The gigantic sums of credit created out of nothing, causing a doubling and in some cases tripling of the money supplies of Western Governments, over the two-decade boom that we have just experienced, have consequences. Unless you were living at the bottom of the ocean, or on planet Zog for the last three years, the most obvious consequence is that this boom was unsustainable, as they all are. The bust has wreaked havoc across the developed world. The poorest members of society will be forced to pay for the errors of their political masters, and the richest members of society will benefit.
During the boom, our nominal prices were pretty stable, i.e. general price inflation was viewed by mainstream economists and the press to be under control. The reality was quite different. Great productivity gains in all sectors of the economy during this period should have been delivering up much more purchasing power for a given amount of money, i.e. lower prices. We saw this in the Industrial Revolution, and the Technological Revolution we are living through should be no different. Entrepreneurs have been mixing up the factors of production in better combinations to deliver up more goods and services with those same factors of production. These productivity gains have been squandered by an inflating money supply.
What some of us have known to be happening in the last two decades is now evident even to those with room temperature IQ. The productivity gains have slowed as the bust bites, and money inflation is now picking up a big head of steam.
We are told by our political masters that “a dose of rapid inflation will clear out the system in the least painful way.” How many times have you heard that said?
Even members of the Fed question this reasoning (albeit a minority). Take a look at this speech by Richard Fisher, the following section in particular:
As to the proposition that higher prices of financial assets will liberate those most in need, I wondered aloud if that were indeed true. We are already seeing the beginnings of speculative activity in stocks, bonds, buyouts and commodity markets. The rich and the quick are certainly able to exploit these circumstances to get richer. I have no problem with market operators making money; I did so myself in my previous life as a funds manager (before I took the vow of financial chastity and joined the Fed!). But I take no comfort, and see considerable risk, in conducting monetary policy that has the consequence of transferring income from the poor and the worker and the saver to the rich. Senior citizens and others who saved and played by the rules are earning nothing on their savings, while big debtors and too-big-to-fail oligopoly banks benefit from their subsidy. I know of no presidential administration or Congress, Republican or Democrat, that will tolerate, let alone advocate for, that dynamic for long, and I expressed my worry that this could come back to bite us and possibly threaten our independence.
I concur fully with these sentiments. Make no mistake here, policies of inflationism allow the governments of the world to unleash a vile pestilence on the poorest members of society, and the rich and nimble will profit from this. Like the man from the Fed, I blame no one for seeking to take opportunities to protect his or her savings and deploy them to take advantage of this situation, and I will do my best to make sure as little of my purchasing power is robbed from me as possible. We must remember that this policy destroys the purchasing power of people who need to live off their savings and who are on fixed or low incomes, largely pensioners and the poor.
The War on the Poor was not unleashed by the current crop of governments around the world, but by their predecessors. I suspect there are no politicians who will point out that what they are actually doing is a soft default. We must remember that the levels of inflation we are experiencing, and will continue to experience, constitute a sovereign default in all but name. It is an acknowledgement that we will never pay back the debt owed in the public and the private sector at real purchasing power terms, but we will do it in nominal terms by letting inflation extract wealth from the population at large. A hard default would cause turmoil, no doubt, as it has in Iceland, but the War on the Poor would stop and a reallocation of resources from the profligate and imprudent to the more prudent and wiser users of capital would take place. Iceland is well down this road, and they will prosper quicker as a result. Our experiment with inflation could be two decades long, just as long as the boom! We may well rue the day we did not opt to let our banks go bust.
Our politicians will tell us that there is no policy of inflation. They will say inflation results from the rise in foreign prices of commodities, the massive costs of imports, and trade unions pushing up wages. Inflation is always a monetary phenomenon, and the root of all control of the money supply goes right back to the government. They have a monopoly on the issue of currency, and power over the issue of credit via their control of the reserve ratio, and control of interest rates (the price of loanable funds).
A simple example will show why the government’s role is essential. If a Russian or Arab puts up the price of oil, as there is more demand and or they have constrained supply, the Englishman buying will pay more to the Russian and the Arab. Thus a wealth transfer is achieved from the Englishman, who now has less to spend on other things. His reduced demand for other goods means that no overall price inflation can occur. Inflation can only happen with regard to commodity price rises if the person buying the commodity is determined to continue spending on other goods at his previous rate, and is able to get more credit from his bank (i.e. more money).
Governments committed to inflationism are dishonest in what they do. I accept that a level of economic ignorance may well dominate the upper echelons of the governments of the world, and most politicians seem to be blissfully ignorant that what they are promoting is the mass extraction of wealth from the largest part of the voting population, to give to a minority. Even more baffling is that left wingers seem as happy with this as right wingers. Our job on this site is to try to make all aware that their policies will impoverish the weakest and most vulnerable, and weaken a recovery. If the War on the Poor is waged unwittingly, that will be small comfort to those affected.
Good article, never a truer word was said.
Yet the self-appointed voice of the poor are the Left, who want more of the same! If you don’t laugh you’ll cry.
I am not left or right, too poor to be concerned with the difference, which is essentially down to whether you want to be ruled by the guys with red ties or guys with blue ties, however, as this article states, the poor will suffer regardless of the red team or the blue teams political gymnastics.
