Some thoughts

This post last updated and expanded on Wednesday 28th July morning

I am on the road. More precisely, I am in Venice and only have sporadic access to internt.

I have a whole bunch to say about fu*%ing Venice and how it is a microcosm of a disfunctional nation that has driven the population to become, by necessity, a bunch of self serving opportunistic thieves… but that’ll have to be for another post.

More pertinent to this blog is what I have come across in the few days I’ve been in Italy.

What prompted this post is a tv program I stumbled across as I was flipping channels this morning. National broadcasting channel Rai 3 had a program dedicated to the disappearance of the middle class.

NB – This post is a first extemporaneous iteration of my thougth process. I will add and/or modify this post as and when I will have access to internet and as I think I can better refine my argument over the next few days.

The program in question started off by playing a tune by Umberto Melnati popular in 1939 Italy called: “Mille Lire al Mese” (One thousand liras a month). Predictably, the song is about an unemployed man that dispairs to find a job that could pay but 1000 liras a month so that he could not only settle his debts and take care of his wife but also have enough money to splurge on some luxuries.

Of course, 1000 liras today is the equivalent of 50 Euro cents which is not even enough to buy a lollypop… which is what this blog is all about.

In 1939 Italy found itself in the depths of the Great Depression (the depression arrived in Europe with some lag). At the time, Europe was still solidly on the gold standard and Fascism and militarism were running rampant in Germany and Italy. More precisely, Italy was still a monarchy in name but effectively under Mussolini’s dictatorship and engaged in empire building in north Africa which pretty much depleted the state’s coffers right at the dawn of WWII. So the depression did nothing to help the state raise funds for its military adventures nor, indeed, to quell rampant unemployment.

However, the point is not Italian history. The above is only a note to give some context.

The point is that today Italians, like Spaniards, Greeks, the Irish or Americans feel a loss of wealth with no options to make up what is lost. To be sure, the loss of wealth has been felt for some years but it is only recently that people have begun to find it increasingly difficult to compensate for the loss of wealth.

Traditionally,  wealth loss compensation strategies consisted in working towards an increase in income (i.e. promotion to higher pay grade or achieving a greater volume of sales or finding extra employment) or making use of credit for a progressively ever greater number of items and services or a combination of all the above.

But most people will have fogotten or do not realize what the original strategy for wealth loss compensation was; the original strategy incidentally, was a social event that fundamentally altered the structure of society. The original strategy was the second  salary: i.e. the working spouse.

This is where my argument may get somewhat hazy till I’ll find a way to clarify it.

If you follow this blog, you know my pet peeve is the monetary sytem. By opting for our particular monetary system (fiat), our governments have set us on a precise path of social and economic development that is predicated on inflation.

Thus, inflation is a deliberate tool of state. But… there is a but… most politicians either do not realize or do not want to admit that is the case.

Personally, in light of the fact that most people including professionals in the banking and finance industries do not know what the monetary system that has been imposed by our governments (unilaterally and arbitrarily I might add) is, I am inclined to believe that most politicians are thoroughly unaware of the environment they evolve in.

But I cannot excuse ignorance when someone deliberately chooses to become a “leader” of society as a politician is presumed to be.

So, just to dispell any doubts, I do think that our politicians are entirely to blame for the situation we find ourselves in today… even though, the current crop of politicians has truly been sold down the river by the politicians that were in charge when our respective countries at the behest of a banking cartel made the choice to go on a fiat monetary system.

So, the current crop of politicians are guilty, at the very least, of not informing themselves on the one instrument that enables them to enact their plans: the monetary system. At worst they are guilty of criminal negligence and dereliction of duty.

But I digress.

A fiat monetary system is predicated on inflation. But inflation is an inherently accelerating dynamic – i.e. you always need more inflation in order to obtain the same result. So that the result of inflation is the loss of purchasing power of the currency.

And that is precisely the point of inducing inflatioin into the monetary system.

