Jay Taylor on Inflation Vs. Deflation, the Possibility of a Gold Standard and Why the West Is Failing
By Anthony Wile - February 20, 2011

Introduction: Jay Taylor is the editor of J Taylor's Gold, Energy & Technology Stocks newsletter. Throughout his career Mr. Taylor worked as first a commercial and then as an investment banker. Most recently, he worked in the mining and metals group of ING Barings in New York. Prior to that he was involved in the first gold loan made in modern times in the U.S. to Amax Minerals, a 250,000 oz. loan facility led by Citicorp. In 1997 he resigned from ING Barings to devote himself full time to researching mining and technology stocks, writing about them in his newsletter, and assisting companies in raising venture capital.

Daily Bell: Thanks for spending some time with us again. Let's jump right in. Are we done with price deflation yet or do we have a ways to go?

Jay Taylor: Certainly we are seeing the opposite of deflation since the equity markets fell down in March 2009. We've seen some success in terms of price inflation, which is what Mr. Bernanke of the Federal Reserve wants to have happen – but no, I don't think we are finished with the deflationary side of the equation. There are enormous amounts of mal investment in the economy and huge amounts of debt that cannot be serviced because of that mal investment. I also think in the credit markets, there is a long way to go yet before the excesses are wrung out of the system. Now, the politicians and the policymakers and Federal Reserve and central banks around the world are trying to do their very best to keep the markets from doing what they do and that is to get rid of the mal investment and get rid of the excess debt. I think the market will have its way and the politicians will end up losing, but the question is, how long will the process take?

Daily Bell: Remind us of the proximate causes of this economic crisis.

Jay Taylor: Austrian economics makes it very clear that our problems have been caused by excessive amounts of credit, money that has been created out of nothing and leads to mal investment, and causes people to make bad decisions with their capital. We saw this with the dot-com and telecom bubbles that occurred and peaked in 2000. Of course we have seen it in spades with the housing bubble.

All this is caused by central banks of the world, especially led by the United States, pumping huge amounts of money into the system. It relocates wealth. It takes the wealth from the people; it does not reward the people who actually create wealth. It rewards the people who manipulate the credit system – the bankers – and they manipulate it for their own purpose. The governments are part of the game, too, because they can allocate wealth and credit for spending. So government is grabbing a bigger share of the gross domestic product (GDP), but the real cause is excessive amounts of credit. Credit that's created out of nothing.

When we were on the gold standard that wasn't possible; that's exactly why the policymakers never talk about the gold standard, why they don't want to have a gold standard, because this fiat money system, which is money by law, not by market, is designed to help those in control of the system re-allocate money into their pocket and away from the people who actually create the wealth. Now you are not going to hear them talk about it in those terms but as I sit back and look at it, I might add as an ex-banker, it's clear to me that's what is going on – the re-allocation of wealth. The destruction is enormous because of the mal investment and disincentives from keeping people to act in a way that is constructive for themselves and the country as a whole.

Daily Bell: Where does the West go from here?

Jay Taylor: I think the West is on a steep and slippery downward slope. If when we talk about the West, we talk about free markets and freedom and liberty and the importance of the individual. The individual is here now to serve the state and not the other way around. When the U.S. Constitution was formed, the idea was that the state was to serve the people. So every time there is another bailout that bails out the large banks that are bedfellows with the government, every time that happens a bit more of our freedom escapes us.

The West is heading away from a democratic environment, where individuals matter, and is moving more and more toward statism, where the individuals are here to serve the state. I would also like to mention that democracy was never mentioned in the U.S. Constitution; it was to be a republic, a limited government republic, so that the markets would rule, not politicians. But that has been turned on its end.

Daily Bell: When do we reach hyperinflation in the U.S. and elsewhere?

Jay Taylor: That is very difficult to say and I still think there is an outside chance that the U.S. may have an outright deflation. I know that's not a popular view among Austrians or people who believe in free market economics. I see the U.S. being somewhat different than some of the other countries because we do have a military that can go around to various parts of the world and say, "You'd better buy our paper, you'd better buy our Treasuries or else." Of course that can't go on forever either.

