the price of cheddar cheese is up 141% year-over-year or gasoline prices are up 30%?
It’s ridiculous, but why does the government manipulate that number? This isn’t conspiratorial. This is just economics 101. If I have entitlement payments that I pay in the form of social security, Medicare, Medicaid, and pensions, and they have a cost of living adjustment in them, I have a problem. If the inflation rate is say running 5%, I have to adjust to compensate for that. It makes my payments go higher. It’s to the benefit of the American government to keep the CPI artificially low because it saves them a huge amount on their budget.
Look, for us to tell people that your cost of living has come down because today you can buy a computer that costs you $1,000 last year, and this year it has more power for $800 is ridiculous. The only thing that the American people are suffering from a drop in price on is their home, for Pete’s sake.
Everything else is costing them more. In our new book, we’re going to be laying this out. How come for so many years, say 1975 forward, Americans were not keeping pace with inflation. Their incomes were not keeping pace with inflation but nobody felt it. Why was that?
Because we had this little default savings account called your home. Your home was going up in value every year. Even though you were just paying your bills, you felt like you were saving. You felt like you were getting wealthier because your home was going up in value.
In 2008, when we had the housing crisis, all of a sudden all your equity disappeared. All of a sudden, you realized you weren’t keeping up with inflation. I think American people are starting to wise up to that.
James: Yes, you’re absolutely right there. Not only that, if you think back to the early ‘70s, that was about the time both parents started working in large numbers. Throughout the ‘60s, you could have one breadwinner, the two cars, garage, and so forth.
That quickly gave way to the two parent working family for a lot of Americans because one just didn’t do it.
But, when interest rates do rise, how is America going to pay the debt service? Is it all just going to be a twist operation and put it out to 90 years or is that going to create a dollar default or dollar crash in your opinion?
Craig: I’m sure the Federal Government would love to see a 100-year bond, but who in their right mind would be willing to buy a 100-year bond? The answer is, I know this is going to sound very curt, very simple but it’s just a reality. The answer is inflation.
How they’ll deal with it is inflation. I wrote a white paper for Congress called “The Uses of Inflation” years ago where I showed clear back to the time of the Romans how inflation has been used to sculpt societies. Once that money creates velocity and causes price inflation, inflation is the best way in the world to do away with debt. We saw this in third world nations, down in Argentina and Venezuela.
Here’s what’s interesting: inflation benefits debtors and punishes savers. If you’re a borrower, inflation is your best friend. If you’re a saver, inflation is your worst enemy. Who is the number one debtor in the world? The United States of America.
Who has more to gain than anybody from inflation? It’s the United States Government. You and your listeners and your readers can rest assured that we will see inflation used in its classic sense like we saw during the days of the Romans.
If you go back to the writings of Cicero in 66 BC, he outlines how the Romans were doing it. He said, “Believe me, that the whole system of credit and finance which is carried on here in Rome and the Forum is inextricably bound up with the revenues of the Asiatic province. If those revenues are destroyed, our whole system of credit will come down with a crash.”
The same exact thing will happen in America. History has a tendency to repeat itself. Cicero wrote about it in his notes, of inflation being used in the traditional sense to inflate away debt. Unfortunately, today, it costs every single American a large portion of their hard earned money.
This ends Part 4 of my interview with Craig R. Smith. Part 5 will run next Friday. JRG.