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Clinging to Old Theories of Inflation

September 15, 2018

Clinging to Old Theories of Inflation

QUESTION: Mr. Armstrong, I think I am starting to understand your view of inflation. It is very complex. I think some people cannot think beyond a simple one dimension concept as you often say. So I am trying to be more dynamic in my thinking process. Here you point out that when debt is collateral it is the same as printing money but worse because it pays interest. Then you point out that hyperinflation takes place not because of printing money but because a collapse in confidence and people then hoard their wealth which reduces the economic output and that compels a government to print more to cover expenses. So there is a line that is crossed and kicks in that collapse in confidence as in Venezuela. This is very interesting but complex. Is this a fair statement?

ANSWER: You are doing very well. You are correct. Some people cannot get beyond an increase in money supply is automatically inflationary one-dimensional thinking. If that was true, then why did 10 years of Quantitative Easing by the ECB fail completely to create inflation given that theory? It is like brainwashing kids with global warming ignoring all evidence to the contrary.

There is yet another dimension that you have to add to this complexity. The BULK of the money is actually created by the banks in leveraged lending. If I lent you $100 and you signed a note that you would repay it, then the note becomes my asset on my balance sheet. I can take that to a bank and borrow on my account receivables. In this instance, just you and I are creating money. Now let a bank stand between us.

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