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Dealing with Inflation

by on October 20, 2011

Inflation is very much on the minds of people today. With massive FED handouts to the banking system people fear prices will rise. Our current predicament is much worse, we’re suffering from stagflation, but inflation is an important part of that.

Like with all monetary matters, many half truths are presented as facts and downright lies as conventional wisdom. So let’s get to the bottom of inflation and see what a rational money system can do to prevent it.

Inflation is a growing money supply.

If the money supply grows faster than production, prices will rise.
But if the money supply grows slower than production, prices will fall.

Therefore we can immediately establish that inflation is not the same as rising prices.

An interesting fallacy which many people believe in, is that society at large can ‘inflate it’s way out of debt’. The idea is, that by letting prices rise through inflation the nominal value of the debts of society decrease.

However: in our ‘system’, all money is debt. So if the money supply grows, the debt grows. The value of the debt in real terms is stable: the amount of debt grows exactly as quickly as the nominal value decreases.
So although individual debtors stand to gain from rising prices, indebted society as a whole wins nor loses. The question who wins and loses, is answered by who is taking on the new debt.

The United States Government, for instance, could not ‘inflate its way out of debt’, because she would be taking on all the new debt (the inflating money supply) herself.

An important point is, that rising prices through inflation knows clear winners and losers.

The two main losers from inflation are creditors and savers. However, debtors win. The real value of their debts is declining when prices rise.

People who have zero net assets lose nor win when prices rise through inflation. The price of labor (wages) rises along with all other prices.

It is important to note that at this point the majority of Americans have zero net assets. These Americans are safe from the results of inflation (although not from the stagnation that comes along with stagflation).

Another point we should mention is, that when the money supply is inflated, those spending the money into circulation gain. Once the new money starts to circulate and prices rise, the same money will not buy as much as with the first transaction.

This is one of the strengths of Social Credit, a system where the Government prints debt free money and hands it out to populace to spend into circulation. Even if the Government inflates this money supply into oblivion, the population would be fully compensated because it would spend the money into circulation herself.

An important benign aspect of inflation and rising prices is that it spurs economic growth. A well known example is 16th century Europe, experiencing a long term boom because specie from South America was flooding the European markets, who had been chronically depressed as a result of scarce currency.
Another good example is the US in the 19th century, rising to World Supremacy during the inflation of the Continental and the Greenback, while Europe was depressed under a Gold Standard. And let’s not forget the post war boom, that was also a result of easy money combined with rising prices.

There are two reasons rising prices through inflation helps economic growth. In the first place businessmen see higher future profits, because prices are rising. They therefore are more eager to invest. Secondly, inflation is detrimental to those hoarding cash. They will spend, rather than hoard it, because tomorrow it will buy less. Therefore the velocity of money circulation increases, providing even more net liquidity to the economy as a whole.

Our experience with inflation, therefore, provides good anecdotal evidence of the proposition that money should be used as a means of exchange, and not as a store of value.

Inflation is most feared in it’s extreme form: hyperinflation. This happens when the money supply is inflated so fast, prices rise dramatically in a very short time span. Wiping out all savings. And thus wiping out the middle class.

This is destabilizing to society, because as long as the middle classes as contented, they won’t side with the poor against the plutocracy. But when they get disowned by their partners in maintaining the status quo, strange things can happen.

The most famous example of hyperinflation and it’s consequences is the 1923 Weimar inflation, which was one of the key ingredients of Hitler’s rise to power ten years later.
Nowadays we have Zimbabwe, where hyperinflation is so bad normal society has difficulty operating.

Hyperinflation will be the end of the remnants of the middle class in the US. Because the middle class is the class that hoards cash. The poor don’t, they have none to hoard, and billionaires don’t either. Insiders know when to get out of the paper assets and you don’t become a billionaire by saving, but through investment.

However, it is useful to observe that the middle class could easily protect itself from inflation. Just don’t hoard cash or other paper assets.

