The US Dollar, Inflation, and Deflation

The policies of the politicians have been to inflate, inflate, and inflate some more. And they have been quite successful in doing that. Since the Federal Reserve was created in 1913, the dollar has lost something like 97% of is purchasing power. So the boys controlling the printing presses have done quite well in their creation of deflation, except for a period of time in the 1930s when the purchasing power rose considerably.

The question in my mind is not whether the Fed and other policymakers will try to inflate. Indeed I think they will. Bernanke has even talked about printing-press money. The bigger question is whether they will be successful in creating endless amounts of money out of thin air.

I am absolutely certain that at some point in time—and I think it won’t be long now—policymakers will no longer be successful in creating endless amounts of inflation of the dollar. But I’m not sure how that will end. It could end in a hyperinflation, such as John Williams, James Turk, Marc Faber, and others on my radio show have suggested. At some point the currency would be inflated out of existence and what would essentially be a new currency would be created. Hopefully we would learn that to stabilize money, it needs to be asset backed and not liability backed, as our current fiat money system is.

But I am not absolutely sure the dollar can continue to be inflated away. First of all, as Ian Gordon and the late John Exter point out, debt is growing exponentially, while income is growing in a linear fashion. What is especially problematic in the effort to inflate is the fact that every stimulus measure results in more debt to income than before the stimulus. The picture of debt outpacing income at an accelerating rate of speed can be seen in the chart above. With each stimulus, the force of deflation increases, such that the deflationary pressures continue to get larger and larger.

Jay Taylor
Gold Investor