Ultimately, I think the markets win. Now I am not ruling out hyperinflation, I think it's very possible. I think most people think it's almost a certainty. Congressman Paul, who I have featured on my radio show, definitely believes that, and so does James Turk. Most of the hard money people believe we are inevitably heading toward inflation, and that could be. But I think we are near a peak in the equity markets and probably the commodity markets now; maybe we see another swing downward.

When we see this thing play out is anybody's guess. John Williams, who is a hyperinflationist, is convinced we are on the tip of it right now, that we could see it happening in the very near future. The problem is you have to predict when the velocity of money is going to change; when will people finally decide and have enough confidence to stop sitting on their savings or start spending it in the United States?

Daily Bell: Where do you stand on the euro? Does it survive? Does the EU survive?

Jay Taylor: I think the euro, like all other fiat currencies, will self-destruct. The Europeans have been very strict about money creation, but human beings are weak, and the easy way out seems to be printing money. On the other hand, it doesn't go down well with the Germans. So you can see the beginnings of a political schism that will pull the EU apart. The timing of that, again, is impossible to say.

Daily Bell: How about China and price inflation? We think the market is tremendously overheated, and have for two years, long before it was popular.


Jay Taylor: I think China is overheated and corrupt. I have a good friend from Beijing, who keeps close to his friends in China. He tells me that China's inflation is a big worry; they are creating a bubble that will be bursting anytime. There are stories of whole cities being built and not occupied because of political whim and incompetence. Chinese companies are speculating in commodities as well. The Chinese people are right not to trust their government or their currency, unlike Americans, who are naïve and willing to believe what they see and hear on major media. I know that the Chinese people own gold; they buy gold, they love gold, and as soon as those restrictions were taken off, we saw them buying more and more gold.

Daily Bell: Does China collapse?

Jay Taylor: I think China is too big a nation to collapse entirely but they have gone through waves of history where they have had expansions – good times followed by extremely repressed political situations. It would not surprise me to see something very severe take place in China. I think the current system could collapse and we could see another brutal totalitarian regime take its place, that's a real possibility.

Daily Bell: What about western economies?

Jay Taylor: The western economies, as I said earlier, are headed downhill. We have forgotten the lessons of Adam Smith and free market economics, and the reason is they are not taught in schools. Basically what you have is a statist propaganda machine through the schools and universities, which are state owned and controlled. It's the frog in the water heating up slowly.

Daily Bell: Give us an update on the IMF and amero. How about the bancor?

Jay Taylor: Policymakers have a desire for one-world government. We are seeing more and more talk of that; we are seeing a move toward pooling the markets together in North America via the amero: Mexico, Canada, and the U.S. would merge or at least use a common currency. It is generally a move toward more tyranny and totalitarianism in government.

On my radio show I have featured people such as Daniel Estulin, a foremost authority on the Bilderberg group, Ed Griffin, Adrian Salbuchi, an economist from South America; these are men I have spoken with who are all pointing to the idea of one-world government in our discussions. Economically, financially, socially, our living standards are going downhill, our moral standards are going downhill.

Daily Bell: Where does the dollar go from here?

Jay Taylor: I think the dollar in the short term could be stronger, because if we go into another credit contraction, which I think we will, the dollar will be stronger relative to other currencies and maybe even for a short term relative to gold. But longer term, there is no question the dollar will disappear. The timing of that is very difficult. Will it survive ten years? I rather doubt that can survive beyond ten years.

Daily Bell: Are central banks any better off these days, any more credible?

Jay Taylor: No. I think central banks are losing credibility, certainly in the United States. The Tea Party is an example. Now since commodity prices are rising, the credibility of Wall Street has risen; but I think Main Street America has lost faith in the system. I think there is more skepticism, more lack of belief in the system. So central banks are not better off and they are not any more credible, in the minds of the populace. The populace as a whole has not gained respect for the central banks, following the 2008 crash.

Daily Bell: Are they going to be able to re-inflate successfully? Stupid question actually, given the amount of inflation that is already out there. Do you think this is probably the calm before the storm?

Jay Taylor: They will be able to re-inflate; we have seen them re-inflate since 2009, but it depends on how you define success. The moves have not helped unemployment, and we have all this debt, to boot. It's exactly what happened in the 1930s. Roosevelt tried it. Eight years later his Treasury Secretary said, "Mr. Roosevelt, unemployment is as high as when we took office eight years ago, and we have all of this debt." The answer eventually came in the form of World War II. Of course if they try hard enough they will turn stagflation into hyper-stagflation. They will make what is already bad a great deal worse. I think all my hard money friends are betting that this will be the outcome. It will lead to heartache and many tears, ultimately.

