The Inflation Game

International Herald Tribune - October 12, 2006 - by JEREMY W. PETERS, The New York Times - U.S. Trade Deficit Widens to Record

NEW YORK The U.S. trade gap widened in August to a surprising $69.9 billion, setting a record for the ever-growing disparity between what Americans import and export, the Commerce Department said Thursday.

Nearly a third of that deficit, $22 billion, represented the imbalance in trade between the United States and China.

Higher prices for imported petroleum also were a contributing factor, as were increased purchases of computers and consumer goods from abroad.

The numbers defied expectations. Economists who were surveyed before the report came out predicted that the deficit would fall in August, but it rose $1.9 billion from July.

When the gap hit a record in July, economists said they believed that the numbers were nearing a peak. But as energy prices remained high this summer, the deficit continued to swell. Still, many economists said Thursday that they now believed the bottom was near.

"This is probably as bad as it gets," said Paul Ashworth, senior U.S. economist with Capital Economics, a research firm in London.

30 years of gold prices (up until 2004), courtesy of goldprice.org.
10 years gold price

Gold price over the span of 10 years, courtesy of goldprice.org.

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Hansadutta: Inflation means the government is printing paper money [or issuing bonds] without sufficient gold in reserve. During inflation, money is abundant, but it is worthless. If we buy something at a fixed price this year, 10 years from now, if money has inflated 20 times, we shall have got the same thing for practically nothing. Soon the economic bubble will burst, and all the paper money will become completely worthless. The public will lose its faith in paper money. People will start bartering—"I have a banana, and you have an apple, so let's trade." The more money inflates, the easier it is to pay off debts. During inflation, the debt collector loses while the debtor is getting ahead, because the debt collector is getting nothing; whereas the debtor is getting something in tangible goods.

Guest: Will there come a time when we won't be able to get paper money?

Hansadutta: By that time, the gains and losses will already have been transacted.

Guest: There will be so much money that it won't be worth anything, and we'll have to accept a new standard.

Hansadutta: The economists will create another standard. By the time that happens, if we are dealing in tangibles such as land or gold, we will have already paid off the debt. In 1970 we could buy gold for $32/oz, and in 10 years it shot up to $600. Again, it's up to around $600/oz now. That means the price shot up about 20 times, or 2000% inflation.

Guest: That's incredible.

Hansadutta: That's inflation. It's the same piece of gold, but the money has been inflated 20 times against the value of the original item. And the price of silver has been inflated even more. From 1979 to 1980, the value of silver has gone up five times.

silver prices over 10 yrs
Silver price over span of last 10 years, courtesy of goldprice.org.

Guest: If we exchange the gold for money, although we may have a lot of money, the money soon will be worthless.

Hansadutta: Before inflation runs wild, everyone takes his money and spends it on something tangible like land or gold. The basic principle of modern economy is just an agreement. The government agrees to recognize a piece of paper as having a certain value, but when the government and business no longer agree or want to play the game, then the system will collapse. Presently everyone is trying to exchange his money for gold, real estate or other tangibles, so the discrepancy between the actual gold stock and the value of paper money is becoming apparent. Paper money has no value, because the government has printed more promissory notes than there is gold in stock to back them up.

Guest: Switzerland has zero inflation, because it is based on the gold standard.

Hansadutta: Paper money was introduced for the purpose of cheating people. Why should the government substitute paper for gold? American Express says, "Give us your dollars, and we'll give you this cheque. Wherever you go, you can cash it at one of our branches." Srila Prabhupada said that actually what they are giving us is worthless—it is only worth something because they promise to pay us. It is another step removed from the actual gold substance, and in the meantime they are using our money to make money. The banks take our money and say, "Okay, we are going to give you 4% interest." We may think we are making money by giving them our money, but in the meantime they lend out our money and make 10-12% on it. Perhaps the fellow who borrows it will lend it to someone else. One day the whole thing will snap. Then, depending on what the government does, we shall see either inflation or depression.

Guest: The economists inflate 6-8% every year. They will keep putting more money into the economy until at last it reaches the point where the money will be worthless. Then no one will take any more money.

Hansadutta: I recall that when I was a child in Germany the government created a new money system three times, issuing new coins and new bills.