Most of what we hear on TV or radio about the big enemy: INFLATION, is only partially true, at best. Defeating that enemy, which politicians claim to be doing for their constituents, is impossible if we fail, sometimes on purpose, to understand the nature of it. Let’s examine the primary aspect, or feature, of Inflation: it is a tool of government, by which we mean, the federal government.
This is not to say that government intends to raise prices on commodities and goods and labor, but then, prices rising is not the definition of inflation, which is why much of what is spewed about “inflation”… is disinformation. Inflation represents only an increase in the money supply; along with the federal government’s sneaky mechanisms, there are only a couple of ways to expand the money supply, primarily banks, and banks can do so only because of federal regulations. Oddly, foreign banks and governments can ALSO expand the money supply, increasing inflation of the supply of dollars, not of wealth. When prices rise there are temporary bumps in wealth due to increased receipts and, often, fixed rates of interest on loans. So, there is a spotty increase in prosperity, but not for everyone. Inflation increases dollars, but each represents less wealth than it did even a few months, if not weeks earlier.
Only the federal government can “create” money. The Constitution charges the Congress to “…coin money, (and) regulate the value thereof…” In 1913 Congress shed that Constitutional responsibility – and authority – when it created the Federal Reserve Bank, which is a consortium of private banks with federally appointed “governors.” Legally, “The Fed” can loan money it does not have, to the government – it’s a neat trick. Of course, the Congress must approve expenditures and, when the government has no cash, it must approve borrowing “… on the full faith and credit of the United States …” to enable those expenditures. To LIMIT the degree of overspending, Congress created the ”Debt Ceiling” in 1917, streamlining the emission of bonds by the Treasury as World War I expenses mounted. With various changes and accommodations since, Congress has largely permitted the federal government to borrow whatever it can justify politically.
Since the Johnson Administration and the federalization of welfare and healthcare, the “Debt Ceiling” has proven to be not much of a ceiling, or limit, at all. As we approach $33 Trillion in federal debt, the debt ceiling has become merely a tool of negotiation, with the ultimate “threat” of “government shutdown.” With millions of people now dependent upon government handouts, it’s possible for those on the left to raise huge public, political outcry against a “shutdown.” All that conservatives can garner is some compromise on unrelated policies or spending changes, but never is there a reduction in spending or overall cut to the federal budget. It’s always an increase. The $33 Trillion is documented inflation. It’s not static, and it is expensive. When the Federal Reserve was created in 1913, the concept of interest costs to federal borrowing was supposed to keep borrowings small and temporary – that is, “paid back” to stop the interest costs. Today, the cost of interest on the national debt is well over $800 Billion – approaching the defense budget(!). The concept of limitation through interest obligations is out the window with the debt ‘ceiling.’ Our “representatives” have shown over many decades that they cannot be trusted with OUR money. How does inflating the money supply serve the interests of government?
On any given morning the value of all the dollars in the world is whatever it is. Let’s call it ONE (1). “Da Gummint” comes up with some cockamami plan to save the planet or forgive student loans or flood the country with 7 Million new welfare recipients… just saying. With the federal budget already overspent by 30% or so (financed by earlier borrowing) the president’s party dutifully files legislation to make everyone’s life better while enrichening donors to their party. It requires a new loan to enable the new magnanimity and, since all the loaned money (and tax receipts) authorized so far has been allocated, the “debt ceiling” must be raised. Eventually it is and a new $500 Billion or so is authorized and the loan made. The government spends the new dollars at a value of “1,” and target recipients do as well. Congress-people brag to their constituents about the wonderful benefits and bacon they’ve delivered.
Some of the money is used to pay current federal expenses of various kinds, including entitlements, and some goes to pay interest on this and earlier debts, now approaching THIRTY-THREE TRILLION DOLLARS, with an “F.” But, you ask, how does that cause the price of eggs to go up? Simply put, increased “prosperity” in consumers’ / buyers’ hands and bank accounts, puts stress on the marketplace: supply and demand. At first, sellers are happy – more people want more of what they sell, and… every seller is also a buyer.
