What this country needs is a good 5% CPI

And this, from no other than the Wall Street Journal. Granted it is but the opinion of Mr. Brett Arends but he’s given space on the WSJ.

http://online.wsj.com/article/SB10001424052702304451504576394002810246540.html?mod=googlenews_wsj

Inflation cures a debt hangover. It may be the only known cure. The reason? The value of the debt stays the same in dollars, but there are more and more dollars to go around and pay the debt off.

Mr. Arends’ opinion is not surprising. This is exactly the rationale that has been inculcated into most main stream economists and politicians for the past 100 years so that it is unreasonable to expect anyone else to understand the problem inherent in this strategy. After all, despite empirical evidence to the contrary, to anyone unwilling to question the received wisdom,  inflation does appear  to have served us well for the past century.

Mr. Arends of course fails to realize or understand that inflation is limited mathematically. But even for those that understand the inherently limited nature of inflation few realize the darker side of this dynamic when it is used within the context of Debt Based Fiat Money.

Inflation can only be induced for as long as a currency can be debased. Debasement of the purchasing power of a currency cannot go below zero and that is your mathematical limit. Said limit was reached in 1929, in 1969 and again now. The only way debasement can be stretched out in time is if the currency in question can assimilate other markets and currencies thereby extending the time line to total debasement. Hence the Lend Lease Act of the late 30s, then the Marshall Plan and Bretton Woods, then the abrogation of Bretton Woods and the adoption of Floating Exchange Rates. At that point, the currencies of all major Western industrialized countries became de facto dollarized thereby extending the capacity of the US Dollar to be debased. Unable to assimilate any other markets of consequence such as the Chinese currency (yet), the last major effort to extend the life of the US Dollar was the creation of the Euro. The creation of the Euro induced an immediate devaluation of all European currencies of between 20% for Germany to 50% for Italy thereby affording the US Dollar some respite.

The other problem is that inflation conforms to the law of diminishing marginal utility. This means that as the dynamic evolves, you always need greater degrees of inflation in order to get the same result. This is evidenced by any number of metrics the most glaring of which is the Money Multiplier:

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The above metric evidences what happens when you induce inflation artificially, aggressively and persistently; each further  Dollar of debt gets you less and less bang for your buck. Hence the reason why since 1980 Federal Debt progressed from about US$1Trillion to currently US$14Trillion (that’s only Federal Debt not including personal and corporate debt… that’s a rise in excess of 1000%) whereas GDP barely doubled from US$6Trillion to currently US$14Trillion.
Naturally, one of the tangible results of unbridled inflation over long periods of time that everyone has felt but nobody can explain, is why and how a family could get by quite nicely on one salary till the 40s but then gradually not even two salaries have been sufficient to keep up with the Joneses and why debt has become such a prevalent feature of people’s lives.

That’s for the mechanics of inflation.

But inflation within the context of DBFM is a much more insidious and devastating dynamic and it is deliberate. This is where the vast majority of people are unable to venture intellectually hence believing inflation is as a panacea.

DBFM arbitrarily and unilaterally bestows the privilege to create the currency to an entity that is separate and protected from society. This entity is allowed to make a profit on something that has no cost of production but that society, under penalty of incarceration, must make use of and pay for AND must pledge to pay back fully. In other words, here is one single entity that stands apart from the entirety of society and that is allowed by decree to make 100% profit on something that costs nothing.

Thus, in the particular case of DBFM, inflation not only guarantees fabulous profits to the monetary authority and its cohorts, but it also guarantees that as the currency is debased, the productive capacity of society is gradually transferred to those entities that gravitate around the monetary authority. This is simple arithmetic. By dint of not having any capital, temporal or labor costs the monetary authority’s profit potential is unlimited. The more inflation is injected into the system, the greater the profits and the more productive capacity leaks out of society. On the other hand, society’s profit potential is limited not only by all input costs but also by virtue of the cost of money (interest rate) AND by the deliberate debasement of the currency on the part of the monetary authority. Thus society always needs greater amounts of currency units not only to expand production but also in order to pay for the use of all units of currency circulated prior. This of course leads us straight to the paradox of DBFM. That is; if someone decided to gather all the currency in circulation to return it to the monetary authority this individual, though noble this individual would still be out of pocket to the tune of the interest owed on the currency that was just returned. But having already returned the entirety of the currency in circulation there is no currency left with which to pay said interest.

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4 Responses to “What this country needs is a good 5% CPI”

  1. rogerglewis Says:

    Tim C, least culpable must be the general population They really have very little chance to get a handle on this stuff even if they venture out from the Media Saturation and Educational smoke screen. On Governments and Banks well thats Chicken and Egg but they are all in it together now a whole bunch of Turkeys busy worrying that we all cotton onto the idea that perhaps Christmas
    would be much better if we gave the lot of them the chop.

  2. Tim C Says:

    Agreed. Excellent post. Just thinking using UK terminology (as that is where I am) – who is more in the wrong – the monetary authority of the banks that extend credit due to the possession of banking licenses, the Government who issues those licenses, the Bank of England for pursuing an inflation target, the Treasury for creating the inflation target, the economist in such august institutions as the London School of Economics who must surely know this but don’t seek to teach their knowledge, or the public who let all of the above get away with this?

    • guidoamm Says:

      Apportioning blame is difficult. Certainly the politicians that have acquiesced to the imposition of DBFM bear much greater responsibility than all others. But individuals are to blame too for their intellectual passivity which plays in the hands of the monetary authority.

  3. rogerglewis Says:

    Spot On.

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