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ChrisGraley (30.25)

Counterfeiting is illegal.



December 27, 2010 – Comments (24) | RELATED TICKERS: AM.DL , CRIS

They put you in jail for it for a reason. The reason that they put you in jail is because it is theft by deception.

By artificially putting more money in the system, you make that money worth less. (Yes I realize that you can counterfeit other things, the theory is the same, but I would rather not go down a different path in this post.) It doesn't matter if it's a bunch of small counterfeiters or 1 great big counterfeiter, the amount of the theft is determined by the total amount of bogus money in the system.

So who are the victims? Well a Keynesian will tell you that the creditors are the victims, because they are being paid back in dollars that are worth less than when they loaned those dollars out in the first place. That is actually partially right, but they neglect to tell you that the value of the stock that creditors issue also increases in price, so they get more invested dollars. They also get to loan out more dollars since the things that they are financing are now more expensive. (if the creditor is a bank, we let them print their own money anyway so this isn't as big of a factor) While the creditors are victims they aren't the biggest victims.

Another thought would be that the wealthy are the victims. Since they have more money, it should hit them harder right? In most cases that would be false. 

I'll give you an example..

Lets say Ed is worth $1M dollars and most of it is invested in stocks. He makes $250K a year.

George is living pay to pay, is worth $100K and can't afford to invest in anything. He makes $25K/yr.

Bill is on Social Security, he's has literally zero assets and scraping by on $15K a year.

Todd won the lottery and keeps everything in cash. He is worth $1M. He has no job.

If inflation went up 10% in a given year...

Ed's equities went up 10% as well. He still has the same purchasing power as last year.

George has 90% of his purchasing power.

Bill has 90% of his purchasing power.

Todd spends $100K this year, so the $900K that he has left is worth 90% of last years value.

Now most of you would agree with me that Todd is screwed, but would argue that George and Bill's income would rise with inflation, but that is where the wage/price spiral comes in.  Bill being on Social Security would not see an increase in pay till next year. George may see an increase in pay in the middle of the year but that increase in pay increases the price of goods and causes more inflation. Bill's increase in Social Security will cause a raise in prices as well, it will just take longer. They are both victims of the wage price spiral. Their wages will always lag inflation and they struggle just to maintain the same purchasing power. Todd gets screwed even more if their wages go up as well. Ed will be sitting pretty for a while, as inflation goes up, so will the value of his investments. That is until George, Bill and Todd start making cutbacks because they can't afford the same lifestyle that they had before. Then the earnings on his equities go down and he himself finally sees hardship.

Hardship is a relative word. A guy worth 90% of $1M doesn't need to change his lifestyle anywhere near as much as the guy making 90% of $15K.

The sad thing is that when most crooks counterfeit, the bogus money is usually found and taken out of the system. When helicopter Ben prints that money it lasts forever.

Sucks to be Todd...

Disclosure... Chris owns Silver



24 Comments – Post Your Own

#1) On December 27, 2010 at 10:42 PM, tomlongrpv (82.09) wrote:

Interesting Chris.  Of course it was the proponents of "Free Silver" (monetizing Silver in addition to Gold rather than just letting it be a commodity) who were seeking to cause inflation to counter deflation which had led to ruinous forclosures on farms as deflation caused crop prices to fall in the late 19th century while fixed debts remained the same.   The argument against free silver was in part that it was an "artificial" increase in the money supply.

As interesting as your anecdotes are, inflation does benefit debtors and damages creditors.  Of course factor in incomes and sources of incomes and the issues can change a lot.   But whatever the problems with inflation, most people in the USA have no idea what severe deflation causes.  It is at least an equal danger and we have been on the brink of sinking into it for some time.  Just as hyperinflation disrupts economic activity by literally forcing people to run out and spend money before it loses its value (one of my partners grew up in Weimar Germany and that's what his parents did anytime they sold something in their shop) deflation does something similar by causing people to keep delaying purchases with the knowledge that the price will be lower tomorrow.

And no, Ben's increases in the money supply do not stay for ever.  The money supply can be adjusted downward too and likely Ben will unwind things and do just that as economic conditions permit.  


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#2) On December 27, 2010 at 11:55 PM, ChrisGraley (30.25) wrote:

Well Tom I picked Silver because it was undervalued compared to Gold, but would pick either at this point over cash.

Silver was money before the coinage act of 1873. While the coinage act of 1873 did demonetize silver. (So did a huge find of silver by the way) The coinage act was instilled to combat inflation and to protect creditors from inflation. The "Free Silver" movement was supported by the farmers, debtors and of course silver miners. These people were the ones that went ecstatic when William Jennings Bryan gave his famous "Cross of Gold" speech. All of the above you have correct and I bolded the creditor part to emphasize that.

