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L. Neil Smith's
Number 521, May 31, 2009

"There is good news and bad news."

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Inflation Gets Frothy
by Jim Davidson

Special to The Libertarian Enterprise

Today I went to get gasoline. Now, I drive one of those little foreign cars which gets good gas mileage, and I've been way to poor to try to visit any prospective investors or freedom network events. So it turns out that the last time I got gasoline, at the same store, was one month ago. The price then was $1.899 and the price today was $2.299.

So, let's do some math, see how things are going. I make the difference between these two prices to be exactly 40 cents per gallon. Now I take .40 and divide by 1.899 to get 0.2106 or 21.1% inflation. But, my period is only one month. So I take 0.2106 and multiply by 12 to obtain 2.53 or 253% inflation per annum.

Now, sure, that's just one price. Other prices will vary significantly. But if you thought high gasoline prices were a thing of the past, be assured they are not. The government is printing money as though Obama believes there is no tomorrow.

If the current rate of change continues, by 24 August 2009 we should see $4.08 per gallon gasoline. Which might be good for another major financial crisis just in time for the start of the new school year.

Of course, that paragraph just completed starts with a great big "if." We don't know if the current rate of inflation is going to stay constant. It might be that the price of oil once again collapses as it did last Autumn. The dollar might surge to new strength against commodities and other currencies. Oil might be found in huge quantity somewhere easily developed—in a country with notoriously simple permitting.

However, the way to bet is not that the rate of inflation in fuel prices continues at the current rate, and not that it drops, but that the rate of change increases, that the price of energy surges upward. Why is that the way to bet? Because the government has abandoned plans to tax their way out of economic calamity, has found no buyers for its debt instruments so it cannot deficit spend with increased indebtedness to solve its problems, but, rather, has fixed on a plan to print its way out of the economic mess. (The option of cutting entire lists of government programs has only been mentioned by Ron Paul, who was called a psycho for doing so on "the Ed Show" which tells us what the establishment thinks.

So, as they print ever more money, as the Federal Reserve monetises the debt by buying government debt which won't sell overseas, the rate of inflation should escalate. I would expect it to go up dramatically, as it did in 1979. Probably without any stop, this time.

Now, the skeptics will say that inflation stopped cold in 1980 or certainly by 1981. But there was something happening then that isn't happening now. Dollars were very attractive overseas in countries with very bad inflation—worse than ours. Holding dollars also became more attractive domestically because interest rates were deregulated, so deposit institutions could pay interest on checkbook deposits.

So it was possible, then, to dramatically increase the supply of dollars while both overseas demand and domestic demand for dollars was surging without sending prices through the roof. It still took very high interest rates—prime rates around 20%—to get inflation under control. But it did get back to very low rates after October 1982. "And for a time, it was good. (The Animatrix)"

There was also another interesting bonanza that resulted from the high and increasing commodity prices from 1965 to 1980. A huge amount of new production of oil, gold, and other commodities came on the market. The commodity bull market was sustained for enough time to get through all the effort of generating new discoveries, getting permits to exploit them, and getting permits to produce refined materials from them. That process can take, depending on whether you start with a lot of highly trained exploration geologists and geophysicists, anywhere from ten to fifteen years, depending on how much new stuff there is to discover.

A related bonanza for reducing prices was the increase in conservation motivated by prices. People were doing a lot more to use less energy and less of other things because they weren't able to afford those things.

There is good news and bad news. The good news is that the particular confluence of events can't happen this time, so the system is going to fail. That's good news because the system is fraudulent, evil, and unworkable. The fiat monetary system as a whole perpetuates the establishment now in power, limits alternatives, crushes innovation, and brutalizes hundreds of millions of people worldwide under authoritarian rule. So, change is good news because it creates opportunities for improving our individual situations as well as those of billions of others like us.

The bad news is: the system is going to fail. As Jim Davies on Strike the Root and others (many, many others, going back as far as Andrew Dickson White and even further back to Aristophanes) the reaction of those in power in the establishment is to seek dictatorship to restore "stability" generally with brutal authoritarian consequences—Napoleon, Lincoln, Hitler, Mao. A distributed power elite is arguably better for the individual than concentrated power madness.

A really excellent overview of why saving the system isn't possible this time is available at by Bob Landis. The essay is called "Saving the System."

Here's are some brief excerpts: "Which of the indicated policy precedents would be open to us, even if we could satisfy the foregoing conditions? Deregulate? Clearly not; been there, done that."

The government has already deregulated interest rates. So how does it create more demand for dollars? Further deregulation would certainly be desirable, but isn't likely to increase demand for fiat dollars.

Landis writes, "Hike rates to historic highs in real terms? No way. We gambol in the shadow of Debt Mountain. If the Fed were to raise the Fed funds rate even to within spitting distance of a positive real rate of interest, it would risk an avalanche of defaults, threatening economic and political upheaval."

In fact, it is arguable that this attempt to raise real rates of interest in 2008 did in fact trigger an avalanche of defaults. Just review the headlines from September and October 2008 to get a sense of who defaulted and by how much. With GM and Chrysler going bankrupt, even with massive federal bailout infusions of stolen cash, it seems clear that the avalanche has not run its course. Something on the order of 250,000 retail stores are expected to close this year.

Landis writes, "Expand the market for dollars? Get real. Just how do you expand a saturated market? The challenge now is rather to ward off blowback of the big foreign dollar float."

We have, in fact, begun to see foreign governments and foreign banks stop buying federal debt. Not long ago, the Federal Reserve stepped up and bought about $1.2 trillion of "agency debt" such as Fannie Mae and Freddie Mac represent, as well as government debt. No foreign buyers were available. As well, China and other countries have begun to propose other currencies, regional currencies for their region.

