I think the article is deficient. The author clams that government can print all the money it wants but cannot force people to spend it. But this is clearly false. Of course the government can force people to spend. Bernanke himself spoke of the idea a few years ago. All you have to do is deposit in the bank account of every American sufficient money. If you deposit $1 million to every American's bank account, do you REALLY THINK they will keep it there and not cause inflation?? Ok, so the threshold is not one million, make it 2 million, 5 million, at some point if your neighbour is buying a Ferrari you are going to do it too.

So deflation is NOT POSSIBLE under this system. I can't believe people still fear it!

The ponzi scheme is only possible because the game is rigged. The value of a currency can be controlled irrespective of what the players do. You can hoard a pile of money in a hole in the ground, but it can be rendered valueless by decree. Even more so with money in bank accounts.

There is only one known way to sidestep these issues, and that is the possession of physical assests, mainly gold. Anything else leaves control of your families future in the hands of criminals.

The current events (in especially Europe) seems to indicate that many people are starting to realise that fact. Gold has started to act as currency.

A comment I received from a friend, Dr. Paul Prentice, a former economist in the Reagan administration:

"A pretty good piece on the subject. However, most such analyses miss the point about interest rates. They represent much more than the return to capital, or the price of debt. At the highest level, they represent the "social rate of time preference." The reason that zero interest rates are a "black hole" is that they represent a total indifference between consumption today and consumption tomorrow. Based on basic human nature, this is impossible and can only be created by government manipulation.

Zero percent interest rates represent the ultimate disconnect between a fiat currency and real economic activity. A discount rate of zero totally erases the time component from economic calculation. In my opinion, that is the true "black hole".

Reply from The Daily Bell

Wow. Interesting analysis. Thanks for sharing.

I enjoyed the article and the comments, as always.

Government bonds put citizens in bondage to pay them back out of future production. The sad reality is that here in the U.S., the government is not only borrowing at a rate no future increase in production can pay back, but is simultaneously destroying the very capacity for that production.

In simple terms, this translates to: Pretty soon the world will see that we can't pay those bonds off. Not only won't the government be able to roll over its short term debt, but holders of these bonds will want to be the first ones out rather than get left holding worthless paper. At present, only the prospect of mutually assured destruction along with greater distrust of their own currencies are preventing sovereign debt funds from dumping U.S. government debt. On the day when it appears destruction is inevitable (because we will never be able to pay those bonds off), the bond market will implode.

That will be the day our currency is dead, and likely others along with it. The only options will be repudiation or inflation. Or perhaps a restructuring, with the IMF running the U.S. as it does every other spendthrift country it bails out.

If anybody sees any alternative to this outcome given what has been happening, I'd like to hear it. (Brighten my day, please.)

Oh, and if you want something to cheer you up, just remember that all the schools in the land teach the widely accepted premise that World War II 'got us out of the depression', and it wouldn't surprise me in the least that our 'leaders' and those of other countries might all agree that all we need is another great war to clear things up.

i'd understand things better if instead of saying velocity we said hoarding or dishoarding

So what the Fed really needs is a champion/champions to whom they can supply free credit/ready cash, which they can spend lavishly to generate new economy with a virtual energy which will itself enable and fund/energise those areas/goods/beings on whom it is has been spent by the aforementioned champions/bank proxies/ringers/cal them what you will ....... creating a virtuous generative circle, rather than the present crazy nonsense of apparently creating vast wealth and quantitatively eased funds, to in reality buy nothing but the toxic debt and junk bonds which created their escalating problem in the first place? And that would thus be guaranteeing the swift arrival of another even more severe meltdown and/or rogue market manipulation, for as all can see, has the recent horrendously expensive trillion dollar global bailout solved and helped nothing and no one and has actually made the situation even worse, and has also highlighted the idiocy of its key players.

Does anyone know where one one signs on the dotted line as a active model champion for the System, which is in Real Serious Trouble indeed, and definitely needs novel help?

In a closed system (US EU) maybe this argument holds, but expanded worldwide it doesn't. Example, China implodes and stops buying US bonds, even has to sell them and then gold. Long US rates explode, foreclosures mushroom, production plummets and massive shortages of everything appear. Once shortages occur, the rush of money velocity accerates and a government yields to mob demands.

I find it difficult to visualize a deflationary situation where people will continue to lend money to a central government at zero or near zero interest rates indefinitely. If, as the professor argues, such an environment is a wealth destroying black hole, then where is the capital coming from to lend to government?

What happens when the central government's debt becomes so large that the interest on that debt exceeds the government's revenue collected through taxes especially as tax generating wealth plummets? Wouldn't lenders long before then demand higher interest rates to cover the risk of sovereign default? Absent a new tax source, wouldn't this additional burden then induce the central bank to step in and monetize more of that debt? Wouldn't this latest increase in the money supply, even without the multiplier effect of the fractional reserve banking system, then cause a general price inflation as government spent this new money from the central bank?

Ponzi was correct.

He actually WOULD have paid...because of the supply of players.
The GAME continues to Pay as long as there are players.
when the GOV stopped the playing, the game stopped.
bottom line: as long as the Next Guy takes the bait,
the game goes on. or, as it was said to me...always leave
just a Little More profit for the next guy who buys into
your bull--it and he'll buy.

"Our instinct is to grant more credence to the quantity of money theory than Dr. Fekete does - but he has certainly made interesting and thought-provoking points, as usual. " DB

Money is one mind boggling concept. Personally, even if I was convinced I understood it completely, I would insist on allowing alternatives. Anything else is tyranny, which I will not be a party to if I can help it.

