Why inflation leads to concentration of profits in the finance sector

Democracy is the rule by the will of the majority. One of the characteristics of democracies is the decentralization of power so that the power of each entity can be checked and scrutinized by other entities thus no one entity can act unilaterally and independently.

The monetary system however, falls outside the democratic process and is imposed by government.This fact in and of itself is already an aberration as politicians are not at all well versed in economic theories and applications and, even if they were, political considerations would always trump economic considerations. Politicians are politicians because they want to lead a group of people. Therefore, politicians must inherently and by necessity be ideologues manipulators of information. They have no idea of the how and why the economy works or doesn’t work as the case may be and, if they did, populism would overcome any other consideration under penalty of losing the power to lead. The only thing politicians know is that they need money. Lots of it.

Also, not only does government retain the right to impose a monetary system but it also retains the right to manipulate interest rates.

In the West, in a gambit to keep up the appearance of satisfying democratic principles, governments have bestowed the authority to set interest rates and create the currency to an ostensibly independent “authority” that in the USA is the Federal Reserve.

Since 1913 in the USA and then in Europe from 1971 and then gradually around the world, governments have imposed on their societies a “fiat” monetary system.

Fiat money is a construct that has little grounding in reality. Unlike value based money, the creation of a given quantity of fiat money is a deliberate act. One would assume (hope) that this deliberate act would be grounded in economic conditions. However, empirical evidence shows that not to be the case.

Thus the combination of fiat money and democracy can only result in an accelerating inflationary trjectory leading to a final inflationary blow-off phase followed by deflation.


Inflation is not an equitable dynamic. At the outset, the result of inflationary policies will show up fairly evenly across sectors leading to gains in asset prices and wages for all. But as the inflationary dynamic progresses, inflation shows up more in some sectors than in others creating bubbles that eventually burst (tech bubble, housing, currencies…). In a fiat monetary context the usual remedy for a bursting bubble is to create more money (liquidity) thus pushing even greater degrees of inflation into the system.

As the inflationary dynamic develops and as bubbles burst along the way, inflation progressively shows up in fewer and fewer sectors until towards the end of the dynamic all nominal gains are concentrated exclusively in the financial sector.

You may wonder why.

Fiat money is a dynamic that is exponential in nature thus limited mathematically. The entity that benefits the most from inflation is the entity that receives the money first. Every subsequent user of the money benefits less and less from the use of fiat money. This is because every additional Dollar bill created devalues all previously created money.

In the USA, the Federal Reserve creates the bills and loans them the the Treasury. That’s right. The money is loaned at interest. Thus, the very instant that a Dollar bill crosses the threshold of the Federal Reserve on its way to the Treasury, it is devalued by and amount equal to the interest rate the Fed charges.

Thus, if someone rustled up all the money in circulation and returned it to the Fed, he/she would still be in debt to the Fed by an amount equal to the interest outstanding on the money that has been repaid….

…. can you spot the absurdity… ???

If we return all the money in circulation, we would still be in debt to the fabricator of the currency. However, having now returned all the money, there would be no money left in circulation with which to pay the interest owed…

This is where you would have to sell yourself to the fabricator of the currency and you better hope he’ll have you…

– If the American people (or any other people) ever allow the banks to control the issuance of their currency, first by inflation, and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property, until their children wake up homeless on the continent their fathers conquered. The issuing power of money should be taken from banks and restored to Congress and the people to whom it belongs. I sincerely believe that the banking institutions having the issuing power of money are more dangerous to liberty than standing armies.
(Thomas Jefferson)

– Permit me to issue and control the money of a nation, and I care not who makes its laws. (Mayer Amschel Rothschild)


Therefore, towards the end of the inflationary dynamic, all nominal gains are concentrated in the financial sector because it is the entity closest to the fabricator of the currency. Naturally not all in the financial sector profit equally, thus you have your Lehmans and your Washington Mutual sacrificials for example.









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