Tuesday, February 21, 2012

Paradox of Elastic Currency

Really it is not possible to have it both ways.  You simply cannot have reckless and excessive currency creation designed to circumvent natural economic pruning without expecting deferred consequences.  Humans consistently seem to believe that they can augment natures processes.  We want to prevent any pruning of forests and then we are shocked when fallen unharvested trees become fuel for fires burning hotter and longer than usual.

The US seems to be the most arrogant currency manipulator that history has ever dealt with.  We ironically throw stones at China in this game but really they are acting rationally.  The excessive money creation must always flow somewhere.  As the Chinese have produced what the Americans asked for, cheap plastic toys and consumable items, their society has mopped up much of this excess money.

Here is where things get difficult for the US.  The Fed (reminder for new readers this is a private institution) has maintained order during this period of currency creation by keeping money scarce.  As long as money remains scarce, recipients of freshly printed currency will experience benefits.  For example, if you receive a pay raise during a depression, your buying power is greatly enhanced as most market participants are selling for survival which causes prices to fall.  The Fed has allowed its ownership to benefit from currency creation while keeping money out of the hands of the people.

Now we will be reminded that there are consequences to this behavior.  If you suppress prices do not act surprised when the recipient of this currency decides to take advantage of the bargains present.  And also consider that while Americans want plastic toys and cheap telephones, the Chinese want potash, gold, silver, rare earths, uranium and weapons.


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