Reply from The Daily Bell

Well put.

I've read Antal Fekete with a great deal of interest and appreciate his explanation of the black hole of capital destruction.

However, inflationists would argue that the deflationists discount the effect of price on money velocity. That is, at some price of money (interest rate) money will indeed be loaned, even if that price is negative.

Thus they say there has never really been true deflation in the last 100 years, only asset price deflation and insidious and hidden inflation.

This argument has practical importance in trying to figure out the future movement of gold prices relative to the stock market.

If we are in a true deflationary environment, gold should follow commodities and the stock market down.

In a true inflationary environment all three should be elevated.
Do I misunderstand this, or is this roughly correct?

Reply from The Daily Bell

These are difficult arguments. We published Fekete's piece in part because he is an original thinker (and Bell commentator) and in part to inspire the sorts of discussion in which you are participating. Our instinct is to grant more credence to the quantity of money theory than Dr. Fekete does - but he has certainly made interesting and thought-provoking points, as usual.

One of the best articles I have read in a long time.

It appears to me that Fekete is assuming that people in the US are largely stupid and ignorant. Granting that assumption for now, his thesis will hold for a while until at some point the pain from the wealth redistribution will be so huge that people will start complaining.

And they will start asking questions and the internet will reveal the Cantillon effect and its enabler - the fiat paper/electronic money system. And then the people will really get what they want. If they want to be set free from their bondage, they will not want to hold on to their silly dollars any more.

Further, Fekete certainly engages in some exaggerated hyperbolic illogical claims while accusing others of doing so. For example, witness his claim that "Deflation is the measure of wealth in the process of self-destruction".

We already knew that price controls are bad, inefficient and destroy capital. I don't know why Fekete feels this is particularly true only when the Fed lowers interest rates.

I do not think that Dr Fekete is fully considering the damage to the productive economy caused at this late instant in this fiat cycle by misallocated currency and credit.

I think it likely that a perception of deficiency or deficiency of essential goods and services could occur and that this will drive extremely high money velocity and resultant hyperinflation particularly as the replenishment of essentials occurs over a short time period and as such is a strong catalyst to velocity and upward reprising.

I do agree that the QTM is not alone capable of explaining hyperinflation but that panic driven velocity is the prime driver.

I think it more likely that unstressed rate of money quantity increase would more likely find its way into asset class goods and that this is exactly what we have witnessed prior to 2007.

When the Federal Reserve ceases paying the commercial banks to park their reserves at the Fed, and the banks begin to lend again, the banks' reserves (which have been bolstered with trillions in fiat injections) and the fractional-reserve multiplier will be the driving forces.

Also, when capital is destroyed due to a subsidized pattern of capital consumption, output declines and the existing demand competes for this declining output. The price trends upward from the non-intervention price.

Mass inflation is already baked into the cake. The only question is how bad it will be at this point. A careful reader would note that deflationists have been predicting deflation since the 60's and have been nearly consistently wrong. That is because state interventions in the market take the side of inflation, of reducing output to benefit constituent suppliers of goods and services, and increasing the quantity of money in circulation to benefit constituent consumers of goods and services.

Raising taxes is politically suicidal, so the only thing that can remove money from circulation is central bank intervention -- paying commercial banks not to lend.

Thank you very much Daily Bell for showing us important issues like this one from Prf. Fekete. This is a brilliant post, like most of the others that you put here to the world people looking for the true knowledge.

The only barrier to money velocity and thus hyperinflation is the printing press. The literal one. As soon as they start printing large nomination bills with ever exceeding zeros to catch up with the digital world of the shadow banking system the dollar is doomed.

With small nomination bills there is no enough paper to follow. It explains the dichotomy of talking about trillion dollar bailouts and still you can buy a hamburger for a unit. The paper based money system has material limits which keeps it intact. Even the printers can not compete with the existing stock of money in the short term.

Credit, the real measure of the digital money supply is shrinking and can not grow as the Professor explained. If the convergence of the two systems is too violent there will be separation, there will be hoarding of paper money. That is when the danger of the introduction of the large nomination bills into circulation is the highest.

A good article and informative. However I doubt velocity alone could drive hyperinflation. There is a limit to how fast one can spend his money. However, there is no limit to the amount of money/credit that can be created by a central banking system.

The persians wouldn't lay down and the chinese and the russians wouldn't be happy. My president doesn't have the chuptzpah for a massive boots on the ground campaign unless i'm wrong then we can call it Obamageddon LOL. We couldn't write a better script for sci-fi the whole economic scene is a mess g-d help us.

My hat's off to the good professor. He has forever changed how I view all things about money!

But I'm not so sure that even a war could induce hyper-inflation. Not in the U.S., anyway, as we've already built up our military/industrial complex, which would account for, imv, the bulk of what hyperinflation would be used for. Since we've got all we need (and then "some"!), I just can't see hyperinflation of the USD occurring any time soon. If anything, I would think Iran (or whomever we go to war with) would have to destroy _their_ currency through hyperinflation in order to cope. But whether this was to build up their military or just to deal with economic disruption, it matters not. They would probably be defeated in short order, their money no longer any good in the market. Therefore (assuming this turns out to be correct) any war with Iran would probably a repeat of Iraq and Afghanistan. They would let us invade, with little resistence, and let insurgency drive us away over time, which is a far better alternative to needless hyperinflation (and certain defeat).

Does anyone else think so as well?

Reply from The Daily Bell

Time will tell.