The Crash Course - Chris Martenson [54]
Inflation has the effect of reducing the real value of public debts; it makes them smaller by making the money in which they’re denominated worth less. Inflating debt away represents a stealthy form of default, but one which avoids a declaration of a formal breach of contract. Of course, to inflate away debt, the government must have control of the printing press, something impossible in the individual Eurozone countries that are united under the single currency of the euro.
Historically, defaulting nations have typically either been the financially weaker developing countries or nations that have proven to be credit risks in the past. Between 1800 and 2008, there have been 250 cases of external bond defaults and only 68 cases of internal default.2 So defaults have happened in the past, but in today’s globalized economy, food and energy security often lie outside a nation’s borders, greatly complicating the situation.
Today there are a number of countries that could not possibly support their populations without a steady supply of imports, which changes the dynamic considerably. For these reasons and a number of others, the safest bet is on printing, with defaults and “paying it back” taking (very) distant second and third positions, respectively.
To draw once again from Rogoff and Reinhart’s remarkable 800-year romp through history, we can observe periodic episodes of sovereign defaults against an almost constant backdrop of inflation. What is stunning is that every country in both Asia and Europe experienced an extended period of history with inflation over 20 percent between the years 1500 and 1800, and most experienced a significant number of years with inflation over 40 percent. However, deflations tended to follow each inflationary episode, so after all the ups and downs, prices tended to center around the same levels over the centuries.
In the period from 1800 to 2006, Rogoff and Reinhart note that inflation was ever more frequent and attained higher levels, thanks to the ease offered by modern printing presses. Prior to 1900, their data shows that the world cycled between inflation and deflation on very short cycles of around 10 years, again keeping price levels roughly in check around a median value. But since the last deflationary episode in the 1930s, the world spent the next 80 years in one long, sustained inflationary episode, with no downdrafts to moderate prices.
It is also true that since the 1930s, oil has yielded nearly all of its energy bonanza to humanity, and only in 1971 did fiat money lose its final tether to the firmament of earth when President Nixon cut the dollar’s tie to gold.1 These aren’t unrelated events. The particular style of debt-based money on which we operate requires the very sort of continuous expansion that petroleum offers, while spending massively beyond one’s means requires that no physical, tangible anchor exist to limit the spree. This means that this time it really is different, because the story now involves so much more than a relatively simple case of too much debt being held by a single country. This time the entire globe is involved and there are critical resource issues involved. Most of the world is now chained to and operating on a debt-based monetary system that requires perpetual exponential growth to operate. But that’s the big-picture conclusion; for now it serves our purposes to simply note that the safest bet is to predict that monetary printing, or its modern equivalent, lies in our collective