As Adam Smith explains, the
free market brings its wonders to the world by virtue of an invisible
hand. Individuals cooperating under the international division of labor
and seeking generally to satisfy their own wants end up promoting the general
welfare, often without intending to or without realizing it.
Not to be outdone,
government too has developed a systemic hand that is usually not seen.
Unlike the market, when this hand moves, we lose. Through inflation, government
snatches the market’s bounty for its own purposes, enervating our lives
accordingly.
As a “stealth
tax,” inflation requires no legislation to impose, no agency to
collect, and diverts responsibility for damages onto politicians’
favorite whipping boys. It gives government the ability to buy almost
anything for nothing, while creating endless problems that serve as a pretext
for intervention. Inflation is the foundation of arrogant government
and a prescription for our own demise.
Government inflates
through its central bank, the Federal Reserve System. The Fed does many other
things, but its foremost responsibility is to make the dollar buy less
without leaving a trail.
Central banks such as the
Fed are engines of inflation. Inflation is not some curse of
capitalism; it is government policy, and it destroys capitalism
. Inflation, economist Judy Shelton explains, chisels
away at the foundation of
free markets and the laws of supply and demand. It distorts price signals,
making retailers look like profiteers and deceiving workers into thinking
their wages have gone up. It pushes families into higher income tax brackets
without increasing their real consumption opportunities. [1]
Inflation is alluded to
in the Fed’s charter, which calls on it “to furnish an elastic
currency.” [2] Ben Bernanke once boasted about it:
“[T]he U.S. government has a technology, called a printing press (or,
today, its electronic equivalent), that allows it to produce as many U.S.
dollars as it wishes at essentially no cost.” [3]
If this sounds like
counterfeiting, be advised that almost no one sees it that way, especially
government and Fed officials. According to the MSN Encarta dictionary, a counterfeiter is a person who makes “a copy of
something, especially money, in order to defraud or deceive
people.” Does that shoe fit the Fed? You decide.
The Fed’s inflation
is often part of a process called “monetizing the federal debt,” a stultifying expression
describing the hocus-pocus used to cover government’s deficits.
In simple language, government puts ink on pieces of paper and calls them
“securities,” in response to which the central bank puts ink on
pieces of paper, calls it money, and buys the securities (though indirectly).
Like magic, the federal
government has new money to spend – thanks to the tooth fairy known as
the Fed.
When government imposed its
central bank on us in 1913, pulling money from a hat was more of a challenge
than it is now. If the Fed printed too many paper tickets, people would begin
to wonder if the banking system could redeem them in gold on demand, as
stated on the tickets. The fear of a bank run acted as a brake on
inflation.
Since inflation is the
increase in the money supply, gold imposed a limit on the amount of
government debt the Fed could buy, which in turn put restrictions on
government spending. Restrictions on government spending put
restrictions on government expansion. If gold could be eliminated,
those restrictions would go away.
When the Fed was being sold
to the public, its advocates told people it would prevent panics and
recessions by virtue of its power to provide money and cheap credit on
demand. Eight years after its inception the country slid into a
recession (1921), and after another eight years the stock market
crashed. By the time a new administration took power in 1933, the
economy was on its knees.
Assured the free market had
failed them, a bewildered public turned to government for deliverance.
On April 5, 1933 President Roosevelt issued Executive Order 6102, in which he
ordered all persons to turn in their gold or face a possible 10-year prison
sentence and a $10,000 fine. He gave them until April 28 to comply. [4] For this and
countless other New Deal interventions, most historians regard Roosevelt as a
demigod for “saving” capitalism.
After the gold heist,
dollars were no longer redeemable, at least
domestically. Foreigners were allowed (though not encouraged) to swap
their dollars for gold until August 15, 1971, when President Nixon repudiated
the government’s redemption obligations.
