Inflation… Maybe

Published by John Bingaman on

Everyone knows that inflation is going to destroy the dollar.

Does that “everyone knows” phrase give you heartburn?  It does for me because when “everyone knows” something about the future, it’s usually wrong.  Positioning oneself for something that’s not going to occur is like getting on the wrong train.  You’re going somewhere, but not where you expected.

Let’s think about this expected inflation a little bit.  In RJ Rushdoony’s book “Larceny in the Heart,” he points out that most people want inflation because it makes their debts more affordable over time.  Borrowing money today that can be paid off in the future with dollars that are worth less is an attractive idea for the larcenous among us.  During inflation, borrowing is attractive to those who have a preference for consuming immediately as opposed to saving until payment in full can be made. 

The civil government inflates the supply of money by either direct creation of dollars or by regulations allowing the banks to create it.  Their immorality in this (they get to spend it before it filters into the economy and loses value) is matched by the approval of a society that allows it.  Isaiah described this:  Your silver has become dross, Your wine mixed with water. (Isa. 1:22)

Banks are allowed (encouraged) to create money through lending.  Though regulations change, for a long time banks were allowed to lend out your deposits, keeping only a 10% reserve.  Suppose you deposited $1,000; the bank was allowed to lend out $900 to someone else.  Just like that, $900 was “created” for someone else to spend. You still have “your” $1,000 in the bank and the borrower now has $900.  Once spent, that $900 is deposited in another bank which is allowed to lend out (create) $810.  And so on.  (Currently, there are no reserve requirements but that’s another story.)

With the government now borrowing and spending trillions of dollars that haven’t previously existed, we’re seeing inflation of the monetary supply like never before.  And this is where the “everyone knows” comes into play.  Everyone knows that this is going to continue.  After all, what’s to stop them?  They’ve been doing it for years; now it’s just more.

But if inflation continues like this, wages will increase along with prices.  Drastic wage increases will allow borrowers to pay off loans to banks in fractions of the times expected – affecting bank profits negatively and allowing great numbers of people to get out from under the thumb of the bank.  Does that sound like something the government or their bank masters desire?  I don’t think so either.

The process works in reverse when loans are repaid.  Extinguishing a loan will contract the money supply until it’s loaned out again.  Consider, however, what happens in default situations where loans don’t get repaid by the borrower.  The money creation process not only works in reverse, it is multiplied.  If the bank will not be repaid then that entire amount is taken out of “reserves” to cover the loss and other loans must be called in until the reserve ratio is restored.  As the whole process unwinds we see the exact opposite of inflation, i.e. deflation.  And all of a sudden, debts are not easier to repay but harder to repay and loan defaults increase.  And depositors find it harder to get their deposits out because the reserves are gone.  [Interesting but frightening side note:  Your deposits at the bank have been legally defined as unsecured loans to the bank.  If they don’t repay you have no recourse.]

A deflationary scenario can spiral out of control very quickly with deposits being wiped out and bank holidays being declared.  This is what happened during the Great Depression when thousands of banks closed and never reopened.  They had loaned out much more than their deposits and when the loans failed they could not repay their depositors. 

Then there is collateral.  In the 1930s, the U.S. did not have great numbers of mortgages using homes as collateral – but now we do.  Guess who will own all those homes on which the loan cannot be paid?  The banks.  (Speculation is that when the banks own all that real estate with no prospects of selling it, your mortgage will be converted to a lease.)

The most likely trigger for deflation lies in the global derivatives market.  “Derivatives” are a system of interlocking guarantees of debt between banks, corporations, and insurance companies.  Their total is estimated to be in excess of 2 quadrillion dollars (!!) and has been described as a ticking “debt bomb.”  If a fraction of these debts were to default or the guarantees not be honored, the fallout would be a swift and massive deflation that would also affect retail banking and make most debts unpayable.  ATMs would not work.  Nor credit cards.  Nor checks.

Our society has abandoned fear of debt despite biblical admonitions against being borrowers (e.g. Deut 28:12-13 & 28:44).  We have abandoned sound monetary and banking practices in favor of fractional reserve and debt-based money (watered wine, fraudulent).  We have moved our focus from concern about future generations to a focus on ourselves and current consumption. 

Everyone knows that inflation is going to destroy the dollar.  There’s also a case that deflation is going to put everyone in the poorhouse.  Which will cause more pain to the citizenry and which will cause more pain to the banks and those in power?  Which is more likely?  Your call.

We live in a tumultuous time and need to be very careful about what we “know” about money.  Perhaps we’ll do a very good job of preparing for inflation – or – we might do an equally good job of preparing for deflation.  Maybe both will occur. 

But do we “know” what the government will do in response to either crisis?  Will they introduce an entirely new digital form of money?  Will they outlaw cash?  Will they nationalize farms and industry?  Such tyrannical acts have been previewed by actions taken over the last two years in response to the so-called pandemic. 

There is much to be concerned about, yet our preparation needs to be biblical – and what does that mean?  What should we do?  How do we be like the sons of Issachar, “who had understanding of the times, to know what Israel ought to do?” (1Chron 12:32)

I suggest we get our noses in the Bible and dig out the principles of fair and honest money and business.  Dig out the principles of limited government that bears the sword only to punish wrong-doers (as wrong-doing is defined in the Bible).  Examine the Word of God about how to educate our children.  All of those principles are written down in commands, in parable, and in example.  These need to be understood before they can be implemented, or re-implemented, in our society. 

Knowing that God’s justice will prevail gives us the motivation that we need.  Studying His Word gives us the “knowing” for our motivation. 

The Word is our Light and our Guide.

~John Bingaman, December 2021

Categories: Money