Dan Denning

Don’t ask us why the Maestro showed up in our dream. He just did. So we took the opportunity to ask him a few questions. We’ve reconstructed the conversation as best we can.

“Maestro…you hardly look yourself. It looks like twenty years have dropped from your face. It must be liberating not to have to worry about inflation anymore.”

“What’s inflation?”

“Ah yes. About that. Why haven’t we seen it yet? You’ve seen massive fiscal stimulus plans the world over, a huge increase in the monetary base, and lower interest rates. But no inflation. Bond traders don’t seem especially worried either. They are not demanding higher interest rates because they fear future inflation. And gold? Well, it’s plodding along. But shouldn’t it be going much higher as the supply of fiat money explodes?”

“You’re thinking is so old fashioned. It’s true. Or at least it used to be true. In the days when we had a gold standard, it was a great defense against government monetary fraud (that’s what I used to call inflation, before I became a central banker).”

“Oh. What do you mean?”

“If each unit of paper currency in your hand is redeemable for gold, then each holder of paper units has the power to hold the government accountable for its fiscal and monetary policy. If the government prints too much money to pay for its spending programs, unit holders can redeem their paper for gold. This draws down the governments stores of real gold, forcing it to either reduce the supply of paper money, or lose all its gold.”

“Why would it worry about that if it could just print more paper?”

“Because paper is not money. And your trading partners will not accept your paper if it is not backed by either real money or the ability to collect taxes from your people.”

“I’m not sure I follow. Back up a bit for me.”

“Okay. Back when everyone was on a gold standard, before the Great Depression, international accounts were settled in gold. It wasn’t just citizens who could demand gold for their units. Nation states could do it to. Governments who ran up fiscal imbalances would see international holders of their currency redeem those paper units for real gold. This encouraged a kind of competition among nation states, or at least a kind of accountability. If you ran up deficits and borrowed a lot of money, gold flowed out to pay your creditors and to pay for your exports. Your inflationary monetary policy cost you your national inventory of gold and silver.”

“So what happened?”

“My you ask a lot of questions.”

“Hurry up. I think I have to wake up soon.”

“Well, under a gold standard, governments are forced to manage their monetary system for the benefit of their people. You get a stable price level because the value of the money is not fluctuating constantly with changes in the money supply. Governments want to avoid causing a run on their gold supply that would result from fiscal and monetary mismanagement.”
“Why did the world go off the gold standard if it was so good? What changed?”

“Lots of things. For example, with a gold standard, governments and people must live within their means. This is deeply unpopular with politicians, who must bribe populations with bright new shiny things to get elected. Gold makes it harder to bribe your people and win an election.”

“Okay. What else?”

“For whatever reason, perhaps because it is in their nature, governments like to take their people to war. It keeps them distracted from other problems, usually caused by the government. But war is expensive. To pay for a war you must increase taxes or borrow money. If you increase taxes (directly or indirectly) you risk alienating your population and causing a tax revolt (and sending a lot of economic activity underground, out of the view of the tax collectors). So you have to borrow. It’s the only way to greatly expand spending without raising taxes to punitive or socially disruptive levels.”

“Ah. I see. Under a gold standard, you couldn’t borrow excessively without causing a run on your nation’s gold. So…a gold standard was a natural constraint on a nation’s ability to make war.”

“Yes. That doesn’t mean nations didn’t go to war before there was a gold standard. It just means that if you had to pay for your war with real money, it made it an expensive proposition. And if it undermined the value of the currency your citizens held, they were unlikely to support you. In a monarchy or dictatorship, that doesn’t matter so much. But in a democracy, it matters a lot.”

“If what you’re saying is correct, Maestro, then there’d be a clear connection between the creation of fiat money which is not backed by gold at all, and war between nation states.”

“There might be. But you’re still thinking too small.”

“What do you mean?”

“It’s true that most nations suspended the gold standard upon entering World War I. This allowed them to run up ruinous debts to private bankers. They tried reinstating it, but then the Great Depression hit. And more than ever, governments needed the ability to print money to pay for domestic ‘wars’ on poverty and unemployment.”

“Right. And then World War Two-which was partly a consequence of the ruinous debt and reparations Germany could not repay-came along and you saw a huge explosion in government debt, this time mostly through bonds.”