Inflation is not a totally undesirable dynamic in and of itself. The degree of intellectual and material comfort we enjoy today globally is in large part due to the great leaps we have achieved in science and technology over the past seventy years. I just spent a few days at my uncle’s whom lives in Torino. He was born in 1924 and he still remembers how in 1934 as a ten year old boy everyone used to walk or cycle everywhere and how families still owned mules and horses for moving goods. Though Torino and the Piedmont region were relatively affluent  by Italian standards, wealth and certainly excess wealth was not prevalent amongst the population. Never has man witnessed such rapid evolution in such a short period of time in the history of the world. And inflation is to a large extent the one single dynamic that enabled this development.

You may ask how inflation can be responsible for scientific let alone social development.

Inflation erodes the purchasing power of the currency. Loss of purchasing power manifests itself in a rise in the general price level. So that whereas 1000 Liras a month would represent a fortune in 1939, today this sum does not even allow you to buy chewing gum.

So inflation makes money go a lot less further. Hence whereas a family could live on one salary up till the late 40s, as of the 50s families begin to require extra income in the form of a second salary. Right there, by forcing families to require a second salary, government has achieved an increase in employment (here you must remember that, unlike today, till the middle of the last century natality rates were worrysome). Not only has government successfully engineered higher employment but it has also fostered an increase in the velocity of circulation of the currency; just what the doctor ordered for the health of a fiat monetary system.

But as governments pursue aggressive inflationary policies, even a second salary may not be enough to make ends meet so that families gradually eat into their savings. Anyway, the thinking goes, why save money when inflation is eroding its purchasing power.

Eventually, as two salaries do not suffice to keep up with the Jones’ next door and savings have been depleted, individuals must progressively make use of debt for a  progressively wider swathe of goods and services.

In other words. Politicians are now all high-fiving and back-slapping each other because fiat money really appears to be that golden goose it promised to be…. and it appears to come at no material cost to government.

As outlined above, inflation is an accelerating dynamic so that the erosion of purchasing power is not linear in nature; rather it accelerates. By extension, as the loss of purchasing power of the currency accelerates, the general price level rises so economic activity accelerates fostering an expansion in the credit markets.

One of the characteristics of inflation is that it pulls forward in time the demand and therefore the productioin cycles. In other words, inflation induces economic actors to demand today what they would normally demand over a longer time frame. That is because as the general price level rises due to loss of purchasing power of the currency, economic actors prefer to deploy money rather than saving it. Thus economic activity expands, thus research and development expand, thus science and technology evolve, thus society evolves too. So development happens faster than it otherwise would in a value based monetary system.

So from that point of view inflation is not, as I said before, a totally undesirable dynamic.

But of course. From a mathematical point of view, inflation cannot be infinite. In other words, there is only a finite amount of purchasing power that can be eroded. Put another way, there is only some much money that can be borrowed because there is only so much economic activity that can be engaged in profitably.

And that is the great debate that occupies us today. That is today, the great economic debate revolves around the argument (some would say hope) of the main stream political/economic establishment that says that government can induce inflation at will and, indeed, is duty bound to do so. Hence our various bailouts and government spending programs of recent months. But, if like me, you believe inflation cannot be and is not infinite then you realize we have a problem on our hands. If I am right, the problem is rather more dramatic than your garden variety economic hicup.

Today is the 28th of July and I have made some minor changes to the above text. Also, in the past few days I learned that in 1960 the Italian Lira was nominated by a Financial Times poll as most stable currency in the world. Of course, 1960 was the tail end of the Dolce Vita. More proof if ever any were needed that when the main stream press catches on to a trend and waxex lyrical about it, said trend has usually run its course.

To be continued…

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One Response to “Some thoughts”

  1. ducati998 Says:

    guido,

    Agree except for one minor quibble.

    It is the lack of CAPITAL, not technology that impedes the advancement of living standards. Of course, inflation reduces capital, thus is a major impediment to wealth.

    jog on
    duc

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