Daily Bell: The crisis obviously isn't over. What can people do to protect themselves?

Jay Taylor: The crisis is not over. So, whether you are on the inflation side or whether you lean on the deflation side, as I do, the one answer is go to money that does not lose its value: gold. You start out by owning some gold coins, real money; money that cannot be inflated away. I would say you also need silver. Silver may very well outperform gold in the long run. You need to have small denominations for small purchases. You are going to need this to go to the store to buy bread when the financial system breaks down, and I think it will. You need to stay out of debt. You need a clean balance sheet. Convert your increasingly worthless dollars into something tangible, and start with gold and silver.

Daily Bell: Do you see foresee even better times ahead for gold and silver at the very top of this market?

Jay Taylor: Yes, I will say that gold is going to rise relative to currencies and relative to stocks, but if you ask me for an absolute number for gold, that is very difficult to say. I would rather look at gold relative to the stock market, to the Dow Jones. I think that we are looking at 7 or 8 to 1, if you take the Dow Jones ratio. Whenever we see the equity markets hit rock bottom, it's a 1 to 1 ratio. But let's think in terms of what an ounce of gold will buy, rather than the price of gold being measured in dollars.

Daily Bell: Shifting gears a little. Are WikiLeaks and Julian Assange for real?

Jay Taylor: I really don't know what to make of the WikiLeaks and Julian Assange. I do know that some of my guests, Adrian Salbuchi for example, believe Assange may be used by some of the powers that be. His theory was that there may be some manipulation within the ruling elite, and we are talking about the Bilderbergs, the Trilateral Commission, and groups like that, and that there are conflicts within the ruling elite. It may have to do with Israel, or with the West's position in general with Islam, I really don't know. The intrigue is all behind the scenes and never reported by the mainstream media. What you see may not be as it seems.

Daily Bell: Does Obama run again?

Jay Taylor: I imagine he will. I think a lot depends on whether we get another economic contraction or the beginnings of price hyperinflation, as John Williams predicts. I don't know who else will run. I would like to see Congressman Ron Paul, who has won the straw poll over Mitt Romney by a considerable margin. But in terms of Obama, I think he will run again.

Daily Bell: Is there war in the Middle East? Do the Egyptian riots spread to neighboring countries, along with unrest with the status quo?

Jay Taylor: I think in terms of the U.S. and the CIA, they are doing all they can to keep the status quo in check. As for Egypt, what will replace the current vacuum? More military control and global control? All these events can take place in a way that causes the movement toward one-world government. Obviously, people are angry because they are being taken advantage of.

I read 50% of the GDP in Egypt is military! It's statist economics. This is the direction we are going in the United States and the West in general – government bailouts, government spending, the expansion of a basically bankrupt empire. You are crowding out the productive sector of the economy. The people who create wealth are not being rewarded, they are being taxed. The middle class is disappearing and you are having more and more people in poverty. When poverty hits, people become desperate. All the money being printed is driving up the cost of food now in many of these countries and we have Fed Chairman Ben Bernanke to thank for that.

Daily Bell: Has the power elite in a sense lost control in the Middle East and elsewhere?

Jay Taylor: I think that's the big question. I think the ruling elite is trying to retain control. Clearly there is friction. And I am not completely convinced that our ruling elite isn't in bed with these radicals. An excellent book that I have read is America's Nazi Secret, by John Loftus. Loftus talks about America's ruling elite, how its main families have been aligned with radical Islamic groups associated with 9/11. So, I am not so sure that there isn't some connection there. Of course all this plays into the hands of those who want more world government.

Daily Bell: We believe that as well – and have written about it. Is the Internet making the difference? Should people turn to the Net and alternative news websites?

Jay Taylor: I think this is where people go for truth. There is a lot of garbage on the Internet but at least you get something other than the warmed-over pabulum from the mainstream. Of course, how long will the Internet be free is the next question. God forbid we should be free these days. I think Americans are naïvely, stupidly, and foolishly giving back all their freedoms to the same families, the same elites, that our ancestors came here to get away from.

Daily Bell: We've asked you about the dollar, but let us hone in on the larger issue. Do you think the dollar-reserve system is finished?

