Inflation - How the Government Steals your Money
Stimulating the Economy Increases the Supply - so sneakily Decreases its Value
Savings kept their value, and house prices hadn't changed much. Why? The gold standard meant governments couldn't just print money whenever they wanted more. Since the paper currency used to carry a signed commitment - "I promise to pay the bearer on demand..." - the bank issuing the bank-notes had to keep enough gold and silver in its reserves to honor its promise.
The mission of the Federal Reserve, the US Central Bank, is to:
"Promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
The Decrease in Value of the Dollar Bills in Your Pocket
How successful has the Fed been in achieving its objectives? Employment is a disaster, interest rates nowhere near "moderate," and prices which reflect the disastrous decline in the value of the US dollar since the creation of the Fed in 1913.
A hundred years ago, a business man famously complained that he could no longer buy a decent five-cent cigar. Nowadays it's tough to buy a decent five-dollar cigar.
So, in the past century, each dollar bill - each piece of paper printed by the Central Bank - has lost around 99% of its purchasing power. No wonder governments regularly rebase the Consumer Price Inflation index, they try to obscure the evidence of their disastrous policies. Today's US dollar is now worth only one hundredth of its value, it only buys what one cent purchased a hundred years ago.
So, in the past century, each dollar bill - each piece of paper printed by the Central Bank - has lost around 99% of its purchasing power. No wonder governments regularly rebase the Consumer Price Inflation index, they try to obscure the evidence of their disastrous policies. Today's US dollar is now worth only one hundredth of its value, it only buys what one cent purchased a hundred years ago.
> The Two Types of Inflation
Governments try to hide their responsibility for the loss of purchasing power of the money in your pocket, because they don'l like clarity and the resultant calls to stop their destructive behavior. So they don't want you to understand the two entirely different types of inflation: specific price inflation and regular general inflation. The two are very different.
In a statement such as a widget is priced at ten dollars, two things affect the price of the widget:
But reductions in the value of the dollar - general inflation - are caused by increasing the money supply aka stimulating the economy aka quantitative easing aka monetizing the debt aka monetary stimulus aka printing money. You've seen these without a clear explanation of their serious consequences. Yet the Fed's increases in the supply of money is the largely unknown but delayed cause of generally rising prices.
In a statement such as a widget is priced at ten dollars, two things affect the price of the widget:
- the value of the widget and
- the value of the dollar
But reductions in the value of the dollar - general inflation - are caused by increasing the money supply aka stimulating the economy aka quantitative easing aka monetizing the debt aka monetary stimulus aka printing money. You've seen these without a clear explanation of their serious consequences. Yet the Fed's increases in the supply of money is the largely unknown but delayed cause of generally rising prices.
> Price Inflation
Price inflation - price variations for a specific item - are natural responses to the law of supply and demand. Assuming other things remain unchanged, if the supply is fixed, but the demand increases then its price goes up since there are now more buyers wanting the same goods. So hotel rooms cost more during school vacations. When the demand goes back down, so does its price.
If the supply is goes up, but the demand remains unchanged, then its price goes down, assuming other things are still equal. There are more sellers, more options, for each buyer. When the supply decreases, then prices go up. Strawberries out of season cost more than when they're abundant.
But natural price variations because of supply and demand are not general inflation which is caused by the central bank. The USA was on the gold standard for a hundred years in the nineteenth century. Although specific prices went up and down regularly, prices in general at the end of the century were no different to those at the beginning! A hundred years later, a dollar still purchased the same quantity of goods.
If the supply is goes up, but the demand remains unchanged, then its price goes down, assuming other things are still equal. There are more sellers, more options, for each buyer. When the supply decreases, then prices go up. Strawberries out of season cost more than when they're abundant.
But natural price variations because of supply and demand are not general inflation which is caused by the central bank. The USA was on the gold standard for a hundred years in the nineteenth century. Although specific prices went up and down regularly, prices in general at the end of the century were no different to those at the beginning! A hundred years later, a dollar still purchased the same quantity of goods.
> General Inflation
General Inflation - inflation - is a decrease of the purchasing power of your money. It's the decline in the value of the money in which prices are denominated, rather than the misleading fiction that prices increase. As the Financial Accounting Standards Board (FASB) used to explain, "inflation causes historical cost financial statements to show illusionary profits and mask erosion of capital."
"Mask erosion of capital" is an euphemism meaning that the purchasing power of the money in your pocket goes down. The government surreptitiously take your money by increasing the money supply which therefore increases the price of everything you buy. Yet they falsely pretend these general price increases are nothing to do with them - it's not their fault. But now you know better.
"Mask erosion of capital" is an euphemism meaning that the purchasing power of the money in your pocket goes down. The government surreptitiously take your money by increasing the money supply which therefore increases the price of everything you buy. Yet they falsely pretend these general price increases are nothing to do with them - it's not their fault. But now you know better.
> More about Money, Inflation and the Central Bank - video (4:56)
Deflation also comes in Two Flavors
Deflation is a general decline in prices, the opposite of inflation. Just as there are two types of inflation, deflation comes in two flavors. Bad deflation is a decrease in price with a lower level of demand and increased unemployment which can lead to an economic depression.
