The evil of inflation (Birthday ruminations II)

Debt based fiat money (DBFM) is predicated on inflation or, if you prefer, it is predicated on the devaluation of the currency. In other words, it is predicated on the liberal creation of currency and debt and, crucially, on the currency being spent rather than being saved. This is an important point to keep in mind as we go forward.

Of course, a currency can only be devalued so far. There is an absolute mathematical limit to debasing a currency. If that were not the case, then sovereigns could freely create any amount of debt and give every man, woman and child a state salary and we’d all be rich beyond our wildest dreams. But this is clearly impossible.

As the authorities opt for DBFM and impose the system upon society, the state has an obvious vested interest in keeping the system going as long as possible. Thus as the currency is gradually debased, the authorities must attempt to at least partially compensate for the mathematical certainty that DBFM loses efficiency over time. If the viability of DBFM rests on economic actors spending money as fast as possible, it follows that the state has a vested interest in enacting any legislation or instituting regulatory bodies or mandating the creation of entities whose sole purpose is to create new layers of expenditure. All in the name of keeping the currency circulating. This is because the viability of DBFM is predicated on economic actors spending the currency as fast as possible rather than saving it. This is, inter allia, also the reason why DBFM cannot contemplate gold as a viable financial instrument. Buying gold is the equivalent of saving which lowers the velocity of circulation of the currency spelling doom for DBFM, doom for the banks that sponsor the system hence doom for the state.

– Above, graphic representation of the efficiency of debt, ergo, the efficiency of the currency.

Graph: M1 Money Multiplier

– Above, graphic representation of the diminishing marginal utility of the currency in a DBFM system.

In the previous essay I pointed out how by promising to manage a pool of savings on behalf of the individual, the state not only has access to a source of cheap funding (it is in fact free funding) but by assuring the individual that their future financial requirements are taken care of, the state also ensures that the individual’s need to save for a rainy day is diminished thus inducing more spending in an attempt at keeping the velocity of circulation of the currency positive. Of course, the inherent dynamic of electoral politics greatly facilitates this process because politicians will promise great benefits to the electorate just to get elected. Anyway, even the longest serving politicians will not preside over an entire economic cycle so that it is no skin off their nose whatever they promise and whatever they may enact as policy because they won’t be around long enough to see what the long terms effect of their promises may result in.  But this is a subject for another time.

So the state has a vested interest in forcing economic actors to spend all money at all times and to make use of debt to make up the difference between what they want and what they can afford with their salaries. In this regard, the state mandates a constant and progressive reduction of interest rates. This seemingly innocuous policy in fact plays havoc with a myriad systems far and wide and, eventually, is the root cause of flaring prices in basic commodities of which more later.

Graph: 30-Year Treasury Constant Maturity Rate

– Above, graphic representation of long term interest rates. The trend clearly slopes from the top left to the bottom right. This is most certainly not a natural trend in a presumably capitalistic society free from government intervention. Draw your own conclusions.

So, now you are the de-facto industrial power but you are still reeling from the debt hang-over induced by your first attempt at using DBFM. It is 1939ish or thereabout and your administration seems powerless to lift society out of poverty and the masses are getting restless. What do you do? Why, you spoil for a fight of course.

So, you get your war, you put millions of people to work on infrastructure projects, on armaments and on secret weapons. At the same time you start creating gargantuan amounts of money and credit all with the excuse that a war is raging and “freedom must be protected”. As the single largest custodian of sovereign gold globally and having engaged in the greatest build out in the history of man till that point, you emerge from the war the single and only industrial power that has capacity left standing. This is the perfect set up. Now, after the war has devastated countries, lands and people you can release the flood of currency and debt you have piled up from 1913 under the guise of helping countries emerge from the devastation of war. But that is not all.

Here’s the stroke of genius.

You’ve opened the monetary flood gates upon the world but you know that the diminishing marginal utility of the currency will inevitably come back to bite you in the ass. You need to postpone that moment as far off in the future as possible. What do you do?

Well, for one you create the United Nations.

The United Nations a tool of inflation

I’m not going to spend much time on this subject. But here are some issues to ponder.

How many UN employees do you know that actually have any respect for the organization? How many of these same disgusted employees have willingly tendered their resignation? Ever wondered why the UN never refuses to disburse any sums for projects even in cases where fraud has been clearly and objectively established? Have you ever taken a look at the quality and quantity of perks UN employees enjoy during and after employment? Ever taken a look at the UN pension fund and UN pension entitlements? Ever wondered why when the UN moves into a situation the local black market immediately perks up? Finally, ever looked at the ratio of employees that have been fired from the UN in relation to total UN employee numbers?

The long and the short of it is that the UN is a tool of inflation. The role of the UN is to churn currency globally, churn it fast, churn it far and churn it wide. Ask no questions; just churn dosh. And, granted, the UN does too employ a number of idealists who actually believe they can change the world. I don’t mean to detract from their efforts. But the truth is that the UN is a behemoth that consumes staggering amounts of resources for which they have very little to show other than apparently being chronically underfunded (thought the pension fund and salary perks never run short).