How about this? If you have an economy based on 70% consumption, which was created by a mixture of right and left governments (remember labour? the people who were in for 13 years and actually had blue ties in their back pockets?) and that suddenly comes to an end, shouldnt it be known that this isnt something that is fixed by just getting the liberals to create a magic policy. No its called complete empire decline, and as a UK citizen, i want to see this country as strong as can be, but there is no way you can purchase imports from other countries without the means to pay for it.
Its not nice to say it, but it seems the average joe like me should either get some survival skills and be preapred to try and grow their own food or bury your head in the sand. I suppose its down to how much you care about your life.
I agree with the substance of pretty much everything you say, but can a war that has effectively been waged for decades, perhaps even centuries, really ever be described or be even suggested, as being fought in any way ‘unwittingly’?
You say, “I accept that a level of economic ignorance may well dominate the upper echelons of the governments of the world, and most politicians seem to be blissfully ignorant that what they are promoting is the mass extraction of wealth from the largest part of the voting population, to give to a minority”.
Well, in terms of political outcomes, it was actually ever thus. Indeed, I have long noted that irrespective of whether one considers the intentions and actions of politicians to be benign in intent or whether they be motivated by malign self interest alone, the actual outcome of their actions for most of us poor ‘punters’ is invariably deleterious. At best, it’s simply a matter of the degree of pain inflicted. In brief, whatever the motivation of my would be rulers, I, my family, friends and acquaintances lose. This is my basic understanding of the political process. This cannot, generation after generation, be simply a matter of the ruling ‘upper echelon’ sustaining a condition of perpetual blissful ignorance. Some thought, surely you must agree, has gone in to the process? It is actually quite difficult to plunder and rob people unwittingly. Generally, you need a plan, and the use of inflation is manifestly one such that has, in fact, been wheeled out time and time again by morally as well as financially bankrupt politicians.
As for the ‘Ah they mean well but they are mostly economically ignorant / illiterate…’ line of argument – that lost its power to charm me almost immediately upon my taking an interest in the subject. That the ‘upper echelons’ might not fully understand what they are doing should make them no less culpable for the consequences of their actions.
Further, even if one does assume a benign intent sitting upon a foundation of unrealised ignorance, one still has to wonder why the majority of our ‘lawmakers’ appear to support a particular solution (debasing the currency in this instance) that has not once provided the claimed ‘desired’ outcome in all of recorded history? One certainly doesn’t need a detailed economic education to work that out, one simply needs to ‘check previous for clues about likely results of currency debasement’. Thus why, assuming benign intent remember, do any of them think the outcome will be any different to previous this time around!!?? Do none of these ‘policy makers’ ever take note of any history lesson?
I confess it seems implausible to me that they do not, and as a result, ‘the other (malign, self interested and invested with the requisite power) hand’ in fact suggests itself as the more likely political reality.
Take account of the historically abysmal record of (seeming) government failure, and also assume a generally self interested intent on the part of our ruling ‘upper echelon’, and the words of one such as Albert J. Nock suddenly ring startlingly true:-
“The State did not originate in any form of social agreement, or with any disinterested view of promoting order and justice. Far otherwise. The State originated in conquest and confiscation, as a device for maintaining the stratification of society permanently into two classes – an owning and exploiting class, relatively small, and a propertyless dependent class. Such measures of order and justice as it established were incidental and ancillary to this purpose; it was not interested in any that did not serve this purpose; and it resisted the establishment of any that were contrary to it. No State known to history originated in any other manner, or for any other purpose than to enable the continuous economic exploitation of one class by another”.
At a stroke, the actual outcomes resulting from political activity make considerably more sense, as well as making them a good deal more predictable into the bargain!
Indeed, in respect of “..maintaining the stratification of society permanently into two classes…” the current lot, like the previous lot, and the lot before that etc, can only be considered to be doing, and to have done, an extraordinarily good job. A Government success story no less…who’d have thought it possible?
A war being fought unwittingly? Personally, I think not. Not in any way, shape or form.
Agreed, Mr Wraith. While it is certain that the majority of our MPs are economic illiterates, this should not disguise the fact that their actions are always guided by self-interest. How else can one explain the fact that despite a majority of British people answering on surveys support the UK withdrawal from the expensive and interfering European Union, 95% of MPs are in favour of remaining as part of it? EU non-jobs are very, very cushy.
Perhaps our beleaguered ex-Speaker, Michael Martin – a man whose economic ignorance is legend, was most honest about it in his alleged comment to a fellow MP.
“I didn’t come into politics not to take what’s owed to me”
I was making the same points the other day to a friend of mine who is a multi-millionaire property developer. He was assuring me that fuel price rises are inflationary. I was explaining that price rises are not inflationary – that the counterbalance is less demand for other things due to higher prices paid for the first. He couldn’t get it at all – and he’s a wealthy, successful man. I don’t know if people just aren’t very bright – or if they’re blinded by the media and soundbites of politics.
Strange to note that under the policy of inflation targeting, the higher the the productivity growth the faster the growth of money required to maintain low positive inflation, and therefore the greater distortion and robbery that ensues.
I hardly know what to wish for – the better we do, the more we are punished.
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