What is inflation?

Inflation means the increase in the supply of fiat currency caused by the central bank printing (counterfeiting) currency to buy bonds, thus reducing the yield (effective interest rate) and increasing the bond price. Reducing interest rates reduces the Capitalization Rates for assets that are financed by debt, mainly commercial income property. Reducing the CAP rate increases the Capitalized Property Value (CPV), thus hiding the insolvency of the central banking system. If CAP rates were to increase, then the CPV would decrease, thus triggering a technical default on the commercial mortgage loans that exceed their Loan to Value ratio limits. Lenders would be forced to “extend and pretend” that the mortgage was not in default, causing a chain reaction throughout the financial system. Lenders positioned themselves somewhere within the tranche chain through debt re-hypothecation and cannot meet their redemption obligations, causing a domino collapse. This is what happened in the 2008 crisis. The US Dodd/Frank legislation focused on the symptoms (increasing risk by reducing qualification for the borrower and the property), instead of the underlying cause (the inherit flaw in central banking with fiat currency).

Inflating the currency supply dilutes the purchasing power of the currency, thus increasing the prices. The real concern is the insolvency of the central banking system caused by the same mechanisms that caused the 2008 crisis. Central banks cannot afford to allow interest rates to float according to the free market demand, or else the system will collapse again due to deflation of asset values caused by rising interest rates.

When real money (backed by gold and silver) was replaced with fiat currency (backed by nothing), the “store of value” was lost. Currency is now merely “distilled work”. Printing fiat currency without the investment of productive work in the general economy is counterfeiting, which is theft. That’s why governments outlaw counterfeiting, except for themselves. Gods and governments hate competition.

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CAP Rate is determined by the cost and structure of financing

I wrote a short article about this over at LinkedIn. Click here.

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Fractional Reserve System versus Central Banking System

There is a world of difference between the “fractional reserve system” (FRS) and the “central banking system” (CBS).

FRS merely spreads out the money deposits in the form of loans, and the total sum of deposits plus debt never changes. FRS is a kind of “leverage” on the deposit of money that strongly depends on the debt not defaulting. A default causes a cascade effect, like breaking a link in a chain.

For example, depositing 100kg of gold coins into FRS will spread out those coins (assuming unlimited divisibility) across derivative debt instruments, but the total money in the system remains at 100kg. Only the “name tags” of who currently controls that real money will change.

Prices will change according to the supply and demand of products and services according to the real money supply. The real money supply grows slowly due to the intrinsic nature of real money. Gold and silver must be mined from the earth or salvaged from waste products, and then introduced into the economy by purchasing products or services. The real money supply gradually increases, which may increase pricing pressure, but can be offset by growing the economy with more competition.

More products and services offered in the economy will put downward pressure on prices, because there is a fixed amount of money to distribute across an increasing supply of product and services. Price reduction is *not* a recession; it is a response to an increase in supply and not necessarily a decrease in demand.

CBS, on the other hand, prints currency out of thin air to match new debt (bonds, mortgages, credit cards, signature lines of credit, etc.). Currency is not money. Currency is “distilled work”, which is why printing currency is the same as counterfeiting.

Printing currency (without a commensurate amount of “work” added to the economy) causes inflation of the currency supply relative to the wealth of society, which devalues the existing currency and causes price inflation. Redeeming debt will erase that currency from the supply, which revalues the surviving currency, causing price deflation. Price reduction in a CBS economy *is* indicative of a recession, and is a serious threat to the stability of the CBS, because CBS relies on the price inflation of collateral.

When FRS is corrupted with counterfeiting fiat currency from CBS, the perfect storm is ready for a cascading domino effect when large defaults happen. Defaults in CBS are inevitable, because of the need to print more currency to lend out to cover the interest on the prior round of printing. The interest compounds exponentially until default. Then the collateral is confiscated, which is the whole point of implementing CBS. It is an insidious form of wealth confiscation.

An interesting video about the NYSE halt and the related effect on the silver market:

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