With gold completely
severed from the dollar, our monetary system lost its best defense against
political caprice. Not surprisingly, inflation rose to double digits by
1973. As economist Ludwig von Mises tells us, the gold standard makes
the supply of money depend on the profitability of mining gold. [5] The
pure fiat dollar faces no obstacles to its production, other than the
integrity of government and Fed officials.
Nevertheless, spokespeople
for government’s monetary monopoly assure us the proliferation of
printing press dollars helps the economy. As such, the Fed
doesn’t inflate, it accommodates. Inflation is a dirty word for
its “accommodative monetary policies.” [6]
Fed Accommodation
What happens when the Fed
“accommodates” us by increasing the stock of money?
First, it reduces the value of
the dollar. More dollars means each one buys less, putting upward
pressure on prices. Technology and improvements in production tend to
push prices downward, but because of inflation fewer people can afford
admission to the market’s bounty.
As a rough idea of how far
the dollar has plummeted, $5,000 in 1913 had greater buying power than $110,000
in 2011. [7]
Second, a depreciating dollar
discourages savings. Why put money away if it’s going to lose
value? Instead, millions of investment neophytes put their funds in the
stock market in an attempt to protect themselves against Fed printing
presses. Has this been a successful hedge?
During the biggest bull
market in history – 1984 to 2001 – the S&P rose 14.5 percent a year. But frequent trading by fund managers and
high fees reduced the average rate of return to 4.2 percent annually.
According to Vanguard group founder John Bogle, if you include the results of
2002, the average return from equities was under 3 percent per year –
less than the inflation rate. [8]
Third, new injections of
money spur a tinsel prosperity, and the Fed keeps injecting new money to feed
the boom. With so much borrowing and spending, prices may rise even
faster than the rate of currency inflation.
As the public broods over
higher prices, a semantic shift takes place.
Inflation comes to mean not an increase in the money supply, but the rise in
prices itself. [9] Thus, businesses that charge higher prices
become the villains, while government officials that threaten price
controls are the avenging angels. Most people have no idea what the Fed
does, so government can scapegoat business and appear to be defenders of the
public weal. Nor do most people understand that price ceilings create
shortages, by encouraging consumption and retarding production.
Shortages, in turn, bring on government-imposed quotas, which foster
corruption, black markets, and violent crime.
Fourth, as the influx of dollars
drives prices higher some industries find themselves at a disadvantage with
foreign competitors, tempting them to lobby Washington for protection from
imports. Protective tariffs and quotas, of course, push prices up
further, while sometimes sparking trade wars as other countries retaliate on
American exports. And trade wars can lead to shooting wars.
In June, 1930, with the
economy fighting the recession brought on by Fed monetary policies, President
Hoover signed the Smoot-Hawley Tariff Act, raising tariff levels to the
highest in U.S. history. Other countries immediately retaliated,
markets shut down, and economic conditions worsened worldwide.
Fifth, inflation raises nominal
incomes, pushing people into higher tax brackets, which increases government
tax revenue. As people’s wealth goes out the window in
depreciating dollars, taxes consume more of what remains.
Sixth, inflation shifts wealth
from people who can’t or don’t know how
to defend themselves from monetary destruction to those who can. As a
simple example, a person living on a fixed income
may find his buying power so depleted he sells a family heirloom to pay for
an unanticipated expense. Or a bank that was
part of the lending spree that helped drive prices skyward may foreclose on
the homes of some of its borrowers, whose incomes were ravaged by monetary
debauchery.
Seventh, the Fed’s “accommodative”
measures keep people working much later in their careers because they cannot
afford to live off their deteriorating pensions. Dollar depreciation is
a huge reason why both husband and wife work in many families.
Eighth, because government often
gets the new money first, it can fund controversial measures such as war and
bailouts without drawing taxpayer ire. Government simply puts the
funding on its charge card, prompting the alchemy of Fed debt
monetization. We get the bill, of course, but this way it’s
spread over everything else we buy, so we never see it itemized.