Before the coinage act, the way things worked is that a miner would bring in 1oz of gold and be handed a 1 oz gold coin. It worked the same way with silver before the coinage act, but before the act, silver coins had a much lower melt value than face value. The exchange before the act was already inflating the currency, we already had a defacto fiat currency. The free silver people were wanting to put things back to the way that they were.

As far as your analysis of hyperinflation and deflation, I agree with that too.

I do disagree that people do not understand what severe deflation causes. We've had it here before. I do think that we've just got a peek of what happens to an economy supported by debtors when the bubble burts though. It brings the same deflation that you are trying to avoid. We used even more debt to stem the deflation, but we just kicked the can farther down the road.

I don't support fiat silver any more than I support the fiat dollar. Both are manipulations of currency that eventually have come full circle. You'll eventually get the thing that you are trying to avoid. You have to get it. There is no such thing as a free lunch.

and likely Ben will unwind things and do just that as economic conditions permit

Thanks for the chuckle Tom. They don't call him helicopter Ben for taking money out of the system though.

Could you explain to me how any economist is going to be able to take trillions out of the system without a negative effect on the economy?

Can you name any head of the Fed that has done this in the past?


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#3) On December 28, 2010 at 12:55 AM, Mary953 (66.50) wrote:

No, I don't think it sucks to be Todd.  He won the lottery, remember?  He bought a ticket or maybe a thousand tickets, but either way, his wealth represents no real effort to amass.  He is still doing well.

Ed may be sitting pretty or he may have an unacknowledged problem.  If Ed has a big enough family, he may be supplementing son George or dad Bill whenever and however they need help.  The economy that we have at the moment certainly provides for that sort of situation, family helping family.

Eventually, if this is the case, Ed may find that he has moved into the situation that Bill is currently in.  After all 30 years ago, nice homes were $30-$40K and an income of $20,000 was a professional's income.  Ed had better have some really good advice and a good long-term health insurance plan.  Either that or he had better have some kids that are ready to work and sacrifice as much as he has.  He will need them.

Helicopter Ben, in the meantime, is not doing any of them any favors.

Disclosure:  Mary wishes she owned silver.  ;)

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#4) On December 28, 2010 at 1:12 AM, Starfirenv (< 20) wrote:

Yes, counterfeiting is illegal- so is fraud, collusion, bribery, insider trading, frontrunning, currency and PM manipulation, etc, etc.... "Illegal" is relative. Is it illegal for the DoD to classify anyone who participates in a peacefull assembly a "domestic terrorist"?

Chris, I left some thoughts on your book ending on the 2 big 2 blog. Best  +1 rec

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#5) On December 28, 2010 at 4:13 AM, FleaBagger (29.37) wrote:

Deflation does not hurt an overall economy. It only hurts people who borrowed more than they could afford to pay back. In the absence of government interference, deflation encourages those with money to lend it at fixed interest to those who are producing things of value and will be able to make their payments, because that interest becomes more and more valuable. Also, those who use assets inefficiently and are forced to sell them find buyers among those who believe they can use those assets to make an income with them - an income of increasing purchasing power.

As with all other things, supply and demand find an equilibrium even when there's deflation. Some of the most prosperous times in this country were also times of sustained price deflation. There is no compelling evidence or reason to believe that deflation can cause significant economic harm to the broad economy. 

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#6) On December 28, 2010 at 6:19 AM, dbjella (< 20) wrote:

I am not sure how much I buy the deflation is just as bad as inflation argument either.  I can see how inflation "forces" people to make decisions with their money.  Deflation, on the other hand, doesn't seem to "force" people to do anything, except to spend when they want and need.  

If prices are falling and my TV breaks, then how long do I want to hold out to get the best price?  I need to watch Storm Chasers.  What is more important to me.

I am not sure how to get a country to a more natural ebb and flow of prices, but I think Central Banks have done a lousy job.  I still haven't seen the model from the Fed where they predicted the 2008/2009 recession.  They don't have this model and they are making up excuses along the way. 

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#7) On December 28, 2010 at 8:22 AM, ChrisGraley (30.25) wrote:

Thanks for the comments guys.

In Tom's denfense, he did say "severe" deflation. This leads to job losses and an inability to buy at all for some people. I agree that this is a major hardship on those people. The thing is that you only get "severe" deflation when you first have "severe" inflation. The bubbles have to be inflated before they burst. The "Free Silver" farmers would not have been in dire straits if we wouldn't have inflated the silver to begin with.

Helicopter Ben will not take the trillions of dollars out of the system that he put in, the market will. When the market takes it out, it will do it suddenly and we won't be able to print enough money for a bail-out the next time.

Like I said above. things come full circle and you eventually end up with the one thing that you were trying to avoid to begin with.


