Ho, ho, ho… inflation by stealth

Keen observer Zero Hedge digs out this pearl:

The doubling of unemployment paychecks

By willingly opting for a fiat monetary system, governments commit themselves to inflation rates that are significantly higher than the rate of expansion of the economy. It cannot be otherwise. There is no alternative.

If that were not the case, then governments would opt for a monetary system based on some value that is directly related to the economy like gold for example. In a gold based monetary system, the monetary base can only be expanded by locating, extracting, conveying, refining and distributing more gold thus also feeding the economy in the process. A metal based monetary system can only be expanded by employing people and machinery and requires a certain amount of time. A fiat monetary system has no such material or temporal constraints. Therefore, by willingly adopting a fiat monetary system, governments admit by implication the desire to push inflation faster than economic expansion.

Inflation is peculiar in that it is a dynamic that is exponential and has a mathematical limit.

Exponential means that you always need greater degrees of inflation in order to effect the same result.

A mathematical limit means that at the point at which the revenue generated by the economy is no longer sufficient to cover debt service, no amount of further monetary expansion can induce an expansion in credit or sustain the velocity of money; i.e. the economy no longer expands.

There are of course various ways to induce inflation but towards the end of the inflationary cycle when the velocity of money is approaching 1 and credit markets are imploding, one of the ways that has been theorized about and discussed is the infamous “dropping money from helicopters” solution.

The rationale of dropping money from helicopters is that if you give cash to people, they will go out and spend it thus feeding the economy.

The helicopter solution is of course nothing of the sort as, indeed, isn’t giving money to failing companies. At best, giving money away to banks or individuals can postpone but cannot solve the problem. HOWEVER, the longer a government postpones the problem, the bigger the final crisis becomes.

So, if what Zero Hedge has noticed is an attempt at inducing inflation, there are two things to keep in mind. First, it is illegal on many levels including and most importantly from the point of view of ensuring fiduciary duty. If this should prove to be the case, an attempt at circumventing those parameters used by taxpayers and investors to judge the health of the state to make decisions that affect millions of members of society, that is down right criminal. Second, if giving cash away to individuals or companies could bring about economic prosperity, then why shouldn’t the government just abolish all companies and put everyone on a government salary?  In so doing, the gov could print and distribute as much cash as they wish in a virtuous perpetual motion monetary system.

Clearly you see the problem in just giving cash away to spur economic activity.

If proved true (and only time will tell when economists will pore over this crisis decades from now), this will be seen as the desperate attempt it is to sustain the unsustainable.

If this gambit should work, evidence will be seen in this one government metric in coming weeks:

http://research.stlouisfed.org/fred2/series/MULT

Once again. There is nothing wrong with inflation. It is necessary in a fiat monetary system. My beef is that sustained, aggressive, relentless and pervasive inflation induced artificially is ultimately devastating.

I think we have now entered the devastation phase.

Advertisements

Tags: , , , , , , , , , , , , , , , , , , , ,

3 Responses to “Ho, ho, ho… inflation by stealth”

  1. Inflation, deflation, fiat money, currencies… « Exeis Says:

    […] this essay and this one , I explain some ways that inflation can be induced in the system and why. […]

  2. Inflation, deflation, fiat money, currencies… « Guido’s temple of the absurd Says:

    […] this essay and this one , I explain some ways that inflation can be induced in the system and why. […]

  3. A Lost Decade for Jobs « Guido’s temple of the absurd Says:

    […] Lost Decade for Jobs By guidoamm As I remark in this post and in many other posts before it, the political choice to adopt a fiat monetary system implies the […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: