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Why not throw another log on the coming Inflation Inferno?!?!



April 05, 2009 – Comments (6)

It appears the G20 leaders are determined to do EVERYTHING in their power to prevent deflation and reignite rampant inflation. Chris Martenson analyzes the results of the G20 meeting and what it means for the road ahead. Here's the link and a few excerpts (emphasis mine):

G20 Authorizes Global Printing of Money Out of Thin Air

In a completely expected move, politicians from around the world gathered and made the decision to spend a lot of money that they didn’t have and which doesn’t exist (yet).

I am referring to the recent G20 meeting, where the global crisis was the main topic. As you may know from my past writings, I hold it as a near dead-certainty that national politicians can be counted upon to spend instead of cut and to print instead of tax. It’s just natural to want to take the path of least resistance...

Printing money out of thin air is inflationary and unfair. It steals from savers and preferentially enriches those at the head of the handout line. It diminishes all the money accumulated from past production and inappropriately reinforces the belief that something can be had for nothing.

So I was more than a little intrigued when I read about the $1.1 trillion pledged by world leaders to the IMF. Where did it come from? Who was donating what? As always, the devil is in the details.

Interestingly, I had to read through more than 18 accounts before I found any details at all, which were meager. I finally located these in a NY Times article:

World Leaders Pledge $1.1 Trillion for Crisis

China is expected to contribute $40 billion. Japan and the European Union each pledged $100 billion. The United States has said it will contribute $100 billion, too, though that requires Congressional approval.

In addition to $500 billion in loans, the Group of 20 approved a one-time issuance of $250 billion in Special Drawing Rights, the synthetic currency of the fund, which will be parceled out to all its 185 members.

...Given that none of the governments in question, except China, have that kind of money lying around, the $250 billion in grants and $500 billion in loans will have to be printed out of thin air.

More worryingly was the authorization to create $250 billion SDRs out of thin air. Usually described as a “synthetic currency,” they are nothing more than a type money created out of thin air, but one without any particular association to any given country.

Think about that for a minute. SDRs are being printed out of thin air by an institution that does not have any particular taxing power over the productive output of any particular nation.

What does this sort of money mean? What exactly is it?

It operates like central banking super-money and can be used as the primary fuel for massive pyramiding by the recipient bank. Think of it as the primary deposit into a banking system with a minuscule reserve ratio. It can be leveraged hundreds of times by central banks and then thousands of times further once those funds are disbursed into the next tier of the banking system.

For a world that should be mulling over lessons learned about the peril of thin-air money and excessive leverage, the reintroduction of SDRs are like a gigantic, blinking neon sign that reads, “We didn’t learn anything!!

If we are collecting the fuel for a massive international inflationary bonfire, SDRs are a very dry bundle of sticks.

The chance that this all ends in a year or two with a round of severe and destructive inflation is now quite high, perhaps better than 50%. With any luck, the central banks will continue to try and hide their tracks by selling their gold, meaning you can pick it up at fire-sale prices. Pun intended.


6 Comments – Post Your Own

#1) On April 06, 2009 at 12:11 AM, arboretum (27.96) wrote:

Like many of the old gods inflation will destroy and also create. Among the things it will destroy is debt, which is what hobbles the economy now. I think the G20 decided that this is a lesser evil than deflation.

Staying in cash may be unwise when this starts to unfold...

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#2) On April 06, 2009 at 3:35 AM, TDRH (96.58) wrote:

They owe too much, deflation decreases tax revenues and the countries cannot service their debt.   Inflating their way out is the only option. 

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#3) On April 06, 2009 at 7:49 AM, Entrepreneur58 (37.96) wrote:

What happens when the bond market falls apart and interest rates go to 20%?

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#4) On April 06, 2009 at 8:52 AM, russiangambit (28.86) wrote:

An intresting diffrence in case of the US vs. any other debtor country, that the international debt is usually denominated in dollars. So, while any other country cannot inflate its way out of international debt because all they achieve is debasement of their  currency vs. USD, while it does nothing for their itnernation debt. The US actually can and is inflating its way out of its international obligations. I think, this is what Chinese are so upset about. In this situation USD has only one way against other currencies and commodities, and it is down.

So, those saying that US will default on its debt, it is nonsense, but the US dollar will go down because this is the only politically acceptable way to deal with the issue - stick it to the foreign owners of the US debt.  I wouldn't be buying Treasuries if I were them.

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#5) On April 06, 2009 at 11:10 AM, bostoncelitcs (57.48) wrote:

Where is the alternate budget proposal from Senator Mitch McConnell and the GOP leadership?!!

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#6) On April 06, 2009 at 1:21 PM, AnomaLee (28.46) wrote:

I like Chris Martenson. I especially enjoyed his Crash Course videos which I posted here last year before the series was complete.

However, he is off about SDR's and how they function and confusing the IMF's role.  The IMF serves as a backstop. It's very probable that the UK, Italy, Spain, Russia will need access to funding and the IMF will act as an advisor to restructure their economies.

Also, SDR's will not be a replacement US Dollar. Again, people are confusing its role. These conversations remind me of the orginal arguements about derivatives which people today are still very confused. I won't say I know everything about them, but I have a basic understanding of the functions of SDR's and the IMF. [but no one reads my blogs]. They have been in existence for decades. Yes, "inflation" is the only viable option at the leaders table, and SDR's will serve a purpose in shoring up the current shortfalls in international trade but it won't be to the alarmist extent that Chris Marteson alludes to.

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