“That’s right. Which brings us back to inflation today. When the government finances exploding debts through the issuance of new bonds, investors typically demand higher interest rates to compensate for the inflation that results from the increase in the money supply. But today, in a kind of conundrum, bond investors are not demanding higher interest rates.”

“Why not?”

“Who knows? For one, they don’t see inflation. They see falling prices that come with a collapse in global demand. But it could be that they fear the worldwide recession more than they fear inflation. The contraction in global trade and national GDPs has investors fleeing for the safety of bonds. This allows governments to print money and expand the monetary base with apparent impunity.”


“Yes. Why, there in Australia where you’re sleeping, the government is going to announce a budget in May which may include a $50 billion deficit. This is a country that had a surplus just a short time before.”

“That’s not as bad as my home country. In the U.S., the government is going to run a trillion dollar deficit this year. And it’s told everyone that number will double. But it doesn’t seem to have dented demand for U.S. bonds yet.”

“No, it hasn’t. And that’s because without a gold standard, governments don’t have to compete for capital as fiercely as they used to. They can all sell bonds to investors to finance deficits, provided the deficits aren’t too jaw-dropping and provided they can continue to collect taxes to pay interest on the debt. Plus, they’re colluding with one another to eliminate tax competition among countries, which gives them an even stronger grip on your wealth.”

“I’m with you Maestro. But I don’t see where this is going.”

“Let me show you. Governments can only raise direct taxes (income taxes) so much before it negatively affects the economy (and social cohesion), which in turns lead to falling tax revenues as real economic activity slows. So a sure sign of governments that are getting desperate for revenue is an increase in indirect taxes.”

“You mean like the alcopops tax here in Australia?”

“I’ve never heard of that. But if it’s a tax that the supplier of a good or service passes on to the consumer then yes, that’s exactly what I mean. It’s an efficient way for the government to raise revenue without looking like it’s being grubby, desperate, or just plain greedy. It can also claim the taxes are being raised to discourage socially undesirable behavior, but this is generally just a lie to disguise the need to raise revenues.”

“Ah. I see. You know the alcopops tax is illegal anyway, by the way. The government collected revenue on a tax using a law that hadn’t been properly been passed by the Parliament. How is that possible? What about the Rule of Law?”

“What about it?”

“Never mind. You need to finish your lecture before I wake up. When will inflation result from the large increase in the monetary base?”

“I have no idea, my boy. You see at its core, fiat money greatly accelerates the rate at which scarce resources are depleted. Land, labour, capital, and raw commodities are allocated based on a demand that isn’t sustainable. If you do that long enough-let’s say for the last seventy years or so-you get an entire global economy (and population) that exists because of the increase in credit. That’s the world we live in. And it’s all falling apart with the credit depression you’ve been writing about.”

“Wait a second Maestro. Are you saying that the scope and scale of this economic contraction is a lot greater than anyone expects because the fiat money system itself is failing?”

“You said it. Not me. But it does make sense to say that the last twenty years or so of building national economies around the growth of residential real estate and the finance sector has greatly hastened us to a day of reckoning, as your friend Bill Bonner might say. We will find out if all that investment made by banks is merely ‘temporarily impaired,’ or if it represents an enormous misallocation of our collective resources and has made us poorer for years to come.”

“So what should we do?”

“This is your dream. You decide.”

Dan Denning

April 16, 2009

Dan Denning

Dan Denning is the author of 2005's best-selling The Bull Hunter. A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia, and is a frequent contributor to The Daily Reckoning Australia.

  • http://www.whiskeyandgunpowder.com Gary Gibson

    I’d get aggressive about this if I were you, Shooters. Take a step toward securing your retirement income in an inflationary environment. Please do not wait till rampant inflation is all over the news. And speaking of aggressive action, a Shooter sends in this piece of advice:


    “Here’s an idea for you. Instead of just complaining about the expanding dole, why don’t we refuse to accept the benefits? Most of us scream (sometimes pretty loud) about Uncle Sam sticking his hand into our pocket for others, but how many of us refuse to accept the loot he snatched out of someone else’s? Who refuses Social Security payments or Medicaid once they’re eligible? All of a sudden, “I’ve been taxed,” turns into, “I paid into it!” Bah! A Ponzi is only a Ponzi, and what was paid in is gone — there’s no claim that justifies keeping it running ‘til some younger victim gets left with the bag.

