The Sky’s the Limit

In June and July “economists” and the Fed told everyone to watch out because of a “deflation risk.” Then suddenly, before you could say “Ben Bernanke” everyone is worried about the Fed and their warning of coming inflation.

“[I]nflation surely remains a more serious danger than deflation.” Said George Melloan with the Wall Street Journal. Pointing out that, “the Fed can create money, not confidence.”

The Wall Street Journal reported recently that the US dollar reached a 15 year low and the Fed is talking of “quantitative easing” which is just code for inflation. (Quantitative easing is where the Fed prints money to buy bonds, which is just a specific form of inflation.)

About 6 months ago I, with the help of a world renowned economist Arthur Laffer, wrote about the lurking inflation. Double digit inflation seems all too likely when you add together the people in our government, how similar people think, how they think, the way the market has been acting and predictions of economists, investors and the Fed themselves.

Bill Bonner seems to like the idea of new money to wade in:

Whee! What fun it is to think about all that new, Fed-created money bubbling into the markets, pushing up everything in its path.” –Bill Bonner with The Daily Reckoning, October 14, 2010

Pushing up prices that is. When inflation destabilizes the dollar it reduces confidence in the economy for investing foreign and domestic. It reeked havoc on our economy in the 70’s just like has in Soviet Union, Japan, Bolivia, Zimbabwe, Germany, Britain, Chile, and many others. In some countries, it has literally torn the economy apart. Living standards and entire ways of life have been laid to waste by this monster. When the money is devalued, you have to use more of it to buy whatever you want, and when this happens on a large scale (such as in Bolivia in the 1980’s with 23,500% inflation) it completely devastates the cultural structure, and can have ripple effects that go all over the world. The US in the 1970’s held around an 18% inflation rate coupled with heavy business regulations, an oil crisis and outrageous taxes created the “stagflation” (stagnation + inflation) of the Carter years. And during the years of the Soviet Union there were times of inflation where money was used as wallpaper because using the money itself was cheaper than buying wallpaper.

So why would the Fed even consider inflation? Because the government can achieve all kinds of benefits from inflation. First of all, inflation is really a hidden tax. That’s right, inflation is a hidden tax. For example, imagine you have fifty dollars you put in the bank, and the government prints another fifty dollars, what the government has effectively done is devalue your fifty dollars down to 25 dollars and the government now has the other 25 dollars, it’s essentially theft. Especially at a time like this, inflation makes sense for a government needing money in an environment where raising taxes is unpopular.

A second reason is that it helps governments pay off their debts. Because their debt to bondholders and foreign sources is a fixed number, when you inflate the value of that money goes down and makes debts easier to pay off. So inflation effectively lowers debts to the debt holders and steals money from them (like China.)

Inflation takes money from the people in the name of “quantitative easing” or “economic stimulus”. But any “help” inflation ever provides is artificial. Besides “easing” and “stimulus” have nothing to do with it. Rather, inflation is a tool used to serve political agendas for those who know of its effects, or it is faulty thinking — which is detrimental to the economy — by the ignorant.

Inflation should be a crime, but of course the government does all sorts of things that would be criminal if the act was committed by someone else.

-Ben

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