Inflation and growth (for CK)

The notion that inflation is necessary to the expansion of the economy is due to deliberate misdirection.

Before we can get into this discussion, we must define inflation. Inflation is the deliberate expansion of money supply and credit.

Without beating around the bush, inflation has nothing to do with growth.

Inflation is a political strategy.

Growth is action based.

Consumption occurs naturally and very well in the absence of inflation.

Growth occurs naturally and very well in the absence of inflation.

Inflation induces mal investment.

Inflation erodes and subverts the value of growth.

Inflation causes financial value to run away from intrinsic value.

The deliberate, aggressive, pervasive and sustained creation of inflation, leads to command economies characterized by the rise of an oligarchy and a GDP figure that is sustained purely by new debt. This dynamic inherently robs individuals of their wealth and their savings thus making the individual fully dependent on the state in the process. This is a self reinforcing dynamic (i.e. as the currency is debased, the individual spends all his savings till he must make use of credit; as savings are depleted government promises ever greater social support and protection thus justifying its own expansion and intrusion in the life of individuals; once the majority of individuals are dependent on government for their own survival more inflation is deemed necessary, nay, vital to continuation of life as we know it).

But….

Once the diminishing marginal utility of debt has thoroughly consumed the purchasing power of the currency, no amount of credit or money creation can induce an increase in asset values (GDP).

This is the point at which those promises that have made the individual dependent on the state must be rolled back and, eventually, revoked.

As asset values deflate and government gradually withdraws life support for individuals, you foster unemployment and alienation.

As this dynamic progresses, you end up with mobs of unemployed, homeless potentially hungry people whom are going to be very angry….

So what are you going to do?

—–

As to the nature of money.

Money is purely a vehicle of exchange. There is absolutely no reason why the creation of money should concurrently create a debt owed to a privileged third party.

If a country wishes to make use of fiat money, a quantity of money can be created without the need to award credit privileges to a third party. This quantity of money could remain fixed for some length of time (years) and could reasonably be increased in small increments to take into account population growth for example.

It is then up to economic actors to spend the money they earn or save it. If they should choose to save money, they can then lend their savings at interest to someone that wants to spend money.

The crucial thing is that interest here is charged between economic actors that contribute to society rather than between economic actors and a privileged third party that does not contribute to society.

If interest is charged at the moment of creation of the currency to a privileged third party, than, arithmetically speaking, the third party will in time, earn all the profits of society.

 

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8 Responses to “Inflation and growth (for CK)”

  1. CK Watt Says:

    (Resetting the column width by jumping back to the top level!)

    Thanks for that, Guido. I think I understand your point of view a little better.

    “I cannot help but notice that all your questions infer that government is the solution to growth…. All one could reasonably expect of government is that it does not hinder growth.”

    This seems to contradict your earlier point (the one I responded to), that government should be “dedicated” to maintaining the value of money, which sounded like an active role. Do you mean that they should be dedicated to keeping their noses out?

    I really am not suggesting that government is the solution to growth, but I find it inextricably linked with our current system in more ways than are immediately obvious. I would like to know more about the government’s role in the sound money scenario.

    Some examples of how government influences the economy currently:

    1. It provides (insists on) state education for our future skilled workers/factory fodder/call centre operatives. This is one decision that parents do not have to make (“Do we pay for Kevin to go to school until he’s 16, or send him up a chimney now?”)
    2. It provides bankruptcy laws.
    3. The state protects inventors with patent laws (that also tend to lock some small enterprises out of the economy, and reinforce the strength of the corporations).

    In addition, the government affects the economy and growth by what it allows business to ‘get away with’.

    In the sound money scenario, would these functions of government change?

    In earlier posts you have mentioned the injustice of laws that force people to use the state-sanctioned DBFM. In the sound money scenario, would the government similarly enforce people’s use of the official state currency? What if people failed to understand the benefits of sound money, and set up their own ‘private’ debt-based fiat currency (like ‘Bitcoin’? or whatever) that threatened to rival the state currency?