Climate change former global warming (more convenient and all encompassing)

Here are Western governments ostensibly preoccupied by what is for all intents and purposes a theory that is more akin to the geo-centrism prevalent during the dark ages hell bent on saving the planet by, wait for it, instituting a trans-global entity to monitor carbon credits to be conveniently traded on an exchange sponsored by none other than Mr. H. B. Obama and Mr. A. Gore…. yes, he of An Inconvenient Truth… But that’s actually only a by the by.

The absurdity in the position of Western governments is that despite their stated intent to save the planet, they are also hell bent on maintaining inflation on a positive trajectory or, at the very least, making sure deflation does not happen (B. Bernanke speech to the National Economists Club, November 2002). The problem is that these are mutually exclusive positions.

Inflation conforms to the law of diminishing marginal utility so that you always need more inflation in order to obtain the same degree of GDP expansion. Accelerating inflation induces accelerating spending thus it pulls forward in time the demand and production cycles. This means that economic actors will consume today what they would otherwise consume over a longer period of time. Thus, accelerating spending puts stress on, for example, agricultural land and agricultural commodities. Accelerated spending puts pressure on renewable resources because by accelerating the consumption cycle the growth cycle may not be able to keep up. Finally, inflation puts undue pressure on energy resources for exactly the same reasons. So that oil wells that should reasonably be exploited at lower rates in order to ensure a more thorough extraction over a longer period of time must instead be exploited at higher rates thus leading to the abandonment of wells sooner than otherwise necessary which leads to an increase in prices. Rinse repeat.

So, now it’s the year 2000. You realize that the efficiency of this monetary system is once again hitting the buffers and you desperately need to find a way to keep the gig going either because you think you can actually find infinite ways to bail out the system or because you believe that buying time will actually achieve something. Or maybe you just know that now that DBFM has been forced down the throat of every single sovereign globally, there is no easy way to keep the system going short of some dramatic scorched earth solution … like a global currency for example…So what do you do? For one you just hammer interest rates to the lowest point in the history of mankind.  You then proceed to legally ring fence the sponsors of the monetary system (the banks) in an attempt to prevent their mathematical demise. You then pump the sponsors of the system full of cash that you either appropriate from the public or you down right create out of thin air. Then you go on a rampage creating untold trillions of Dollars that you use to buy your own sovereign debt either directly from the treasury or from your own primary dealers to the point where you become the single largest holder of your own country’s sovereign debt in blatant contradiction of the presumed floating exchange rate mechanism. All the while the real economy is starved of cash, unemployment rises, tax revenue collapses thus bringing about the failure of those social safety nets that were supposed to provide for the individual in his/her old age or when sick whilst, simultaneously, the banks you are so intent on saving are recycling their monetary gifts you so generously offered them into basic commodities just to protect their gift from the loss of purchasing power you are intentionally causing.

You do this aggressively, progressively and pervasively and soon enough you have on your hands a Greece, a Hungary, an Ireland and then a Tunisia, an Egypt and a Libya… and other to follow….

So, now you have a population that is well on its way to become destitute, unemployment is rising, debt levels are high and savings are low and the presumed social safety nets are failing. So now the people are angry, hungry and progressively homeless. The people are looking for somebody’s head. So what do you do? Are you going to give them the head of a Western politician or, gulp, that of a Western banker? What to do, what to do. Why, you spoil for a fight of course.

So this is the time to rev-up the blame machine the West is so good at operating. This is the point in time when the various fingers of blame that to date have been pointed in the general direction of countries and people you don’t like must be pointed more directly and more persistently at some country and people you don’t like.

That, in short, is the reason inflation is evil.

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5 Responses to “The evil of inflation (Birthday ruminations II)”

  1. As to why changing the monetary system should be a priority in altering the political landscape « Guido's temple of the absurd Says:

    […] The Evil of Inflation I highlight the relationship that exists between inflation and aberrant policies that lead to the […]

  2. guidoamm Says:

    I merely skipped 9/11 not to detract from the central theme of artificially induced inflation. For my part, I am not at all convinced 9/11 was not an inside job but that is not the point I wished to make. I have covered 9/11 in separate posts.

  3. Patrick Donnelly Says:

    Inflation means that trust is evil …..

    Inflation is not evil and neither is deflation. Deliberate policies to affect money supply need to be transparent and to we contrarians, it is, nest-ce pas?

    Partaking in statist folly is evil. Note Australia is possessed of high interest rates. Not following the inflationista agenda? More honest or just stupid?

    • guidoamm Says:

      Touche’ and good point. It is the policies of politicians that are evil.
      Regarding Australia I cannot comment in particular other than to say that I do agree with Steve Keen that the Ozzys too have been engaging in unholy monetary policies.
      Regarding commenting on you posts, I have not been insulted… I think… It’s just that I often don’t have comments and/or don’t feel your comments require a one.

  4. Patrick Donnelly Says:

    Good!

    Loving it!

    Keep it up. Sad you didn’t spot the Pearl Harbour in NY, though!!!

    Too radical for ya?

    Good to see that you woke up and put some of it together. Tough journey? Long way to go though.

    What about those who were clued in all along? Did they band together to ensure they got on the right side of all this? Warren Buffet? Mr Green of AIG?

    Geo Bush, any of them? Too radical, eh?

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