    “And that principle is true of most government largesse. When we’re like a litter of puppies down there with our eyes closed pushing each other away from a teat, nothing’s going to change. We need to open our eyes, go through the dog door, and go feed ourselves in the streets. Remember the days when it was an embarrassment to be on the dole, and act like we remember. It really should be an embarrassment!

    “Maybe then when we scream it will sound like outrage, instead of like we didn’t like the division of spoils.”

    I like it! I get pretty damned sick of people accusing me of using the stuff paid for by the taxes I hate. So I try to avoid using them. I don’t even use streets and highways! I instead lurk in alleys and live just a few feet from the Whiskey Bar. If you tuned in yesterday, you already know how I feel about counting on the government for retirement money.

    A Shooter sends a plausible vision of the future:

    “Could not help commenting on Mr. Kunstler’s predictions for the demise of suburbia the flight of its inhabitants to small city centers/towns or rural areas. As we speak, the inhabitants don’t realize what is coming. If they were to be airlifted to the outskirts of Peshawar or Ulan Bator or Caracas they would truly see their future. The suburbs won’t be deserted and the majority of inhabitants won’t flee. No, they’ll stay put and transition to a rather austere and very different existence. Houses with their suburban “yards” will convert to walled mini-compounds with gardens and some sort of livestock, just as in suburban third world locales. As municipal or county agencies gradually curtail or withdraw services, neighborhood based councils will gin up voluntary services to replace them. Hey, it’s not all that bad! E verybody gets together on occasion and has a few home brews and breaks bread. You get to know your fellow citizens and you all will pitch in to survive, just like they do in other countries. Cheap, unregulated bus/van/jitney service will spring up, just like rural Jamaica, Brazil etc. You won’t be needing that car much; maybe you’ll even share a car on your block. You’ll come to find out that home raised eggs and chicken and rabbit and fresh vegetables with lots of garlic and onions really is better than expensive, highly processed supermarket “food,” not to mention the pleasures of home produced beer, wine and spirits. Did I forget the smell of home-baked bread wafting over the walls in the morning? You’ll convert that 2-car garage to living quarters for the family members that just can’t make it on their own. “Third world” living standards are coming to a suburb near you!

    “Thanks so much for having Mr. Kunstler on your site!”

    You’re certainly welcome! But not everyone agrees…


    “James Howard Kunstler needs to lay off the NASCAR-loving, tattooed country folks in IOUSA. We are the backbone of this place. We didn’t get caught up in the housing bubble, or stock bubble, or anything else. It is JHK and his left wing buddies who are the problem. I love W&G and would never stop my FREE subscription. However, if JHK keeps insulting me, I will just delete it when I see his name. I don’t care how good of a writer he is or how accurate he is, the backhanded insults aren’t worth it.”

    Sorry you feel insulted, Shooter, and thanks for speaking up. Actually, we in the Whiskey Room care very much about how good a writer Jim is as well as his impressive grasp on the confluence of debt, energy scarcity and impending collapse…but I take your point.

    Say! You could tell us what you really think about James Howard Kunstler and the Whiskey bartenders to our faces.

    We’re planning to have our own little Tea Party in Vancouver again this year…and this one is really special. It’s the Tenth Anniversary of Agora Financial’s flagship newsletter, la belle The Daily Reckoning. An entire Decade of Reckoning, Shooters! There will be a slew of Agora Financial editors and special guests…and, of course, your mainstay Whiskey editors.

    If you secure your spot now, you’ll get the early bird special: $300 off the regular admission price.

    Hope to see you there.

    Till tomorrow…

    Gary Gibson

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  • Nick Field

    This article is right on. The real impact of expansionary monetary policy is clear to see in the fall in the value of the dollar since the US left the gold standard, and the implied inflation rate vs gold rather than the CPI. You can see the current gold dollar price and real inflation rate at :




  • Cog

    Gold standard? How arcane. The supply of labor, resources and technology changes over time. The supply of gold essentially doesn’t. Tie us back to gold again and watch as global potential GDP becomes a figment of the imagination. Yes, turn the clock back, tie us to gold and watch as the world unifies under one currency that’s pegged to it, then watch as billions starve for lack of innovation and wealth creation as the few and fewer count their midas stash.

    Governmental policies may have screwed up, but you fellas need to evolve.

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