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“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.”
- George Washington
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Quantitative Easing is Nothing New

The term 'quantitative easing' is just the newest term to describe the on-going central bank policy of increasing money supply.

Greetings. There has been an increasing amount of news covering the activities of The US Federal Reserve and other central banks. The newest expression being bantered about is "quantitative easing".

Simply put, quantitative easing is a phrase, more a euphemism really, to describe the process of increasing the monetary supply - printing money so to speak. It is a continuation of actions that central banks have been engaged with ever since their creation.

I would like to show a chart of monetary expansion since 1971 to the present. We will begin with what people most typically think of when they think of money - that being banknotes and coins in public circulation. Economists call this M0.

Here is a chart showing a timeline from 1971 to the end of 2010. Along the vertical axis is a dollar figure.

Global currencies in circulation

The first currency shown is the US dollar. By the end of 2010 there was 920 billion in US dollars. It is estimated that perhaps up to two-thirds of this circulates outside the borders of the United States.

Our next currency is the Japanese yen. Over 86 trillion yen circulates among the public. This represents an amount equivalent to more than US$1 trillion.

The euro is represented in blue. There is just fewer than 840 billion euros in circulation - equivalent to US$1.1 trillion. These three currencies represent nearly 60 percent of the value of all physical paper currency within the public domain.

The fourth most significant paper currency is the Chinese renminbi, also known as the Chinese yuan.

The remaining 131 currencies shown in this chart are represented in grey. Together, these 135 currencies amount to US$5.2 trillion.

At the end of August 1971, when the US dollar was taken off the last vestiges of the gold standard, the total amount of currency was equivalent to US$171 billion. This means, that over the last 40 years, the nominal valuation of all paper money has increased by more than thirty times.

But, there are also other types of money. Namely, demand deposits and savings accounts. Economists classify different types of money using the following convention.

Categories of money classification

This table shows the different types of money commonly defined by economists. The bottom represents the most liquid forms of money, which are used primarily as a means of exchange. The broadest measure of money defined here, is M3. This includes forms of money used as a store of value.

Let's now return to our first chart. We will re-label all of these circulating currencies as M0 and represent them in blue.

Now we will add the global estimates for all demand deposits in order to compute M1. As you can see, the amount of money held in demand deposits exceeds that of currency in circulation by nearly four times.

To this amount of money - equivalent to US$25 trillion - we will now add savings accounts and small time deposits. This is M2. The amount of money in M2 is even greater than that in M1.

Finally, we add in those monies captured under M3.This brings our estimate for the total amount of money to over US$75 trillion.

Global money supply

I hope these charts illustrate the magnitude of monetary expansion that has occurred over the last forty years. Every increase to the existing money supply dilutes the value of the currency already in existence. In other words, those people holding paper money lose purchasing power to create value for the new money. It is, in effect, a transfer of wealth to recipients of newly created money. Quite simply, it is theft.

Common usage of the word "inflation" is the phenomenon of rising prices. I hope that these charts have shown that this price inflation is not a natural process of the free market but, the result of deliberate policy, namely the central bank policy of ever increasing the money supply.

May you find these words helpful in preparing yourself. Thank-you for watching.

Global money supply data available at www.DollarDaze.org

_____

© 2011 DollarDaze

ABOUT THE AUTHOR

Mike Hewitt Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices. Mike can be emailed at mikehewitt@hotmail.com.
Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

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Inflation In History

Governments fund themselves through three ways. They can either - tax, borrow or inflate. The last option is preferred, as it is the method least likely to anger the public. However, inflation is associated with large-scale wars and great social and economic upheavals.

Greetings. Today, I would like to talk about why governments often choose to inflate their currency despite the risks of hyperinflation. There are three ways that governments can fund themselves. They are - to tax, to borrow, or to inflate the amount of currency. Taxation is very unpopular with the public because its effects are so direct.

Borrowing is not a true remedy as it merely delays payment. To some degree, governments can continue borrowing, but it is like a person using one credit card to pay off another card. This can only last so long. At some point, the government must either levy new taxes, begin inflating, or default.

Inflation is an insidious way that governments can raise funds. It is effectively a tax on those holding money. Instead of paying money to the government as with the case of a conventional tax, the government prints new money to spend. The value of this new money is siphoned off the value of the currency already in existence. This transfers wealth from the citizens to the government or at least to those controlling the issuance of currency.

This sordid tale has been retold many times. In medieval Europe, monarchs would clip coins. Clipping is a process whereby very thin shavings of metal are taken off the edges of many coins to produce a new one. Laws are then imposed, forcing people to accept the underweight coins at their face value.

In ancient Rome, from the time of Nero and after, the precious metal content of the denarius steadily declined, from being a nearly pure silver coin to one containing only two percent.

Genghis Khan created what was to be the largest continuous empire in the world. The paper money that only he, and his highest ranking officials could create, concentrated his power, but through successive periods of over-issuance, the economy suffered and the eventually the empire fragmented. Paper money was abandoned in the East until it was reintroduced by the Europeans, some 350 years later.

The printing of money allows for the sustainment of large-scale wars. These simply would not be possible under commodity-based money, as only a finite amount of money could be created.

Hyperinflation predated the rise of Mao in China and the National Socialist movement in Germany. Greatly devalued currencies are associated with both the pre- and post-break-ups of the Soviet Union and Yugoslavia.

Time and time again, the masses suffer the theft of their wealth through a debasement of the money. This process transfers wealth from the existing holders of money to those who have the power to create it.