Jay Taylor: I think the reserve system lasts for the moment, or as long as the United States military can finance itself. I had John Perkins on my show; his most famous book is called Confessions of an Economic Hit Man. He is very confident that one of the reasons we took out Saddam Hussein was his insistence on using the euro for payment of his oil. That does not make our policymakers very happy, as the dollar-reserve system is based on dollars-for-oil. It also provides the political infrastructure for our large corporations to rake in huge amounts of money. It's a statist, corporatist system that works for the ruling elite at the expense of average people. So I think the dollar system survives a little longer than my gold bug friends expect it to.

Daily Bell: Is the world headed back to a gold standard? We've been writing about the possibility for years – or perhaps free-banking generally.

Jay Taylor: You know, I never used to believe it was possible, but now it's looking more and more like that will happen – ultimately, some sort of a gold standard. But what I am afraid of is that it won't necessarily correlate into freedom. I think it will be sort of a façade and the ruling elite will use it to con us back into using yet more manipulated currency of some sort. To hope that we can go back to a global free market system, in which individuals are free to choose what they use as a medium of exchange . . . well, that would be a dream. I don't see it happening in my lifetime and I am 63. But I think that the market forces are inevitably forcing governments to think in those terms. Why? Because people are losing confidence in central banks and the paper they are creating.

Daily Bell: Is democracy discredited? Are we headed toward something else?

Jay Taylor: In my mind, democracy has always been discredited. The Constitution never allowed for democracy; we are supposed to be a republic. As Ed Griffin says, we are headed toward statist, totalitarian systems, and people don't even realize it. Step by step, slowly but surely. I think democracy ultimately paves the way to tyranny.

Daily Bell: Let's press a little on the war issue. Is there going to be a world war of some sort to take people's minds off the terrible state of the world's economy?

Jay Taylor: There are obviously wars, but world war, let's hope not. I think it's part of the game in the United States. We can employ more people, who are not employable elsewhere with this wretched economy. My question is, "With whom would we have a world war?" There's only one country out there waging war and that's the United States. How do you have a war without a country that would stand up to the U.S.?

Daily Bell: How does the power elite recover from all this, or does it take a step back, as it had to after the advent of the Gutenberg press?

Jay Taylor: I think the power elite is still in control, but the question is what will happen when the current dollar system collapses. Will the elite still retain control? The U.S. is a place where the elite still does not have total control. There are embedded cultural expectations for freedom that have given rise to the Tea Party and to people like Congressman Ron Paul. We can hope and pray that if and when the system breaks down, something better results from it. I am hopeful but skeptical.

Daily Bell: Are there spiritual connotations to all this?

Jay Taylor: Yes, certainly, and I suppose difficult times bring out the best and the good in people. I think it depends on where you stand in terms of your own theological views; if you are a believer in a Supreme Being, I think you could probably see difficult times turning into something that is better for a while.

I think when we came out of WWII, there was a certain spiritual awakening in the United States that caused people to be more civil to each other, to care more for each other. But we have moved toward a statist system that requires you to sell out to the emperor, and that's what we are being asked to do – sell out to the emperor.

Our propaganda machine is second to none in that regard. I had a Russian scientist on my show once who said, at least in Russia people saw the Soviet hammer and sickle and they knew where it was coming from. In America, the ruling elite's point of view is presented to us as if it is free thought or free market and it's clearly not. So, there is spiritual connotation, definitely. There are definitely spiritual connections to what happens to us in a materialistic world.

Daily Bell: What endeavors are you involved in that you want to point out to our audience. What's most important to you that you would like our audience to be aware of and support?

Jay Taylor: I think many people would enjoy my radio show, Turning Hard Times into Good Times. It is getting out to just under 100,000 people on a monthly basis. We feature interesting people and provide good investment ideas with lots of worthy companies. I also have a video show entitled Face the Analyst, wherein I conduct interviews. The videos are viewable at JayTaylorMedia.com. As for books, for sure, everyone should read The Creature from Jekyll Island, by G. Edward Griffin, and America's Nazi Secret, by John Loftus, as well.

Daily Bell: On behalf of all of our readers, we thank you for sharing your views with us. And we encourage everyone to listen to your program and visit your site to learn more about your groundbreaking insights.

