Currency notes as firewood?

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Ever wondered why the European Central Bank is so petrified about a resurgence of inflation? A picture is worth a thousand words …

Inflation 1923 – 24: A German woman feeding a stove with currency notes, which burn longer than the amount of firewood they can buy.

currency-notes.jpg

Source: Jim Sinclair’s Mineset

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3 comments to Currency notes as firewood?

  • Eric

    I wonder what they’re doing in Zimbabwe with all that “currency” Mugabe printed. It takes a lot of “money” to cope with 150,000% inflation…

  • Kirk C Valanis Ph.D.

    It is my understanding – please modify if necessary – that when an American company imports goods from China, it deposits in a Chinese bank a check in dollars for the price of the goods that it has purchased, say one million dollars, for the sake of argument. The said Chinese bank then deposits the said check in the Chinese Central Bank and gets paid for the amount of one million dollars, in Chinese Yuan.

    In an equivalent manner, the Federal Reserve buys Chinese Yuan from the Chinese Central Bank and makes these available to American importers of Chinese goods so that Chinese companies get paid in Yuan. The net result is the same.

    The net effect of the importation of said goods is that one million dollars worth of Yuan (seven and a half million or so) is injected into the Chinese economy, while the Chinese Central Bank acquires one million dollars in cash. In a balanced trade between China and the US, in time, Chinese companies would import one million dollars worth from the US and the process would be reversed leaving the Chinese Central bank with zero dollars and the Federal Reserve with zero Yuan. The two econonmies would work in tandem as if they were one economy.

    However, currently the US has a trade deficit of one trillion dollars or so with China, which means that seven and a half trillion of Yuan (or so) have been injected into the Chinese economy while the Chinese Central Bank still holds one trillion dollars in cash!

    The manner in which this trillion dollars was acquired by the US and the manner in which the equivalent seven and a half trillion Yuan is spent by the Chinese consumer and the way the Chinese Central Bank will spend its trillion dollars, leads to variety of important consequences.

    The number of permutations is immense. Some simple examples are useful. First, suppose China and the US were the only countries in the world economy. In the event that the manufacturing capacity of the US decreased and US services were not of interest to the Chinese, imports from the US would be reduced and the seven and a half trillion of Yuan would now be chasing fewer goods and services for the Chinese. This would cause an inflationary pressure on the Chinese economy. Simultaneously the purchasing value of the dollar would be reduced. Subsequent purchases from China would become more expensive and presuming that trade between the two countries is free, this would lead to inflation in the US as well. This is exactly what is happening in the US to day – even though the world consists of more than the US and China.

    However, the Chinese industry is not static. The presence of the extra seven and a half trillion Yuan has spured the Chinese industry forward to higher production and so inflationary pressures in China are reduced.

    The absorption of the excess liquidity in Yuan by an increase in industrial production, frees the Chinese Central Bank to spend its dollars in other ways such as the purchase of oil, metals and other commodities. So China benefits twice from its trade surplus.

    Of course had the US ‘earned’ its dollars through industrial production, US goods would be available to Chinese importers and the trade deficit would either not exist or be so at a reduced level. So this is a clear illustration of how the creation of money in the US by the means of printing process has helped to a significant extent the Chinese industrial expansion and given rise to the Chinese Miracle.

    This is true of other countries to a lesser or greater extent. It would not an exaggeration to say that the US, in the last fifty years, has underwritten the industrial expansion of the world, while seeing its own industry shrivel to a size that is a fraction of its old self. How this has been allowed to happen is a mystery – barring the obvious mindset of letting other people do the work for us.

    As the industrial capacity of the US declines, in absolute terms or relative to the world, look for an exponential decay in the value of the dollar. It will be a currency close to our hearth!!

  • Frank Wordick

    Thanks for this shocking visual trip into the past! And yes it does make the ECB actions more understandable.

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