Prices begin to increase as the early recipients of this new money purchase greater amounts of goods. Those who are unable to participate in this money game, only face higher living costs on relatively stagnant levels of income. Civil unrest resulting from decreased standards of living is blamed on the wickedness and dishonesty of the people. Authorities enact laws to suppress this behaviour, such as price and wage controls. The first well known example of this is the Code of Hammurabi during the time of ancient Babylon. In every case all throughout history, these edicts are passed under the guise of fairness, but they are in fact merely measures to conceal and perpetuate the parasitic burden of the privileged elite class upon the rest of society.

There is a monetary pattern that closely parallels the rise of republics and fall of empires. Initially, money is a tangible commodity. That commodity is then concentrated by those who issue paper receipts merely representative of the underlying commodity. The reason for doing this is to lend out more in paper receipts than what can be legitimately backed. In modern parlance, this is referred to as fractional reserve banking. It permits banks to lend out a multiple compared to what they hold in the vault. This greatly leverages the amount of interest revenue that can be obtained. Occasionally, this leads to public panics when people rush en masse to cash in their paper receipts for something tangible once they realize the scheme for the fraud it actually is.

We live amidst the most modern version of this story. Through a long and steady process, we now regard the paper as not being a receipt for money, but as the actual money itself. Banks lend out enormous amounts of credit based on paper reserves. Central banks stand ready to create whatever new amount of money is required to prevent the spread of panics.

This can only end with the complete debasement of the currency as it is printed into oblivion. In the twentieth century, many currencies have experienced this fate.

Currency Year
Austian krone 1923
Russian ruble 1922
German mark 1923
Polish marka 1923
Austian krone 1923
Hungarian korona 1926
Brazilian real 1942
Greek drachma 1944
Hungarian pengo 1946
Romanian leu 1947
Chinese yuan 1948
Taiwan yuan 1949
Chinese renminbi 1955
Brazilian cruzeiro 1967
Chilean escudo 1973
Argentine peso 1983
Israeli shekel 1984
Bolivian peso bolivianos 1984
Peruvian soles de oro 1984
Brazilian cruzeiro novo 1986
Brazilian cruzado 1989
Nicaraguan cordoba 1990
Peruvian inti 1990
Yugoslav dinar 1990
Angola kwanza 1995
Argentine australes 1992
Soviet ruble 1992
Polish zloty 1993
Yugoslav dinar 1993
Zaire zaires 1993
Bosnia and Herzegovina dinar 1993
Brazilian cruzado novo 1993
Georgian kupon 1993
Yugoslav dinar 1994
Belarus ruble 1994
Ukrainian karbovanet 1995
Bulgarian lev 1997
Zaire zaires 1998

Hyperinflation is not a bizarre event without cause. It is the ultimate end state of policy involving the continual printing of currency.

"The most important thing to remember is that inflation is not an act of God; inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy." (Ludwig von Mises, "Economic Policy")

May you find these words helpful in preparing yourself. Thank-you, for watching.

_____

© 2010 DollarDaze

ABOUT THE AUTHOR

Mike Hewitt Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices. Mike can be emailed at mikehewitt@hotmail.com.
Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

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Can Paper Bring Prosperity?

A short description of money and historical examples where forms of which were not a good store of value ended in economic disaster.

JULIA: Welcome to tonight's show. I'm Julia Sanders. We have with us Mr. Thomas Hughes. It's great to have you here with us tonight.

THOMAS: Thank you Julia. Pleasure to be here.

JULIA: OK. So, today we are going to discuss money.

THOMAS: Yes, it is a very interesting subject. Originally, there were only commodities and people exchanged them according to their wants and needs with one another. At its most basic level, money is a medium of exchange. Something that is desirable to use as money, is also a good store of value and can serve as a unit of account.

JULIA: So what has been used as money?

THOMAS: All over the world, different commodities emerged to play a role, as an acceptable medium of exchange. Cowry shells, wampum, and tobacco, have been used. The word salary actually derives its meaning from the Latin word 'salarium' which means salt.

JULIA: Interesting piece of trivia.

THOMAS: Yes, salt was used in pre-coinage Mediterranean societies. On a small group of South Pacific islands, large stones were used as money.

JULIA: They used rocks as money?

THOMAS: Yes, on the Yap Islands a type of limestone was used. These stones were very rare and were quarried on Palau, some 250 miles to the southwest. New stones were acquired at great peril, perhaps even loss of life. They were valued most highly by the islanders. Here is a picture.

Countries included in analysis

The stone money of the Yap Islands.

JULIA: And what happened?

THOMAS: An enterprising Irish-American was shipwrecked there in 1874. He learned of the unique economy of the island. Sensing a profitable business opportunity he returned a year later, aboard a vessel carrying limestone. He exchanged these stones for goods produced by the islanders.

JULIA: That sounds funny.

THOMAS: Well, perhaps a humorous tale to us today. But to the people of the Yap islands, their economy was destroyed. The stones became so numerous that they lost all their value. The people discovered that they had much less in terms of goods than they previously enjoyed, as they had traded these things away for the stones. They were in effect poorer, although they had much more money than they ever had before. Perhaps there is a lesson in this. Today we trade pieces of paper, a material abundant like the limestone rocks of the Yap islands.

JULIA: So are you suggesting that we may find ourselves amongst piles of paper, and no goods?

THOMAS: That is a possibility, and one not completely unknown to the history books. This highlights why it is desirable for money to also be a store of value. As the people of the Yap islands found out, rocks are a terrible store of value. And to be honest, paper isn't much better.

JULIA: I remember reading about hyperinflation in Germany. A wheelbarrow of money required to buy a loaf of bread. People filling up their wood stoves with paper money.

Countries included in analysis

A German woman feeding a stove with currency notes, which burn longer than the amount of firewood they can buy.

THOMAS: Weimer Germany