So we have established that inflation is dangerous when prices rise too fast. But we have also seen that far from all within society lose from inflation. In fact, ‘moderate’ inflation has historically accompanied long term economic growth, benefiting all.

However, a larger issue needs consideration in our time. More and more people are wondering whether the FED is trying to create inflation to spur economic growth, or hyperinflation to destroy the American Empire so it will accept the New World Order.

Another issue is, that many people believe the iniquities of inflation outweigh the benefits and they are looking for inflation free currencies. Many have a full reserve Gold backed currency in mind.

It is indeed becoming clearer day by day that the power to inflate the money supply in the hands of money masters with hidden agendas, other than serving the public by optimally managing the system is a very grave threat. Second only to the continuous massive drain through interest, manipulating the amount of currency in circulation, leading to booms and busts is quite a scourge.

The question is, is it possible to create a system that will make it impossible for the handlers to inflate or deflate the money supply?

Those proposing Gold say that only God can print Gold, so if we use that, we’d be guaranteed of a stable volume of money.

But is this really so?

A full reserve Gold banking industry would still be controlled by the same financiers.
Gold has been a highly strategic commodity for millennia. It is well known that powerful private parties have had a strong stake in this market for most of this time.
For a stable money supply the World’s populace should be absolutely certain where all of the Gold in the World is. Otherwise said parties could stash a substantial part of the Gold in their private vaults, flooding and freezing the Gold market at will.

This would seem a daunting task, considering the power of the Banking industry and its handlers.

GATA has made quite a reputation for itself in exposing the current manipulation of the Gold market. Proponents of Gold are looking to the Government to end this, but this is inconsistent, because most proponents of Gold have little confidence in Government. Indeed: allowing the Government such a stake in money creation seems sub optimal at best.

Does a free market for Gold exist? Is it impossible to manipulate the flow Gold? These are fairly serious questions that need to be addressed before we can accept that Gold will indeed provide a stable amount of currency in circulation.

Another notable  aspect is the fact that inflation hurts savers and creditors is one of those perverse side effects of traditional banking. They need savers for capitalization. In an interest free credit environment credit facilities would make all the credit available, without any reserves. No saving would be required.

A full reserve banking system would still need savers, exposing them to the risks of inflation.

So again: is it possible to devise a monetary system that guarantees the end of inflation?

Probably not. Every system must be controlled and theoretically the controllers will always be able to find ways to inflate the money supply.

The problem is, the public does not understand what is happening, and so let the handlers of the system get away with it.

The situation is exacerbated by the fact that money is controlled by extremely powerful institutions. It is almost impossible to hold them accountable.

But the fundamental problem is, that people don’t have a choice: currencies are monopolies, and that’s the heart of the matter. The idea that banks compete is tenuous at best (their behavior looks more like a cartel), but it is clear that consumers can only choose for one currency at this point. There is no free market for currency. As a result of this they cannot escape abusive currencies.

So to manage the risks of inflation, a three pronged approach is necessary.
1. The education of the public, so that they better understand what is causing inflation and who benefits. This has historically shown to be a daunting task in any subject, the monetary in particular.
2. The individual should protect himself from inflation by not hoarding cash or other paper assets.
3. Monetary systems should be decentralized. There should be more of them, regional currencies for instance. Those managing these systems will be much closer to the public they serve. They will have more to fear from retribution and they will care more for the people they serve and know. But also global internet currencies, who would be kept in check by stringent market forces. Smaller organizations have a better record of morally sustainable behavior.

When people have access to several currencies, they will desert the ones being excessively inflated.

We need to get rid of currency monopolies. Currency is far to important to centralize in the hands of the few. With a network of currencies, just like with the internet, society can continue to function when one ‘hub’ fails. In a marketplace with competing currencies, it would be far more transparent which currencies are effective, and which are not.

We will explore this crucial subject next time.

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  1. Inflation? Deflation? Stagflation? « Real Currencies

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