A Lost Decade for Jobs

As I remark in this post and in many other posts before it, the political choice to adopt a fiat monetary system implies the desire and will to push inflation faster than underlying economic expansion.

However, it is not at all a foregone conclusion that politicians, bankers or society in general, are aware of the characteristics and ramifications of fiat money.

As an aside, it is a curious incongruity that in ostensibly “democratic” societies citizens are not asked their opinion as to what monetary system should be adopted by a nation. Monetary policy in Western democratic societies is in fact imposed by fiat if you pardon the pun.

Certainly, as attested by Mayer Amschel Rothschild when he said: “Permit me to issue and control the money of a nation, and I care not who makes its laws” some bankers do understand the power inherent in the authority to create money. The key word here is of course “create” i.e. by fiat. In other words, by adopting a fiat monetary system, politicians wittingly or not admit the intention to create money that has no relation to underlying economic activity.

Of course, a fiat monetary system does not have to be inflationary because politicians could choose to moderate money creation to mirror some sort of underlying value. Ironically however, imposing fiat money on a democratic society guarantees that inflation will be pushed to levels that are ultimately devastating.

Naturally any monetary system be it fiat or metal based can be gamed. History is replete with examples of monetary debasement. Even an economy based on barter can be debased. Nothing is full proof of course. What is different nonetheless, is that fiat money is much more subtle and far easier to manipulate thus affording degrees of leverage like no other monetary system can. But, the greater the leverage implied, the greater the corruption.

Inflation is a dynamic that is exponential in nature. This means that in order to obtain the same result, you always need greater degrees of inflation. When the political choice is made to push inflation in an attempt to foster economic expansion as measured by GDP, the exponential nature of inflation means that a progressively greater rate of inflation is required in order to obtain the same rate of GDP expansion. For example, in order to bring about GDP progression of, say, 3% annually, the first year you may only need 4% of inflation but you may need 15% inflation after 30 years.

That being the case, it should also be obvious that inflation has a mathematical limit. If that were not the case it would mean that we had discovered perpetual motion and I can assure you that nobody on planet earth is anywhere close to doing that.

Thus, once the political choice to adopt a fiat monetary system is made, then inflation is the inevitable and necessary consequence. Hence the reason that a hamburger and coke used to cost $0.50 in the 50s but it now costs $3.

If inflation is exponential in nature and it has a mathematical limit, then it follows that, specially in a democratic society, at some point along the inflationary dynamic, government has a vested interest to tolerate or disregard illegal activity particularly, but not exclusively, in the financial sphere of the economy. This is because any year-on-year decrease in inflation would kill GDP expansion.

One of the things that is very often missed by observers and professionals alike is that GDP expansion does not necessarily equate to expansion of wealth. This is particularly the case in an economy that is 70% service based as the US economy is. The question that needs an answer is: how much of that 70% is real wealth as opposed to monetary inflation?

If you then consider that the US economy constitutes about 40% of the entire world economy, along with the fact that the US$ is the world reserve currency, answering the question above should at the very least be a vital concern for politicians…

But is it?

If you can get your head around what I’ve just laid out, here is another bit of interesting information.

One of the more interesting characteristics of the inflationary dynamic is that it brings demand and production forward in time. That is, inflation allows you to accelerate the demand/production dynamic by allowing society to consume today what they would otherwise consume over a longer period of time.

Of course, by bringing forward demand and production, governments can accelerate the build out of industry thus fostering employment in a seemingly virtuous cycle.

But, and it is a big BUT, if inflation has a mathematical limit, it follows that at some point in time industrial capacity will be so large that pricing power will collapse.

At that point, no amount of inflation inducement can expand GDP

That is the point at which governments take it upon themselves to expand the economy by expanding the role and size of government.
But government is not a productive actor. Government has no wealth or income of its own. Therefore, the larger government becomes, the more money it has to extract from the economy for its own survival.

And that, is what deflationary depressions are made of. That’s when world wars become inevitable…

Now, take a good look at the first two graphs in this article.


War is right around the corner… I say by 2013 /2015 …

also implies that the effects of inflation diminish over time. If that were not the case, this would be the

It is not at all a foregone conclusion that politicians or bankers are aware of the characteristics and ramifications of a fiat monetary system.


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One Response to “A Lost Decade for Jobs”

  1. Fraud reporting « Guido’s temple of the absurd Says:

    […] By guidoamm As shown here, here, here and proven here with charts, and in many other posts on my blog, in a fiat monetary system, […]

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