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A brief history of princely debasement

Excellent repost at The Big Picture. Originally from Institutional Advisors. It is a brief historical facts of taxation abuse and how debasement of the currency has always been the way of government. It is a good read.

The current way of debasing of course is for governments to print money to themselves, by central banking and fiat money. This creation of money, or fiat money, can effectively be used as a stimulus, in the Keneysian sense. In the US it is used to achieve quantitative equilibrium.

Critics point out that it is appropriation by the community, as the government has created a pool of money for its own spending, without equivalent and offsetting income or taxation. Furthermore inflation will be a residual effect of the creation of this monetary mass. How much inflation will result is fuzzy and depends on price elasticity of goods. China has exported net deflation, through its immense production capacity, just in time production gave us great elasticity. In other words, if your economy can absorb your monetary injection, use it.

And in effect, fiat money is a taxation, an indirect one, therefore politically palatable. The printing of money by the US has effectively turned on the chinese economy and the chinese government buys treasuries in its own keynesian logic. To fund their economy all they need to make sure is that the US remains funded, a continuous depreciation of the US debt would be akin to a stimulus package taken on by the communist regime. This ongoing imbalance can be politically justified. The US is taxing China, but China views it as a stimulus package. The best proof point is of course the current market price of treasuries. They are so in demand, the US cannot print money fast enough, figuratively. This bodes well so far as it gives the US authorities a lot of room to maneuver.

Quantitative Equilibrium aims at price stability, which, by definition of price stability means no inflation. The risk of over-shooting and degenerating into hyper-inflation exists as a probability.

When the gold bugs talk about "a return to gold" they really long for a return to sound money, where the volume of money being created, the volume of appropriation or taxation by the state is clearly known by the public, because supposedly gold is harder to debase.

Mind you, this time around the level of debasement was set by the invisible hand of the shadow banking system, and the not-so invisible hand did a mess of things. Reason? the same one that has endured for thousands of years, they printed too much money, took on too much debt. This time around, the shadow banking system printed money via debt levels, took fees on the newly created debt and did so until it exploded like a mosquito. Those that are calling for a return to gold, the gold-bugs are really calling for a return to sound money, one where the monetary levels are known throughout the system. Transparency and accountability need to be brought back to the system.

I believe we don't need gold to do that. It also seems impractical to want to do that. We have the political infrastructure to achieve just that. Debt levels were regulated at the commercial banking level after 1932, the debt levels were always deregulated in the investment banking world. The article reminds us that

A broader form of wealth confiscation capable of tapping even the poor was accomplished by currency debasement and extreme examples in ripping off everyone provoked severe social disorder. No matter what method employed, financial outrage prompted the evolution of parliament as a necessary means of constraining fiscal ambitions of the governing classes.

Read the original blog entry...

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