After Thoughts

We want to thank Jay Taylor for his perspectives on inflation and deflation. He is a most knowledgeable man and his track record speaks for itself. But we want to try to make a controversial point in this brief "after thought." Here it is (after long thought): There is probably no real way for anyone to ascertain whether an economy is inflationary or deflationary save through market indices. If prices are headed up and interest rates (especially longer rates) are headed down, then the economy is an inflationary (too much money). If prices are headed down and interest rates are headed up, then the economy is in the grip of deflation (not enough money).

We've struggled with the issue of inflation and deflation through numerous articles and have decided this is probably the best we can do – outside of repeating the general notion that during a crash deflation (or at least disinflation and credit contractions) tends to occur before the inevitable fiat-money inflation (reflation). The idea that one can ascertain the "money supply" by ascertaining how much currency is held by banks, funds, etc. and how much credit is being offered is increasingly unsatisfactory, given the confusion surrounding the numbers.

How exactly does one define the stock of money in a fiat money environment, for instance? Is it money that is circulating? Is it money sitting in bank coffers uncirculated? Does it include money in mattresses? The current crop of Keynesian money-analysts provides no answers, only more confusion.

How about hard-money types? Free-market economists tend to define inflation (in the modern fiat era) as an increase in money that is available to banks (along with other sorts of monetary availability). But an increase in the money supply cannot be said to have taken place if the money does not circulate. Monetary circulation does drive recoveries, but as has been discussed in these pages, the monetary circulation is actually driven by human action itself. To focus merely on the circulation of money is to miss the point. It is people's willingness to invest and spend that increases money-circulation. The recovery begins with people.

When someone talks about deflation, he or she is speaking of price deflation (or disinflation) for the most part. In a fiat money environment it is difficult to remove currency entirely from circulation; a bank would actually have to retire the paper or digital currency (return it to the central bank), not reinvest it. Thus, it could be argued that for the most there has not been much monetary deflation in the West, only price deflation and credit contractions, during the current crisis.

One of the results of the world's current phony (fiat) money system is that even the very basics of monetary definitions have become debased. Unfortunately, however, in a real money environment of gold and silver, the definition of the money supply is not actually that much simpler. We've accepted Murray Rothbard's definition a "true" money supply in the past, as follows: "The TMS consists of the following: Currency Component of M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions."

This definition seems to include all money that is "immediately" available. But we also note that Rothbard in numerous discussions made the distinction between "hoarded" money (in a gold economy) and circulated money. According to Rothbard, inflation would occur when there was too much gold and silver circulating in the economy (thus the velocity of money is important). Deflation would occur when not enough money was circulating in the economy (when it was being hoarded).

But here is the issue: If one wishes for a larger definition that does not include "demand money" and the velocity of money as the meaningful criterion, one could define the money supply more broadly to include hoarding as well – money available outside of bank deposits and not circulating. The broadest definition of inflation might be the verifiable reserves in gold or silver mines. This is gold or silver that has not been mined and is not circulating. There are plenty of stories of mine owners visiting their mines and removing gold and silver directly within a 24-hour-period (surreptitiously or not). That counts as "demand money" to us.

One concludes from all of this that the obsession with "measuring" the money supply is part and parcel of the larger technocratic society that the power elite is constantly trying to form. (Rothbard probably played the game only to illustrate the essential silliness of modern money supply definitions.) Yes, only "experts" can measure the money supply, we are informed, and then tell us whether the supply is in an inflationary uptrend or a deflationary downtrend.

In fact, modern definitions of the money supply by mainstream economists double count the supply and also mysteriously subtract money from the money supply when people pay into the government. The whole idea of measuring the money supply seems essentially useless – shot through with questions and contradictions. Even Rothbard's True Money Supply valuation comes with various question marks in our view.

Is the money supply going up or down? Perhaps only the market can tell us. If prices are going up and if interest rates are going down, then money is more plentiful. If prices are going down and interest rates are going up, then money is becoming scarcer. Of course this is a simplistic "real money" analysis, because various economic and Treasury/central bank funding actions have an enormous impact on rates; one will need to look beneath the surface to determine what other factors are in play, perhaps giving more weight to prices than rates. But at least it is research that one carry out using news sources and analysis rather than arcane, inconclusive data. Anything else seems to us to be increasingly speculative, as the current crisis is making clear.

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