    • guidoamm Says:

      Protecting the value of money is a passive role. It requires that politicians keep their grubby paws off the currency. That is the beauty of sound money. It subordinates politicians to the people. By extension, it is a monetary system we are not about to see implemented ever again for exactly the same reason.

      To answer your questions:

      1. Government should have no role in education. The only role of government should be to provide an environment where the rights of individuals are upheld.

      2. Absolutely. Government’s role should be limited in upholding the rights of individuals and their property be it material or intellectual.

      3. Absolutely. As above

      4. Allowing business to get away with anything, is contrary to the role of government. Debt Based Money and fractional reserve banking can only result in sprawling government thus it results in government picking winners regardless of their adherence to the law or their efficiency (and if they are picked as winners, by necessity the no longer need to be efficient).

      … and your last question is very good I fear…

      The problem is not so much economic entities within a country that might attempt to rival the sovereign currency. In a context of sound money, someone attempting to lure individuals into a debt money scheme would trigger the intervention of the state to protect the property rights of individuals and their liberty. Debt Money is a pyramid scheme so the state would be obligated to intervene as it does intervene to stop some pyramid schemes today.

      The danger lies in sovereigns going down the route of DBFM and Fractional Reserve Banking. That’s why we’re in this quagmire today.

      Once the state, under the guise of promoting education for all, intervenes in the academic curriculum and once the monetary system enables select entities to acquire media assets, the education and values of a society are subverted and you end up where we are today…

    • guidoamm Says:

      CK, if you are still reading these pages, I think I have finally found the silver bullet to explain the aberration of fractionally reserved currencies.

      The fundamental problem is possession.

      Fractionally reserved currencies belong to the central bank.

      In exchanging your work for currency, you are exchanging something you own (your knowledge and your skills) for something you do not own fully nor outright.

      Due to the arithmetic underpinning fractionally reserved currencies, the money you earn is also subject to constant debasement.

      Imagine if you will an economy composed exclusively of yourself and the central bank. You can work hard and produce surplus to trade with the central bank. In turn, the central bank merely creates currency at will to buy your surplus. The beauty of this system is that once you think you have a stash of money saved, the central bank calls back all the currency that it has circulated till this moment and issues a new currency to replace the previous currency … but at half the value of the preceding money.

      The central bank can, will and has done just that.

      The fact that the economy is composed of hundreds of millions of individuals merely delays the arithmetical outcome. But the basic premise does not change.

      That’s where we are today.

      Profit and ownership is concentrated in the hands of the finance industry. This is not a coincidence. This is arithmetical.

  2. CK Watt Says:

    I understand that there’s a difference between growth and inflation, but does inflation have a psychological effect, that induces people to ‘spend now before the price goes up’? There would certainly be a different psychological effect if prices were perpetually falling, I imagine.

    And a simple question: should people be encouraged to buy stuff they don’t need? I believe that the current system has this encouragement built into its very essence, for better or most likely worse. With your new neutral system, will people become used to ‘making do with less’?

    • guidoamm Says:

      The effect of inflation is not at all psychological CK. It is tangible and arithmetical. Yes, absolutely, the current system is geared towards inducing spending just for the sake of spending. This is the reason leading to malinvestment and big intrusive government.

      The entire thing is designed to do two things: a) concentrate profit into the hands of the monetary authority and b) Tie the individual to the state.

      Once the majority have no wealth and are fully dependent on the state for their survival, they can be used to do the state’s bidding regardless of right, wrong, morality or, indeed, the absence thereof.

      We have moved from a system where laborers and slaves were controlled physically (chains for those transported from a country to another walls for those living at the mercy of a feudal lord) to controlling people’s wages. The latter being more insidious, more opaque but giving access to a far greater pool of individuals across boarders.

      • CK Watt Says:

        I don’t disagree with the fundamental point that the current system is nothing more than a giant Ponzi scheme that *needs* growth in order to exist. (I would like to hear your view on whether growth is, in itself, a good thing, or a bad thing, or just a natural by-product of the free market economy, and therefore that recession is also OK, too).

