06.11
I won’t say that inflation is misunderstood, because people generally understand what it is. But, it is perhaps the most underappreciated and misdiagnosed source of pain in the economic history of this country. If you think that’s hyperbole then let me prove my case. First off – just for the record – let’s clearly define what inflation is. Inflation is the phenomena of a currency losing it’s value by increasing it’s supply. It’s that simple. Sometimes we want to claim that inflation is currency losing it’s value over time. And, while it’s true that inflation does happen over time, it can also happen in a crash, with lightning speed. We, in America, have become accustomed to the idea that our currency loses more and more of it’s purchasing power over time. Each year we come to expect that it’s going to cost three to four percent more for the same good or service than it did the previous year. That’s what we call inflation. And we stop there. All of that is legitimate, but the problem is just arbitrarily stopping at that definition. Inflation reeks much more havoc on us than simply making milk go up twenty-five cents per year.
The most serious consequence of inflation is the effect it has on saving. Saving money is ridiculous when the currency is inflating at four percent a year. Think about this. Let’s say you have determined that you don’t want to have a mortgage. You really want to just own your house outright. How much do you need to save up to do that? Well, if you started saving in 1980 you would figure that you needed about $25,000. You figure that in order to save that much you need to put back about $2000 per year for ten years. Of course buying a house for so little seems silly now, but that’s what inflation does. It makes saving money useless. With a hard currency such as gold, silver, etc. people could just stuff a few coins under their pillow each month and have enough to support them when they got old. The idea of a “life savings” is just stupid now. Inflation makes long term saving futile.
So then, what’s a fella to do to beat inflation and save for retirement or old age? There’s only one real answer. Play the stock market. That’s the dirty little secret behind inflation. It forces people who have no business investing in the market to do just that. Let’s face it, most people just do not have time to monitor their IRA portfolios to make sure they are doing the right thing. That’s assuming they know what the right thing is to begin with. Mutual funds cropped up as a direct result of this. As inflation began to accelerate in late 70’s and ever since, more and more people realized instinctively that their only hope for developing a decent life savings was through the stock and bond market. Mutual funds were created to make it easy for people to hand over their money and then just forget it. “Let our brilliant fund manager take care of it for you.” The reason so many people lost their life savings and their IRA’s last year isn’t because of greed on wall street. It’s because the Federal Reserve’s easy credit policy over the last 30 years has created an inflationary moral hazard that forces people to take large risks with their money just to keep up.
These inherent, perpetual effects of inflation are chronicled well in Jorg Hulsmann’s book The Ethics of Money Production. He says:
It would be completely pointless in our day to hoard dollar or euro notes to prepare for retirement. A man in his thirties who plans to retire thirty years from today (2008) must calculate with a depreciation factor in the order of 3. That is, he needs to save three dollars today to have the purchasing power of one of these present-day dollars when he retires. And the estimated depreciation factor of 3 is rather on the low side! It follows that the rational saving strategy for him is to go into debt in order to buy assets the price of which will increase with the inflation. This is exactly what happens today in most western countries. As soon as young people have a job and thus a halfway stable source of revenue, they take a mortgage to buy a house—whereas their great-grandfather might still have first accumulated savings for some thirty years and then bought his house with cash.
Things are not much better for those who have already accumulated some wealth. It is true that inflation does not force them into debt, but in any case it deprives them of the possibility of holding their savings in cash. Old people with a pension fund, widows, and the guardians of orphans must invest their money into the financial markets, lest its purchasing power evaporate under their noses. Thus they become dependent on intermediaries and on the vagaries of stock and bond pricing.
It is clear that this state of affairs is very beneficial for those who derive their living from the financial markets. Stockbrokers, bond dealers, banks, mortgage corporations, and other “players” have reason to be thankful for the constant decline of money’s purchasing power under fiat inflation.
Is it any wonder that the people who created the Federal Reserve were all bankers, predominantly from J.P. Morgan? They knew what they were doing and they did it well. Inflation ties people forever to banking and finance institutions as intermediaries for helping them overcome the un-relenting march of inflation. It works this way for businesses as well. Inflation punishes savers, but it rewards debtors. Think about it. If you take out a $5000 loan, inflation helps you to pay it off faster. That two-hundred extra dollars a month you struggled to come up with ten years ago might be what it costs you simply for a night out with dinner and a movie today. The impact of debt diminishes over time. This entices businesses to be too casual with their debt load and thus results in moral hazard. But again, it’s not too hard to see why those Morgan men who met on Jekyl Island in 1913 to create the Fed in secret did what they did. They were ensuring themselves customers for life.
The effects of inflation aren’t just purely financial though. Inflation is the main engine for government growth. Obama is a living example of that on a daily basis. When the government can print it’s own money, it can grow as big as it wants to. There’s no way around that fact. Again, I defer to Hulsmann:
Inflation spurs the growth of central governments. It allows these governments to grow larger than they could become in a free society. And it allows them to monopolize governmental functions to an extent that would not occur under a natural production of money. This comes at the expense of all forms of intermediate government, and of course at the expense of civil society at large. The inflation sponsored centralization of power turns the average citizen more and more into an isolated social atom. All of his social bonds are controlled by the central state, which also provides most of the services that formerly were provided by other social entities such as family and local government. At the same time, the central direction of the state apparatus is removed from the daily life of its wards.
Just look at American history. When Thomas Jefferson made the Louisiana Purchase he was roundly criticized by many for such an outlandish purchase. The sum of fifteen million dollars was twice the Federal budget. And yet, a mere 20 decades later, the annual Federal budget is 3.5 trillion dollars. When you graph it out though, you see that it wasn’t until the creation of the Federal Reserve that the Federal government had the fuel it needed to start ballooning out of control. Things such as the welfare state and medicare could never have been sustained before the Fed inherited the power of the printing press. Before 1913, the national debt barely registered and the Federal government was tiny, having total receipts to the treasury totalling just 588 million in 1901. But within 7 years after the Fed was created the budget was 6.6 billion. Inflation is the fuel of big government.
The last major consequence to look at, but by no means the only other one, is war. Inflation makes long, brutal war possible. Even in the time of the War of Northern Agression, Lincoln found it necessary to create a central bank to fund the war footing in the North:
…on February 25, 1862, the Legal Tender Act empowered the Secretary of the Treasury to issue paper money (“greenbacks”) that were not immediately redeemable in gold or silver. The National Currency Acts of 1863 and 1864 created a system of nationally chartered banks that could issue bank notes supplied to them by the new Comptroller of the Currency, and a 10 percent tax was placed on state bank notes to drive them out of business and establish a federal monetary monopoly. The government’s paper money flooded the banks so that by July 1864 greenback dollars were worth a mere 35 cents in gold.
The South, having no such system in place, and promising redeemability, had to keep extending the redeem period as the war dragged on. The Confederate currency defaulted to a fiat state at that point and it was devalued rapidly in hyperinflation. Before the Fed’s rampant inflation in the 20th century, war was devastating to an economy. Governments that could manage to fund a long, large war campaign were left in financial ruin by it’s end. Yet the twentieth century would see America fight the largest war in human history, WWII, and then turn around and within five years go right back to full war with North Korea in 1951. This would have never been possible without a money printing, inflationary system to back it up.
Critical listening on this subject:
The Cultural and Spiritual Legacy of Fiat Inflation:
Download
Jaguar Inflation:
Download