Ninth, because inflation has an
uneven affect on prices, raising some faster or sooner than others, people
have a hard time distinguishing illusion from
reality. As cheap credit abounds, business people, investors, and cube
dwellers hear the siren call of can’t-miss profit opportunities.
Fortunes are made then lost, and companies that lose money find it harder to keep employees.
Tenth, government may pose as
the savior of a group of voters they’ve impoverished, such as the
elderly, by subsidizing their medical expenses. New entitlements create
the need for more revenue, which fuels more inflation, pushing the dollar
closer to a complete collapse.
Eleventh, as Mises observed,
“under
inflationary conditions, people acquire the habit of looking upon the
government as an institution with limitless means at its disposal: the state,
the government, can do anything.” [10] Through deficit spending
the state will devour limited resources trying to maintain this illusion.
If gold is the barbarous
relic its many detractors claim it is, we might expect the Fed’s fiat
currency to be a better deal. But even former Fed Chairman
Greenspan admits that it isn’t, telling a New York audience in 2002
that prices soared in the decades following the gold heist of 1933. [11]
Lord Keynes, the 20th
century’s guru of deficit spending, never spelled out how deficits
should be financed, admitting only that increased taxation was not the
answer. [12] Perhaps he had pangs of conscience about calling for
inflation outright, since he knew it would destroy society in a manner that
not one man in a million could diagnose. [13]
Political issues dominate
the news, but how little we hear about the policies nurturing those issues,
one of which is government’s power to confiscate wealth with the
Fed’s invisible hand.
We should wipe every trace
of the Federal Reserve from our lives and allow the market to freely choose
our monetary standard, which most likely would be gold. In the
meantime, the FOMC should be prohibited from purchasing any more
“assets.”
References:
1 “Capitalism Needs a
Sound-Money Foundation,” Judy Shelton, The Wall Street Journal, February
11, 2009, http://online.wsj.com/article/SB123440593696275773.html
2 The Federal Reserve Act, http://www.federalreserve.gov/generalinfo/fract/
3 Remarks by Governor Ben
S. Bernanke, November 21, 2002, “Deflation: Making Sure
“It” Doesn’t Happen Here,”
http://www.federalreserve.gov/boarddocs/speec...121/default.htm
4 Presidential Executive
Order 6102, target="_blank" http://www.the-privateer.com/1933-gold-confiscation.html
5 Mises, Ludwig von, Economic
Freedom and Interventionism, target="_blank" http://www.mises.org/efandi/ch43.asp
6 Remarks by Governor
Ben S. Bernanke, January 4, 2004, “Monetary Policy and the Economic
Outlook: 2004,” http://www.federalreserve.gov/boarddocs/sp...104/default.htm
7 Bureau of Labor
Statisti target="_blank"cs, http://www.bls.gov/data/inflation_calculator.htm
8 Bonner, William and
Wiggin, Addison, Financial Reckoning Day: Surviving the Soft Depression of
the 21st Century, John Wiley & Sons, Hoboken, New Jersey,
2003. p. 245
9 Sennholz, Hans F., Age
of Inflation, Western Islands, Belmont, Massachusetts, 1979. p. 69
10 Mises, Ludwig von, Economic
Policy: Thoughts for Today and Tomorrow, Regnery Gateway, Washington,
D.C., 1979, p. 66
11 Remarks by
Chairman Alan Greenspan, December 19, 2002, “Issues for Monetary
Policy,” http://www.federalreserve.gov/boarddocs...219/default.htm
12 Hazlitt, Henry,
“Keynesianism in a Nutshell,” 1982, http://www.thefreemanonline.org/columns/keynesianism-in-a-nutshell/
13
Keynes, John Maynard, Economic Consequences of the Peace, 19 target="_blank"19, http://socserv2.socsci.mcmaster.ca/~...s/peace.htm#Ch6
George F. Smith
Read h target="_blank"is book : The
Flight of the Barbarous Relic
target="_blank"Visit his website
Read his blog
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