PREVENTING INFLATION

If an inflationary period can be foreseen, how can it be prevented? It can only be prevented (or ended once it has begun) by sucking out of the economy all the excess money that is causing the problem. This can be difficult at any time, but especially difficult in the circumstances the U.S. finds itself in now with the extremely rapid expansion of the money supply, and the rates of government spending and borrowing.
There are only a few ways to get money out of the economy once it has been issued. They all involve monetary and fiscal policies. On the monetary side, the Fed has to stop digging the hole. The printing presses have to stop excessive printing. Obviously, this tightens the money supply. Secondly, the Fed can use the banking system to take money out of circulation by increasing their reserve requirements. (It is the opinion of some that this is nearly all the "banking reform" that is currently needed. If you don't want banks to take big risks with their money, make them hold more of it in reserve.) To make it easier for banks to do this, the Fed will pay a higher rate of interest on money that the banks park with the Fed.
Higher interest rates will be a broad-based feature of inflation control. Higher rates take money out of the economy, and also serve to reduce demand for goods and services. Higher rates discourage individual and corporate borrowing. They result in higher rates of savings.
On the fiscal side, government spending has to decrease. Also, government borrowing has to decline. Finally, higher taxes will take money out of the economy. And with less disposable income, demand for goods and services declines.

So, what do you think the prospects are that the U.S. can avoid a period of inflation? As for monetary policy, these things can be done. As for the fiscal side of the coin, I think we can be sure that taxes will go up, but will government spending and borrowing be curtailed? Unless that happens, the likelihood of inflation is increased.

HERE COME THE P.I.G.S.!

About a month ago, I discussed the P.I.G.S. (Portugal, Ireland, Greece, and Spain) of the European Union, and the financial risk they posed for the E.U. At that time, it looked like Greece would be the first P.I.G.S. economy to tank, and it has. The E.U. "requires" that its members hold no more than 3% of its GDP in debt. Greece now acknowledges debt of nearly 13%, which means that it probably is more like 17%.
The dilemma for the rest of the E.U. is what to do about it. Officially, the E.U. charter doesn't permit a bail-out. And officially, Greece isn't asking for one. . That doesn't mean there won't be one, but it is no sure thing. Yesterday, the US stock market was buoyed by the prospect, and today, as the bail-out became less certain, the market was down, but only slightly as of this writing.
The Euro has been sliding against the dollar for about 7 months. It remains to be seen what effect this will have in the currency market, whether or not there is a bail-out. Generally, the Euro is seen as the "anti-dollar". If the Euro weakens further, this will continue to strengthen the dollar and bring money into the U.S. bond market as investors seek refuge.
All this will be up to France and Germany to decide. The U.K. has never adopted the Euro, in part because of the viral nature of currency problems. Another reason is that when countries like the U.S. get in debt trouble, they can print more money and inflate their way out. This is not an option for any country using the Euro. And they can't print gold.
Of course the rest of the P.I.G.S. are still in trouble.

MODERN MONEY MELTDOWNS

The collapse of currencies is not a phenomenon which occurred only in ancient history. There are plenty of modern examples. I'll note a few.
We all remember seeing in our history books pictures of Germans taking wheelbarrows full of Weimar marks to the grocery store to buy a loaf of bread. The Weimar government owed so much in war reparations that they had to run their printing presses full-time to print enough money to pay it off. Germans saved "money" by burning marks in their stoves instead of coal.
Here's how the mark was valued in relation to one USD:
April, 1919: 12 marks
Nov, 1921 263 marks
Jan, 1923 17,000
Aug, 1923 4.621 Million
Oct, 1923 25.26 Billion

In 1932, Argentina had the world's 8th largest economy when its currency collapsed.

In 1994, Mexico's peso crashed.

In 1998, the Russian ruble was severely devalued.

Right now, the currency of Zimbabwe has no value due to hyperinflation (among other things).

Note to Obama, Geithner, and Bernanke: This is Peoria, not Port au Prince!

JOHN LAW AND FRENCH CURRENCY

John Law was a Scot. He was a brilliant economist and monetary theorist. But he was a Scot. Which, by definition, meant that he had a propensity for trouble-making. By the time he croaked, he was persona non grata in several European nations. He wound up in charge of the French money supply after Louis XIV croaked and France was deeply, almost hopelessly, in debt. There had been wars to finance, don't you see?
So, Law withdrew all coinage from circulation, and outlawed the export of gold and silver. In substitution, paper currency was issued which was backed by the coinage that contained precious metals and had actual value. Law thought that the French citizens would accept the new paper money, and for a while, they did. And Louis XV loved the stuff. It allowed him to retain all the gold and silver.
To keep the French economy humming right along, the king kept the printing presses running to ensure that everyone had enough cash in their pockets. Pretty soon, people noticed that it took a whole lot of the paper money to buy stuff, and they wanted their coins back. When the government declined these requests, the currency collapsed and John Law went to live in Italy.

Note to Obama, Geithner, and Bernanke: This is Peoria, not Paris.

MARCO POLO AND CHINESE CURRENCY

From 1271 to 1295, Marco Polo went around China and saw a bunch of things. Kublai Khan was running the place. (Coleridge tells us that Kublai decreed that a stately pleasure dome be built in Xanadu, but I think he made that up.) Anyway, among the strange things that MP saw was paper money that was being printed in vast quantities. He thought this was a brilliant idea, because it cost Kublai nothing to produce it. MP thought that printing paper money was akin to alchemy.
Later on, he saw the results of China's experiment with paper money. He observed thusly:
"Population and trade had greatly increased, but the emissions of paper notes were suffered to largely outrun both... All the beneficial effects of a currency that is allowed to expand with a growth of population and trade were now turned into those evil effects that flow from a currency emitted in excess of such growth. These effects were not slow to develop themselves... The best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion."

Note to Obama, Geithner, and Bernanke: This is Peoria, not Peking!

DOING AS THE ROMANS DID

Here's a little history for you as it relates to the debasement of currency and the collapse of economic empires:
The silver content of Roman coins was continually reduced.
In the beginning of the first century, it was essentially pure silver.
By A.D. 54: 94%
By A.D. 100: 85%
By 218: 43%
By 244 : 0.05%
At the collapse in 476: 0.02%. Nobody wanted it anymore.

Message to Obama, Geithner, and Bernanke: This is Peoria, not Pompeii!