In the 7th Letter of On Money, we will learn the answer to an economic conundrum that is plaguing economists of 2021 as much as it did in 1921.
Namely, the connection between economic growth and money.
Maybe you have heard some economists claim that excessive money printing causes inflation, while others claim that the velocity of money causes inflation.
The latter thus claims inflation can’t happen today, because the velocity of money is at record lows today.
What both of them don’t understand is can be learned from this letter. Firstly, we must distinguish between “useful” and “idle” circulation of money.
Money circulates productively, when it is used to build new products, real estate and companies. While it circulates idly, when it is inherited or used to purchase shares from the stock market.
Idle circulation is not bad per se, it is only bad, when the idle circulation eats up the useful circulation as we see today.
In a healthy economy, price determines the velocity of money and the rate of production determines the price.
So if you want to increase the useful velocity of money, production of goods must be increased, until the point, when prices become so cheap that it becomes more desirable for people to invest their money in existing companies, rather than new enterprises. This is both the driver and regulator of economic growth in a healthy economy, where the number of money tokens is relatively stable.
But what happens in our money sick economy today?
By means of the virtual printing press we give massive amounts of new money signs to those people who usually use their money mostly in idle circulation, namely banks, big corporations etc.
By this Cantillion effect, we transfer purchasing power from the normal people, who usually buy goods and services, to those who buy shares and exiting real estate.
We thus artificially transfer money from useful into idle circulation and thus, seemingly the velocity of money goes down.
But by putting money into idle mode, we create the effect that prices of exiting houses and other assets, like stocks (think buybacks) inflate.
And the more money the central banks press into the market by means of QE and cheap credits, the faster and higher these existing asset prices rise.
Thus the asset prices outpace the rate of return on newly created goods and services.
This forces producers to increase their margins, think shrinkflation, low quality goods, exploitation of workers, environmental pollution.
Effectively the environmental disaster we see happening is largely not the fault of rampant, free market capitalism, but rather the consequence of the central planners at the FED, EZB and all the other central banks, happily creating money.
But the longer this goes on, the less potential there is for manufacturers to cut costs, so at some point, necessarily production must fall. This is what we saw in 2019.
Bizzarly, the Covid crisis saved producers, because it both artificially lowered production further and by means of government bailouts and handouts, increased their margins.
Nevertheless, producers will need to increase their price and/or reduce production the more money central banks blow into the financial sector.
And when this happens, at some point all the dams break and suddenly the money that has been idling in the financial sector, rushes into the economy and creates hyperinflation.
It’s nearly impossible, to predict when such a tipping point is reached, and it might well be that we are already past the point of no return, but what is certain is, that if monetary policy continues as is, the Euro-Dollar system will go into hyperinflation.
And it will be far worse than that in Germany in 1923.
Because in Weimar Germany the world reserve asset was Gold. And today it is the dollar. This is an unprecedented situation in history.
Usually when the dominant currency collapses, people switch back to gold, but there is not gold currency to switch to and to make matters worse, the gold market is heavily manipulated by central banks and with paper gold.
So in my opinion -and this is not financial advice- our only way to rescue our purchasing power, is Bitcoin.
And with this grim prediction and the orange silver lining, to the reading…