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#8) On December 28, 2010 at 9:41 AM, Jbay76 (< 20) wrote:

On a side note Chris, whats your take on moving to New Zealand.  I recall from previous posts that this country was not on your list of those you would relocate to, but I was wondering if you had looked into NZ at all.



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#9) On December 28, 2010 at 11:39 AM, ChrisGraley (30.25) wrote:

Jbay76 I did look a little at New Zealand and I may look at them again. I think it's important to restate that I am looking more at a PT lifestyle (Perpetual Traveller) I will spend time in NZ as well as many other countries.

As far as getting passports, I'm looking for very specific advantages for travel, taxation, and lack of government interference. This is why I'm really looking hard for a European passport right now, because travel in Europe will be so much easier. There aren't very many channels that meet the criteria and those channels are very unofficial, if you know what I'm saying.

If you look up the "6 flags theory" on the internet, you might get a better idea of my thought process and I think I should probably post a blog about the whole process for others to consider in the very near future.




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#10) On December 28, 2010 at 11:56 AM, kdakota630 (29.81) wrote:


First off, great blog!

I was 'following' this, however, to see how you would reply to JBay76 about New Zealand.  I think I'll be fine here in Canada, but am always looking for alternatives, 'just in case.'  I'm thrilled that I did though because I'd never heard of the Six Flags Theory and after checking a link I discovered, my interest is certainly piqued.


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#11) On December 28, 2010 at 12:32 PM, ChrisGraley (30.25) wrote:

Believe it or not Kdakota, I looked at Canada too! They have a very interesting program for citizenship with many tax advantages (for foreigners only of course) and a top notch passport for travel. The downside is that it is a 5 year commitment and I would still be under the thumb of the US for the entire 5 years. Given that I now have other passports, Canada is back to being an option again though. I'm going to look at it again after I figure out whether or not I can get the European passport.

BTW kdakota I'm still looking at the 519 area code for ooma. The first 2 devices that I set up were transferring their old phone number, so it didn't show me a list of available numbers. However, my brother does not currently have a landline so I should be able to find out when I install his.


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#12) On December 28, 2010 at 12:46 PM, kdakota630 (29.81) wrote:

Awesome.  Thanks for the updates for both.

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#13) On December 28, 2010 at 1:12 PM, Jbay76 (< 20) wrote:

Thanks for the reply Chris!  I always look forward to your posts, especially those concerning the PT lifestyel.  l am more considering PR (permanent relocation), and all the info you post helps.  So, i look forward to reading a blog about the whole process.

I'll do an internet search for the 6 Flags theory in the meantime.




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#14) On December 28, 2010 at 1:40 PM, Jbay76 (< 20) wrote:

Wow, 6 Flag theory is more than I realized.....Wow!

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#15) On December 28, 2010 at 4:51 PM, russiangambit (29.49) wrote:

It is illegal unless it is you government doing it. The reality is that whatever government does by defintion is legal no matter what Consitution says. .It is as simple as that. Who is going to prove otherwise? The only time something declared unconsititutional is when powerful states go against federal govrenment and they are not much better.

 Just read archives, which get open after what - 50 years? There is so much illegal stuff ion there, it'll make your head spin - killing, kidnapping, lying, bribery and so on. Money printing?  It is the legal way for government to steal from its citizens, this is why every government usurps this power in the first place.

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#16) On December 28, 2010 at 5:53 PM, leohaas (35.73) wrote:

#6: that only works if you have one TV.

I was personally in that position a few years back that I wanted a big screen plasma or LCD, but still had one of those glass clunkers. I knew prices were falling fairly quickly, so I postponed and postponed and postponed my purchase. Note that this was not because I did not have the money...

So there can be no doubt that serious deflation leads to postponing purchases of non-necessities. I am not so sure that is a good situation to be in for our economy. After all, 70% of our GDP is consumption (and judging by what I witnessed during the recent Holiday season, quite a bit of that is on frivolous items).

Any comparison with the last quarter or so of the 19th century (when we had deflation) is 100% useless. In those days, the vast majority of people was dirt poor and spent virtually all of their money on necessities. And since it is not possible to postpone the purchase of necessities, deflation did not hurt the economy. People spent anyway because they had to.

By the way, this whole discussion is academic. We have neither serious deflation, nor serious inflation!

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#17) On December 28, 2010 at 7:41 PM, ChrisGraley (30.25) wrote:

I agree with you as well leohaas.

We don't have serious inflation.




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#18) On December 29, 2010 at 11:42 PM, tomlongrpv (82.09) wrote:

Chris all currency is "fiat."  Gold and Silver are just worth what we decide they are worth apart from their (in most cases) minimal actual value.  They will be worth nothing other than their fiat value in the event of a real economic collapse.

