Inflating Our Way To Civil Unrest

When the protests started in Egypt, they were over something relatively benign: the increased costs of basic food items. That led to full on revolts, and the eventual toppling of the government in Egypt.

We now see what's happening in Libya, and it's possible that these are just the first few pebbles in what will undoubtedly be a much larger avalanche. People who are hungry are motivated for change.

Make no mistake, the increased costs of commodities and food is in large part the result of the United State's loose monetary policy, especially concerning QE1 and QE2. You simply can't double your entire money supply overnight and not see consequences.

The US runs a trade deficit every year, which means that it buys more items from other countries than they buy from the US. The net result of that is that US dollars flow out of the United States and stock pile in other countries. Since the United States is creating massive amounts of inflation with Quantitative Easing, you can just as easily say that the main export of the United States is in now inflation, causing prices to increase wherever that money ends up.

And that's what's happening. The inflation the US is creating is being exported to countries all around the world, which is why it still hasn't been entirely felt at home. But rest assured, it will be at some point, and it's possible you'll see the same sort of riots here in North America that everyone is now watching on TV.

Is there a speculative component to the rise in commodities? Most assuredly. Given that QE1 and QE2 are still largely being held be banks and not directly into the hands of most consumers, it's likely those companies are eager to make returns on that money, and are heavily investing in commodities. But I would say a large component of the increases we're currently seeing are inflationary.

The sad part of this whole episode is that nobody in the G20 seems to fundamentally understand that the inflationary problem they are trying to solve is a monster of their own creation. Many people are quick to blame China's currency peg as contributing to the problem, which it undoubtedly does. But it's disingenuous to blame China for currency manipulation when that's exactly what Quantitative Easing is meant to do, as well as the monetary policies of all of the G20 countries, the majority of which print money to pay off debts. In fact, if the Yuan is allowed to float, it'll rise, making products in China more expensive. That will mean less money will flow to China and more will stay in the US, causing rapid price inflation there.

How did everyone get into this mess?

War.

The gold standard worked extremely well historically. It was scarce, it was valuable, and governments couldn't create more out of thin air. That meant governments had to live within their means, which they were mostly successful at.

But how do you finance an ongoing war with a limited supply of gold?

You don't, not easily at least. That was the point, and why gold was always thought to protect individual liberties. But governments found a way around it, and started temporarily pulling their countries off of the gold standard during periods of war. At first, when the wars ended, the countries worked hard to eventually restore the gold standard. But after a while the promise of endless money by fiat currency was too hard to resist, and every country left the gold standard like a row of dominoes, one by one.

Nixon actually was the person who put the final nail in the gold coffin. The reason? The lingering costs associated with the Vietnam War.

Presented with a dwindling gold stock pile in the United States and more and more countries starting to ask for their excess US dollars to be converted into gold, the US, led at that time by President Nixon, was forced to suspend the convertibility of US dollars into gold, effectively severing the Bretton Woods Agreement and the last remnant of the gold standard. That was 1971, and the world has been using Monopoly money to settle transactions ever since.

The US dollar is the reserve currency for the entire world, which means they have the luxury of being able to export their inflation when other countries do not. That's going to end, sooner rather than later.

Look at Egypt, Libya, Spain, Greece, Ireland - while each country has its own domestic problems, inflation is going to cause the cost of living to start skyrocketing, causing bad situations to get a lot worse. China and Russia have already started switching away from the US dollar, and once the momentum starts, other countries will follow, otherwise more of that inflation will simply end up in their countries.

While my post isn't about politics, it's hard not to call the Capitalistic experiment a massive failure. Capitalism and Democracy are different beasts, but they generally go hand in hand. Watching what's happening in Egypt, I can't help but wonder if they're going to be any better off switching to systems such as ours, where Capitalistic Democracies slowly wither and morph into Socialistic Plutocracies, often masking Fascist Empires at their core.

Sound like a stretch? It's not really. Simply look at the US. Congress alone has the authority to initiate a war. But historically several presidents have initiated wars without congressional approval. The entire money supply in the United States is now in the hands of the Federal Reserve, a private institution that isn't accountable to anyone it would seem. Back in 1933 FDR issued an executive order declaring the private ownership of gold to be illegal - the government collected the gold, gave a token amount of dollars in return, revalued gold to be worth more than it was when it was collected and then pocketing the profits. Where I grew up that would be called theft.

There's no greater hypocrisy than attempting to perpetuate freedom and liberty by using military action. Even more so that the US has paid for it using money from Communist China. Last time I checked the US had a military presence in over 120 countries. That's no longer a Democracy, that's an Empire. And Empires generally collapse when they run out of money.

The founding fathers in the US once warned that democracies weren't compatible with individual liberties. When asked by a women what type of government the US had just created after the Constitution was ratified, Benjamin Franklin replied, "A Republic, if you can keep it."

Since those simpler times the Constitution has been amended and disregarded many times, adding the ability for Congress to levy income tax on the population (absent in the original Constitution), to print money (the original Constitution only allows metal-based coinage), and central banks (Jefferson warned they would destroy the wealth of citizens). As a result, the US is only a shadow of the liberty-based country it was once envisioned to be.

It's hard to believe there was once a time when the average person could approach Thomas Jefferson on the street, while he was president, and strike up a conversation. The president was never envisioned to be current powerhouse that position now entails, simply a knowledgable person who supported liberty and the concept of freedom. Now the president has incredible powers and authority, and travels with 100s of security personal to keep him safe, all of which are perpetually funded by tax payer dollars.

Inflation is going to get a lot worse before it gets better, if it ever does get better. That means that I suspect prices for basic items are going to continually increase, making it harder and harder to make ends meet. For now North America is sheltered somewhat due to the United States dollar's position as the reserve currency, but eventually that inflation will come home to roost. The right move is to start raising interest rates, which Canada has done, but the US probably won't do as it'll negatively affect their "recovery" and put the housing market into even further disarray.