Landis: "How about rigging commodity prices? Now we're getting somewhere. Trouble is, we can't rig them all, and we can't keep it up forever, even for the ones we can rig. Sooner or later, the law of supply and demand in the marketplace for real things will trump the price management effected in the markets for paper derivatives."

Many of us who are close observers of commodities like gold and silver have been aware of tedious market manipulation efforts. The 04:00 New York time manipulation of the gold price in London, for example, or the 1:30 p.m. New York time stimulation of the stock markets, have become notorious in certain circles. For a time during the height of the crisis in 2008, physical delivery was so scarce that default on commodities contracts was a real possibility—something that had not happened since the potato famine of 1849.

Ludwig von Mises called it. "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved (Human Action, A Treatise on Economics (Fox & Wilkes, 4th rev. ed., 1963))."

So, what should you expect? How should you proceed in order to avoid being wiped out? What tricks are left in the system to avoid total collapse?

We know that late last year, the system nearly did collapse. People were withdrawing huge sums of that interest-bearing money market money, as panic set in. How was that stopped? We know that commodity prices are going back up. How were they brought low, temporarily?

One of the critical factors is timing. Are you going to have enough time to work out what to do?

Landis wrote (in 2004) "So it seems likely that the terminal monetary crisis will unfold on virtually an instantaneous and discontinuous basis, once the fog of statistical deceit and false market cues begins to lift and a clear trend either way becomes evident. We are not likely to enjoy the luxury of observing either a deflation or an inflation unfold in the fullness of time, but rather, just as Mises foretold, a final and total catastrophe of our fiat monetary system."

No, you aren't. You are going to have the money you have on hand when the collapse comes. You are going to have the gold and silver you have on hand. You may or may not be able to get at gold stored remotely on your behalf. Things in your bank safety deposit box may be out of reach.

So what should you do to prepare? Endless advice is possible. In fact, J. Neil Schulman and I are developing a new financial newsletter based on the concepts of agorism, the individualist free market philosophy of Samuel Edward Konkin III. Called The Golden Economy our advice will appear at the eponymous web site, in a few weeks.

Meanwhile, buy gold, silver, copper and other easily identified and weighed commodities. Good money is divisible, durable, consistent, convenient, and a persistent store of value. Gold, silver, and copper have always been these things. Cigarettes, chocolate, wheat, and many other commodities have served as money, even though they are not always durable (wheat spoils) or convenient (a tonne of wheat isn't easy to carry).

You should already have weapons and a thousand rounds of ammunition for each gun. Think very seriously about reusable-projectile weapons such as slingshots and bows.

Grow a garden. You live in a city? Grow a garden in a window box. Grow expensive herbs indoors—think saffron, rosemary, garlic.

Have a year's supply of bulk food and canned food on hand, and rotate stock. Rice and beans last a long time, but not forever. Canned goods swell when botulism ruins them, and corrosion can ruin buried cans.

Meanwhile, the state is going to grow, become more and more authoritarian, and power grabs are going to be more obvious, more brutal, and less pleasant. Get involved in a network, or several.

On Thursday 14 May 2009, Adam Mueller, Jason Talley, and Peter Eyre were stopped in Jones County, Mississippi for allegedly having unreadable license tags on their motorhome. They happened to be traveling the country interviewing freedom activists for their blog "Motorhome Diaries" and they were blogging the traffic stop as it happened. So we knew they were being arrested.

We, in this case, was Campaign for Liberty activists, people who got involved in the Ron Paul campaign in 2007 and 2008. Very quickly, though, it became Boston Tea Party activists when Allison Gibbs sent word to her network and Darryl Perry picked it up and sent word to his. And then it became Agorist Cadre when I got Darryl's status update and sent word to my networks. Within 8 hours we had raised $2,580 by Western Union, Allison was on the ground in Ellisville, MS to bail the guys out, we had civil rights attorneys from all over the country interested in their case (including significant brutality from one sheriff's deputy), and a huge surge in donations to their PayPal account, as well.

Our network rose up and beat down the sheriff. The charges were reduced. The ATF "hold" went away. So many of us called their jail that we shut down their switchboard. We got our guys out of jail, their vehicle out of impound, and I think we scared the willies out of the sheriff.

Think about how useful that would be next time you get pulled over. Or thrown into a death camp. Think very seriously about getting involved in some of these networks, and adding Twitter or Facebook to your mobile phone.

The Golden Economy newsletter promises to explain terms like The Golden Economy, identify business opportunities, explore new networks and new payment protocols, develop opportunities for you to have fun, meet people with similar interests, and, most of all, avoid the state. Avoid it where possible and counteract its effects as necessary.

The coming collapse of the dollar is very near. And the authoritarian response is already obvious—the Homeland Security goofs think we're domestic terrorists if we supported Ron Paul in the last presidential race, or have a Gadsden flag on our bumpers. And they are going to get worse, more paranoid, more freaked out, as the panic whips into a frenzy.

But remember that the Chinese ideogram for crisis is the combination of the characters for "danger" and "opportunity." We'll never have a better opportunity to implement systems to be fully free. And we'll never have a greater risk of being butchered in a death camp and roasted in an oven.

As TE Lawrence said before he set off across the Empty Quarter with 50 men to attack thousands of Turks garrisoned at Aqaba, "It's going to be fun!"

Jim Davidson was surprised to learn that he is executive producer on two film projects including Destination Resorts in Orbit, a documentary, and Alongside Night, a feature film. He is working on new networks and new business opportunities, like any serial entrepreneur. You can keep up with him on some lists and networks, especially and


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