Deflation builds spirals even more than inflation does.  And there is no indexing that addresses it (there is no downward adjustment of loan balances to compensate--on the other hand CPI and interest rates can be used to adjust for inflation.)  So I stand by my view that deflation (if we sink into it again) will prove to be much worse than any inflationary periods we have seen in this country.  It's just that no one alive now really remembers deflation very well and we do a poor job ot teaching history in this country so we are it seems doomed to repeat it.

Bernanke is a good student of the history of the depression and is doing a good job trying to keep us out of another one--notwithstanding the anti-government demagogues who are gaining more political power.  

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#19) On December 29, 2010 at 11:51 PM, hmhn31 wrote:

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#20) On December 30, 2010 at 12:25 AM, Mstinterestinman (26.98) wrote:

Hey Chris good stuff and won't Lie after school Canada is on my list of places to

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#21) On December 30, 2010 at 11:00 AM, ChrisGraley (30.25) wrote:

Tom all currency is fiat now, but it wasn't always that way. Fiat currency is part of the reason that the economy experiences the ups and downs that it does.

Deflation would be the better option of the two, if and only if we didn't try to inflate our way out of it and relied on growth instead.

By normal equilibrium, deflation can only respond equally to the initial inflation. The bubble can pop, but it can't pop and create a black hole.

We do a poor job of teaching history, but we do an even worse job of teaching economics.

So I stand by my view that deflation (if we sink into it again) will prove to be much worse than any inflationary periods we have seen in this country.

This part is absolutely right! That is because we not only inflated in poor times, but in good times as well and the deflation has to bring us back full circle. The Keynesians promising to take the money back out in better times never take it back out of the system and in fact put more money into the system in good times.

Bernake may be a good student of history, but he's a poor student of economics and I wouldn't trust him to run a lemon-aid stand.


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#22) On December 30, 2010 at 6:01 PM, tomlongrpv (82.09) wrote:

I'll stick with Bernanke.  Even though he was originally appointed by Bush he seems to understand the full ramifications of deflation and has managed to keep us out of it.  There is no growth in deflationary periods.  You cannot "grow" your way out of a deflationary spiral without inflation.  No one in their right mind will borrow in a deflationary period and if you don't have borrowing you don't have a modern economy.  And while sever deflation may not cause a "black hole" what it will cause will be so bleak you won't be able to tell the difference.



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#23) On December 30, 2010 at 8:31 PM, ChrisGraley (30.25) wrote:

You can absolutely grow out of a deflation. You think that going into debt is what spurs the economy?

No one will buy anything when the prices are cheap? No one will start a business when they can afford to pay cash instead of borrowing?

Are you saying that no-one has accumulated any real wealth and it's all on paper?

I currently have no debt. (This is technically a lie. I recently got a credit card and I technically have debt until I pay off the monthly balance.) I think that debt is evil and most people become slaves to it, but give me a Japanese style interest rate right now and I'll borrow to the hilt! I'll take as much as they'll give me. If I can make 3% on a loan that I borrowed at 2% and build equity until the economy recovers, I'm winning the game. When the economy recovers, I'm making money hand over fist just for owning something during the recovery.

What would I invest in? Probably farm land. I don't know much about farming, but I know that people will still want to eat today whether they think that food will be cheaper tomorrow or not.

Why would I borrow during the worst times when I am so steadfast on not borrowing in the best times? Our growth by leverage system is designed to fail. The best times have to continue to get better for everyone to be able to pay back their loans. When it doesn't, and creates the day of reckoning that you are so afraid of, the Fed fires up the printing presses, leverages the economy even more, and now everyone needs the economy to be even better to avoid the same day of reckoning. It's even harder for it to meet expectations. The day of reckoning comes sooner and hits harder. The feds fire up the printing presses again, point a finger North and a finger South and hope everybody buys the idea that inflation is better than deflation one more time.

Yes we are poor at teaching history, but we are even poorer at teaching economics.

Leverage is a "Get rich quick" scheme. Hope that you die before you have to watch your children pay your debts on the next day of reckoning.

In other news...

A bomb blast on Thursday morning in front of two courthouses in central Athens damaged cars, shattered storefronts and rattled nerves but left no one injured.

The bomb, which was attached to a parked motor scooter, exploded during rush-hour traffic at 8:20 a.m. local time in front of two courthouses used for administrative purposes in the city's Ambelokipi district, according to the Associated Press.

Austerity sucks, but it sucks worse the longer that you wait.

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#24) On December 31, 2010 at 4:21 PM, lemoneater (79.38) wrote:

I once read a true story about a man who made it his business to counterfeit nickels only. He passed his coins at nearby amusement parks so the the FBI was able to get a sense of his location. They were amazed at all the hard work and expertise he put into making nickels. He should have just been a machinist the money would have been easier!

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