Dear CIGAs,

Money always starts in some form of contract between the holder and the Treasury of the issuing country.

We will call this contract money.

During these times politicians have no control over issuing paper beyond the contract limitation. In the case of the $20 Gold certificate and $2 Silver certificate, the Treasury has agreed to give to the holder a $20 gold coin or 2 silver dollars in exchange for the certificate.

This controls the amount of liquidity in the system and acts to maintain the currency buying power without dilution in the form of increased money printing.

When things are going well in business and the paper assets of the issuing country are in market demand, government in modern times want politicians or people appointed by politicians to run the amount of money in the economy, not being restricted by a contract between a treasury and the holder of a currency.

That is well and good for many years until increased amounts of speculation as a product of increased amounts of money in the system blows a bubble so big that the natural explosion of that bubble whips out the balance sheets of the players, banks and financial institutions.

Once it was a tulips bubble. Once it was the South Sea bubble, but this time it was different and more insidious.

Placing the horse in front of the cart, it was the creation of speculation money called OTC derivatives to a level that can only be described as COSMIC. The OTC derivative bubble exploded with a minor dip in the real estate market but then the OTC derivative collapsed on a modest recession in the real estate buying market. It was the collapsed OTC derivative that drove real estate and the credit markets into a total lock.

At this point non-contract money, which we will call CONFIDENCE-MONEY, begins to get shaky.

When general confidence is broken by a crash in the equity markets, or a market valuation of the currency in question, regardless of the depressed economy, hyperinflation occurs. Hyperinflation is a currency event described as a loss of confidence. It is not an economic event and does not occur in positive market environments or positive business conditions. This is a key point that the present students of markets haven’t a clue about.

This is called Confetti Money.

This has happened in America twice. The first was the collapse of the US Continental and the second was the collapse of the Confederate currency.

A close of the USDX below .72, which is certain to come, would be an event that would trigger a loss of confidence in the US dollar.

Loss of confidence in the US dollar could come in other ways such as the high expectations for the abilities of President Obama to be proven incorrect. The economic impact of the fall of Pakistan to the Taliban is another. There are many ways that confidence can be broken.

Every hyperinflation scenario has effectively stemmed from a result to some type of contract money.

You can see even Zimbabwe tried it where they tried to link their last printed money to agriculture by calling it an Agro but the name was nothing but hot air. The currency became totally worthless.

The Rentenmark was Contract Money of a sort, much like what will come when the US dollar fails.

This is where the Federal Reserve Gold Certificate Ratio, modernized and revitalized, plus the policies that have a precedent of returning deficits towards surplus enters with Volcker at the helm.

The US Dollar then will be Contract Money, of a sort.

Pray to God Volcker lives long enough.