But benign good deflation is a period of generally lower prices combined with reasonable growth. Supply is good, productivity is moving up, more stuff is being made more cheaply which puts downward pressure on prices. With good deflation, economic output improves, people keep buying, and their money goes further.
The Fed only worries about bad deflation, it's unconcerned about good deflation because there hasn't been any - absolutely none - since it took control early in the twentieth century. Politicians don't like good deflation, it takes buying power away from them and restores it to the citizens who actually earned the money. Should you worry about deflation? No, Who's Afraid of a Little Deflation
concludes the economy is NOT inherently unstable and has no need of constant guidance by the Fed. There are effective policies proven to stop inflation dead [link now broken to www.freemarketfoundation.com/issues/feature-article-three-ways-to-stop-inflation-dead] because, although little understood, inflation is a form of theft [ink now broken to www.freemarketfoundation.com/issues/feature-article-inflation-is-a-form-of-theft.]> More about Good Deflation
There were many more periods of good deflation than bad deflation before the Federal Reserve came along, but essentially only periods of bad deflation since the Fed's inception early in the twentieth century.
Economists Atkeson and Kehoe (American Economic Review 2004) conclude:
For more on this crucial subject of deflation, there's a four minute segment starting at 17:20 in this interesting (but lengthy 40:57 mins) Ludwig von Mises Institute video by Doctor George Selgin, Professor of Economics at the University of Georgia. It's entitled: A Century of Failure, Why it's Time to Consider Replacing the Fed, and its sub-title is The Coming Currency Crisis and the Downfall of the Dollar. https://www.youtube.com/watch?feature=player_embedded&v=yLynuQebyUM
Economists Atkeson and Kehoe (American Economic Review 2004) conclude:
"A broad historical look finds many more periods of [good] deflation with reasonable growth than with depression, and many more periods of depression with inflation than with deflation."
So why do governments and central banks all fulminate against deflation? Could it be that they benefit from low interest rates when they print money through quantitative easing? Would their economic mismanagement be far more visible if their deficits were far larger as a result of higher interest rates?For more on this crucial subject of deflation, there's a four minute segment starting at 17:20 in this interesting (but lengthy 40:57 mins) Ludwig von Mises Institute video by Doctor George Selgin, Professor of Economics at the University of Georgia. It's entitled: A Century of Failure, Why it's Time to Consider Replacing the Fed, and its sub-title is The Coming Currency Crisis and the Downfall of the Dollar. https://www.youtube.com/watch?feature=player_embedded&v=yLynuQebyUM
The Decline in the Purchasing Power of your Money
British citizens have suffered even more than Americans over the past 100 years. Their politicians have been less financially responsible since the UK has no written Constitution to limit central government power. When the Federal Reserve was created, a British pound was worth US$4.87. In 2013 a pound is worth around US$1.60. So, over the last century, a British pound has lost three times more of its value than the US dollar due to inflation.
Inflation - general inflation - has led to the downfall of many a government starting with the Roman Empire. Government Central Banks all over the world surreptitiously take your money by decreasing the value of the currency, the notes in your pocket. Nowadays they increase the supply of money and misleadingly call this quantitative easing rather than the more honest term - printing money.
They say quantitative easing is to buy assets, government bonds to stimulate and grow the economy by spending more. But it also causes the value of the currency to decrease later, although not today. For real economic growth, the secret of success is to maximize the productive private sector. Without the freedom to keep more of what you earn, how can you become wealthy?
Note the number of zeroes - fourteen - 100,000,000,000,000 - in the top left corner of the blue Zimbabwe bank note. Its face value is one hundred trillion dollars! Zimbabwe's inflation took a few short years, a lot faster than the US government's. But every government's "monetary stimulus" and "quantitative easing" are slowly having exactly the same effect. Check with anyone on a fixed income - it purchases less and less each year.
Inflation is a slippery slope to hell. Although there are 39 countries listed at wikipedia, the older hyper-inflations are forgotten. So ask the people who experienced Zimbabwe's recent hyper-inflation. France has forgotten theirs in 1795, but Germany remembers the horrors of their hyper-inflation early in the twentieth century, that's why they refuse to print more money and so reduce its value.
With quantitative easing, your government is doing exactly the same as Zimbabwe's government, although to a lesser degree. And it has the same effect also to a lesser degree. Zimbabwe's hyper-inflation is the most severe outcome of such egregious government failure.
Inflation is a slippery slope to hell. Although there are 39 countries listed at wikipedia, the older hyper-inflations are forgotten. So ask the people who experienced Zimbabwe's recent hyper-inflation. France has forgotten theirs in 1795, but Germany remembers the horrors of their hyper-inflation early in the twentieth century, that's why they refuse to print more money and so reduce its value.
With quantitative easing, your government is doing exactly the same as Zimbabwe's government, although to a lesser degree. And it has the same effect also to a lesser degree. Zimbabwe's hyper-inflation is the most severe outcome of such egregious government failure.
Food for Thought
"Those that fail to learn from history, are doomed to repeat it."
Sir Winston Churchill, (1874-1965), British Prime Minister, author, historian, statesman
"Let us print the money instead ... quietly steal a certain amount from every pound saved in building societies, in national savings, from every person who has been thrifty."
Margaret Thatcher, first female British Prime Minister, rejecting the quantitative easing responsible for many of the country's economic woes
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