Topic: Economics
The Destructive Art of Inflation It should be obvious that the government, without reservation, will always abuse the powers of inflationary fiat creation and in turn it will always be forced to intervene because of the economic consequences of such inflationary policies.by Republicae
(libertarian)
Friday, October 31, 2008
Inflation is a peculiar thing particularly since it is not necessarily innately built into an economy. Continual inflation is an act of intervention into normal monetary mechanics, unlike supply/demand inflation; continual inflation is implemented by a very narrow operation of expanding monetary creation, particularly that of the fiat monetary supply.
It has been relatively easy for this government and the Federal Reserve to hide the inflationary monetary policies from the public for decades behind the idea that it is simply a supply and demand issue increasing the price of goods and services in this country, but that ruse is rapidly coming to an end as more of the population is becoming educated to the actual causes of our continual inflationary push. Of course, there are other factors that can be manipulated to contribute to the ruse of inflation, such as the rising costs associated with raw materials and labor.
Since 1971, we have seen a continual rise in prices; year after year there has been a depreciation of the purchasing power of our dollar. Part of the ruse is that there appears to be much more money floating around, and indeed there is along with more people earning more dollars each year and thus there appears to be a great deal more wealth in our country. The problem of course is not the number of dollars within an economy, but the actual purchasing power of each dollar that determines wealth.
Under the Federal Reserve Act of 1913, one of the primary objectives listed in that Act is price stability, but what really is price stability and who can appropriately determine a stable level of price. As we have seen, repeatedly, the FED attempts to determine price through its policies by seeking to balance economic growth on a razor's edge; it is an impossible feat as we have seen over the years. So, what is price anyway? In a free-market price is really determined by equilibrium between those who produce the goods and those who consume the goods. In other words, the market sets the price of goods and services under a free and unencumbered market economy; the same is true of interest rates in a free market economy.
There are extremely crucial elements within free market economies, which cannot be duplicated although they can be distorted. Not only are there numerous variables within a free-market economy, but also there are numerous variables of variables that simply cannot be adequately determined, measured or predicted. In terms of pricing, one thing in particular either compels or restrains price and that is the purchasing power of each dollar within economic circulation at any given moment.
This is particularly true in a fiat monetary economy since continual inflationary pressures brought about by government or central banking intervention into monetary mechanics always plague such systems. Thus, if we were to take an overall view of pricing throughout the entire economy under a fiat monetary system, we would see a direct correlation between the total monetary stock within that economy and how pricing if effected by that supply. Since the Federal Reserve has a very limited pallet from which to work, the primary tool that it has used over the last decade has been monetary expansion. It appears that in the collective mind of the FED that it believes that a continual increase in pricing is essential for economic growth and thus it appears that inflationary pricing is the same, in their collective mind, as stable pricing.
As we have seen through the years, this government and the FED cannot bear the thought of price declines and will do everything they can to assure that there is absolutely little or no deflationary pressure within the economy. This however, is a very dangerous road to travel upon, as we have seen of late. Eventually, when the artificially created booms begin to deflation the FED must resort to extraordinary measures, once again, as we have seen in this latest fiat fiasco.
It is essential to understand that under normal circumstances, within a free-market economy, prices are determined as a reciprocal quantity of the supply of goods and services then directly by the demand of consumers for those goods and services. As we have seen within our economy, there is an overwhelming supply of both goods and services, which, under normal free-market forces would mean a steady decline in pricing. In some instances, such as computers, we have seen a drop in pricing, that however appears to be the result of technology rather than an actual supply/demand issue. So, if there is such a huge supply of goods and services within an economy such as ours where is the inflationary push coming from? Obviously, it must be coming from the demand side and the primary source for all demand-side inflation is the increased supply of money and therefore the depreciated purchase value of each dollar in circulation.
Since we have determined that the source of our chronic inflation, particularly over the last 37 years, has been the steady increase in the monetary supply then it is important to understand who controls that supply. As we know, the FED controls the supply, has, over nearly four decades, increased that supply enormously, and has done so not necessarily due to a growing demand for money but as a political expediency to fuel a rapidly growing federal government and maintain its political agendas and policies on the domestic front and around the world.
We should understand that government has always sought to control money because with that control breeds a power that rivals any level of military might. When a government can control not only the creation of the money supply, but the means in which that money is distributed within the economy then there is a huge degree of power shifted away from the people and the markets. At one time, a man's money was his private property and an asset that was literally beyond the control of government and government hates any form of money beyond its reach or control. The more control over money the government can retain the more control over the people it can retain. Therefore, the government has always sought to bring about a complete control, a complete monopoly of money in order to finance what it considers its interests along with its interventionist adventures; but just as importantly, to maintain social control over the population of citizens.