        But under the current system, *our* lives have been just one big (unsustainable) party where we can’t separate what is real in the economy, and what is just froth. Did my retired father really earn a living all his life and deserve his pension, or was he just riding on the expansion of a decades-long Ponzi/pyramid/bubble? We don’t know, and we can’t, therefore, predict the consequences of ditching the current system and replacing it with real money. (I’m not suggesting we shouldn’t do it, though).

        What I am asking is, may there be one or two things that the current system does ‘right’ e.g. encouraging ‘risk’-taking and engendering economic optimism? If we replace it with a neutral, true free market-driven economy, do we know that it won’t just collapse in a heap of rationality and justifiable pessimism? If that was found to be the case, what would the government do about it? Anything they do, I suggest, would be a corruption of your mythical free market, and open to the same problems as we find in the current system. I would like to hear your plan for dealing with an economy that collapses in a heap and refuses to budge if left to its own devices. As World President, what could you do to stimulate the economy that didn’t in some way artificially manipulate the value of money?

        • guidoamm Says:

          Of course I believe growth is a good thing. Moreover, I feel growth is in the natural disposition of man and, as such, it needs no stimulation.

          I cannot help but notice that all your questions infer that government is the solution to growth. This is, of course, arithmetically impossible. All one could reasonably expect of government is that it does not hinder growth. But, in an environment where government grows progressively larger, the inescapable consequence is that it hinders real growth in favor of wasteful and expedient malinvestment.

          With regards to risk taking. Why would there not be risk taking in a sound monetary environment? What is it about sound money that you feel would hinder risk taking? The economic dynamic remains exactly the same with sound money as with debt based money. The only thing that changes is that sound money allows society to retain the profits and the productive capital created.

          The advantage of sound money is that it protects the value of work and it constrains expedient politics. In other words, sound money subordinates politicians to the people which is exactly what the founding fathers of the USA intended incidentally.

          Of course even in a sound money environment recessions are to be expected. The economy is a living construct and as such it breathes; it inhales and it exhales. This is a natural state that should not be tampered with for political gain. There is little a government can do other than getting out of the way. In a perfect world, the cost of doing business should increase when the economy is expanding and decrease when the economy is contracting. Sound money conforms to this idea. Not so DBFM which, as is evident today, increases the cost of doing business as we are gripped by depression. It is absurd. It is mathematically impossible for a government to “stimulate” an economy by spending money it does not own. In the current construct, the more money is spent by government the greater the financial burden on society becomes; but this is not a linear function as the burden, although not quite exponential at the beginning, does evolve in that direction.

          Look! Even our current debt based monetary system could serve us well if only politicians were not allowed to interfere with its natural cycle. The bailout of LTCM (and associated banks) in the late 90s, or the bailout of any of the airlines, or that of car manufacturers or, indeed, TARP or the ESM (as few examples amongst hundreds in the recent and not so recent past) are all attempts at preventing the natural disposition of the system to reset. But of course, the political gravy train is such that politicians must make mathematically ludicrous promises in order to have access to the trough. And to the trough we send them because the vast majority of folks cant be bothered to understand that the more promises are made, the larger government becomes, thus the more money it needs from those idiots that believe the promises. As more idiots vote for politicians making ludicrous promises, more idiots become dependent on government thus squeezing the productive segment of society ever more.

          Pauses in economic growth should not be feared and are quite healthy as society and the economy adjust to new circumstances. But to stimulate the economy continuously, aggressively and artificially is the equivalent of making use of steroids on athletes or horses. Eventually, you have to deal with the diminishing marginal utility of the drug. And when you have pumped up society to the point where most are in debt and/or dependent on government for their survival and injecting more money no longer gets you the desired results… then what?…

  3. Patrick Donnelly Says:

    Excellent analysis.

    Now explain, if you can, I cannot, why despite such analyses being available centuries ago, it recurs again and again, as often as is possible! It usually takes 60yrs minimum.

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