Understanding the sinking Titanic

I just sent out an email to my family after watching a video on Youtube.  Here’s what I sent them:

Hello Family,

I just saw a video that I want to share with you and help explain a little.

Here’s a video that does a good job of visualizing the amount of money that has been spent in the last year or less:

Keep in mind the money is either borrowed or it is printed. Most of it is printed, created out of thin air. This is inflation. Inflation is not higher prices, inflation is an increase in the money supply. Higher prices are the result of inflation. Inflation is not a natural phenomenon that just advances over time. It is a direct result of how much money is in circulation. The amount of money that has just been dumped into circulation will destroy the dollar.

Let me try an analogy: Dad’s pecan pie.
Let’s say Dad baked a pecan pie at Christmas time. Several of us had a piece, but we saved one big piece for Tony (*my brother-in-law in Iraq) in the freezer and Brittanny sent Tony a certificate that said “You are entitled to one piece of pecan pie” so that he can bring it back home with him and have his pie.

Now, let’s say that Brady got a hold of the certificate template and printed out a bunch of certificates and gave them to all his biking friends. Mom enlarged the font size of the certificate and printed several to give to other teachers at school. Bryan bribed his teachers with some more certificates, and even gave one to Nicole. And Dad printed out and gave each of his employees a certificate for one piece of pie as a Christmas bonus.

What happens when they all show up to claim their piece of pie? Well, that big piece of pie that belonged to Tony now has to be divided among all the certificates. So Tony’s piece is now maybe a single pecan, probably less. The piece that was put in the freezer for him magically shrunk.

That is what is happening with the dollar. A dollar originally represented 1 UNIT of value. What happens when more money is printed? Does the total amount of value in America increase? Does the total amount of pie increase when Brady prints a certificate? No. What the dollar represents decreases. If twice as much money is printed, then 1 dollar would = 1/2 UNIT of value. If 4x as much, then 1/4, etc. That is why a dollar put in a savings jar in 1913 is worth only $0.05!

Inflation has generally been gradual, but the system is reaching it’s end and politicians are panicking. Remember the video you just watched? That ridiculous amount of money that is being spent is being printed. They are increasing the supply of money in circulation at an uncontrollable level. It takes time for the effect of inflation to raise prices, but because these bailouts were not gradual, when the effect hits, it will be hard and fast, especially for anyone who does not receive the new money but is relying on “old” money being saved. It’s probably 12-18 months out.

The other option for Tony would have been to send him the piece of pie directly. No certificate, just the actual pie. That way it would be his and no amount of certificates could change his piece of the pie. His piece of pie would not grow bigger, it would remain the same, even if what his certificate represented decreased in value. That’s the way gold and other hard assets work. Investing in gold is not because gold will increase in value, but because it will retain it’s value while the certificates (dollars) will lose their value. (And if 1 oz of gold had been put in a jar in 1913, it would be worth 1 oz of gold today).*

Here is Ron Paul talking about inflation:

in a little more detail:

And here is Glenn Beck talking about it last October:

*No analogy is perfect. And I do not mean to imply that the dollar/certificate actually represents gold, because it no longer even does that. It represents whatever faith people have in the currency. So no faith = no value. Uh-oh.

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