Thus, as we know, our government has implemented a central banking system that is completely politically motivated in order to achieve this degree of control. In a very real sense, this great power has been placed into the hands of a rather small group of people that are in charge of the creation and control over the money that once belonged to the people. It should not be a surprise to anyone that there is a very good reason behind this fact; one is that under a fiat monetary system the government can easily avoid the need for over-taxation of the population to keep them placated. Another huge advantage of a fiat monetary system is that it can be easily manipulated to provide a vast illusion of wealth through the extension of debt.
An equal consideration is that under such a fiat monetary monopoly, the leadership of the country can easily create any amount of money needed for its own expansive functions, spending without much restraint and lending or giving it always to ensure the sometimes-precarious loyalty of the allies it attempts to buy favors. Of course, this was not nearly as easy under a sound monetary system that required much more responsibility and accountability. While gold and silver money proved to be the bane of the "ruling class", the printing press has proven to be its best friend. Once the dollar was defined as a measure of gold, today it is defined as a note of increasingly questionable value. So, the transformation of the dollar from a demand note representing an actual redeemable value of real money to a debt note was easily completed without much fanfare or public notice. It is truly an amazing fact just how complacent the people of this country have become, for once revolutions would have been fought to retain the monetary integrity of a country.
Instead of being restrained by common-sense budgets under a real sound monetary system, the government was now free to stamp its "seal of approval" on pieces of paper and call it money with virtually no real costs associated with its creation. While the consequences of such maneuvers are not immediately visible, eventually, due to the nature of fiat money and the gluttony of governments, the consequences of monetary depreciation will wreak havoc on all fronts including economic, social and political. This government will "print" as much money as it can possibly get away with until the consequences of its actions catch up to its irresponsible actions. Political expediency has trumped common-sense reality in this country for decades, but that too will end as the consequences of its actions become blatantly apparent under immense inflationary pressures.
Since money only performs its ideal utility at the pinnacle of its purchasing power and inflation is a process of depreciation, then there comes a point when people begin to realize that the utility of their money is no longer as functional as it once was at a previous time. As the government, through the agency of the Federal Reserve, increasingly depreciates the purchase value of each dollar through inflation of the money supply, people reach a point where they seek to convert their cash into other tangible assets as quick as possible to retain some degree of value. Additionally, there comes a time within the market itself that begins to demonstrate that the purchasing power of each dollar has been debased to the point that it is no longer a reliable measure of exchange. During the final stages of an inflationary push leading into a hyperinflationary event, there will be a rapid increase in the purchasing of goods due to the fact that more and more people will lose the confidence in the currency and seek to exchange it as fast as possible for some asset in which they feel a degree of security.
The monetary history of the last century has seen the systematic dismantling of all types of restraints that checked the power and scope of our government. With the advent of the Federal Reserve Act, the leash was removed from the government's neck and it was free to roam in just about any direction it deemed necessary in order to accomplish its goals and secure its interests. By 1933, the all-out assault on sound monetary policy had begun and the actual restraints of monetary inflation were eroded by gradually erasing the gold barrier from the fiat dollar and creating the impression that the paper Federal Reserve Note was the actual money instead of the gold that once backed those notes completely. By the 1960s the last vestiges of sound money were eliminated from the domestic monetary system and, of course, by 1971 all ties were successfully broken between gold and the U.S. Dollar. The actions taken in 1971 finally released the constricting bonds of gold on the fiat monetary system and thus ushered in an international push toward a relatively uniform fiat mechanism as the U.S. effectively declared it would no longer pay its foreign creditors and trading partners. Essentially, the U.S. Government once again reneged on its obligations in a similar fashion as it did under the Administration of FDR. So much for the "Full Faith and Credit of the United States"!
Though few seem to realize it, the fact is that there is a defined limitation upon the Fiat Monetary System and that limitation is based in the inflationary deterioration of the purchase value of the money itself. Even under a process of controlled monetary expansion, the government will always push such a system to the extreme limits of its efficiency. The degree of this limitation is easily measured by the level of degradation of the currency itself, from the peak of its purchasing power to the point where the money has been depreciated to such a low level of exchange that it no longer functions within an economic matrix. At that point, of course, the currency collapses and all that is dependent upon that currency collapses.
It should be obvious that the government, without reservation, will always abuse the powers of inflationary fiat creation and in turn it will always be forced to intervene because of the economic consequences of such inflationary policies.
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The views expressed in this
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Very good article. Very sound arguments. The basic premise is simple really, more currency with same amount of goods, inflation. The complications come about when trying to tie in a world where basically all nations are using the same faith based monetary policies, one dependent upon the other. I would think the results would eventually be the same, but for a time, it would seem like we could "purchase" the work of underdeveloped countries with the fiat funds to forestall serious inflation here. But, I would think that would just put off judgement time.
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