Demand for eggs goes up as more people feel they can afford eggs, but, more significantly, large baking companies demand more eggs than a month ago because stores are selling more of their higher-priced goods. Egg producers need to expand production but it takes a while to do so. Large buyers bid up the price of eggs because they are determined to produce more crème-filled pastries to meet demand, and producers will accommodate their largest customers. Eggs go up in price for domestic buyers, too. Soon, a new equilibrium is attained and eggs stop rising in price from their new baseline, market price, but buyers of all kinds of things are spending dollars at a value of, say, .93, not 1.
Two hundred-million buying decisions, or more, are made every day based on relative values to buyer and seller. Prices are “driven” up as if every seller wants to be a more expensive supplier, but, in fact, most don’t: most want their value to appear higher to attract the next buyers’ ‘buy’ decision. But the seller’s “cost of eggs” has increased and he must pay the rent from his sales; he raises his prices, usually reluctantly. Everywhere you turn some “news” outlet is decrying “rising inflation,” when what they are talking about is “rising prices,” usually the CPI or Consumer Price Index. If there weren’t simultaneous DE-flationary forces at work, we’d be in real trouble.
Okay, then, what is a deflationary force? First and foremost, rising prices! It’s a sloppy, effective and painful way to absorb the extra cash created by inflation (of the money supply.) Government-generated inflation is done so without any connection to increased production or wealth; worse, it has no mechanism for debt destruction. Private, or economic inflation is tied to improved production, greater efficiency and, usually LOWER prices overall, another, positive, deflationary force: increased productivity and wealth. When “The Fed” sets ever-higher interest rates to “combat inflation,” it doesn’t put any meaningful brakes on government-generated inflation, but it does screw up economic inflation.
“Real” companies borrow money from banks when they are certain that a bigger plant, new production equipment, new delivery vehicles or better computerization, for examples, will enable the company to produce more for less, or at higher quality, or with such marked improvement that it opens new markets, or with such improved efficiency that waste is reduced and costs per unit are lowered. The loans involved come from banks that operate, by federal regulation, on the basis of fractional reserves. This, essentially, allows banks to lend out about SIX TIMES more than what they hold in reserves. That is, about 86% of outstanding loans are comprised of… wait for it: AIR. Every commercial or real-estate loan is mostly air. But! It’s generally fine. Why?
“Real” loans are made to people or businesses that have the credit-worthiness that predicts the “destruction” of that new debt. Those are what banks call “performing loans.” Depending on the nature of the loans and the financial standing of the bank, itself, “performing loans” are counted among “assets” of the bank and fractional reserve rules can apply to them, too! Simply stated, bank loans inflate the money supply. But it’s not like government / Federal Reserve inflation; “real” loans include mechanisms for 1)debt destruction; 2)increased WEALTH; 3)increased productivity and economic activity; 4)rewards for smart economic risk and honest, legal, work and growth. Smart, conservative banking is essential to healthy inflation.
The federal “system” of over-spending, over-borrowing and aversion to intelligent economics, is essential to economic weakness and political mendacity. See the difference?
It is necessary to introduce capital – and cash – into the economy. It’s called “liquidity.” There has to be enough money to borrow and enough to spend, but how much? Is there some federal agency or department that would ever add new liquidity in the right amounts and the right places? Absolutely not! Neither now or ever. Free enterprise capitalism pretty-much automatically introduces enough liquidity to enable growth, PROVIDED that the government isn’t competing with its citizens to do ever-larger fractions of the spending – and borrowing – in the economy, AND that conditions are not made politically acceptable for monopolies to form and distort markets, which is where we are, now.
The FED sets rules for banks, including what the fractional reserve rate is, and what the overnight interbank lending rate of interest is. They can chill a “too active” economy almost overnight. Income-Tax policies can interfere with even small investment decisions. Fannie Mae and Freddie Mac can skew the quality of the mortgage market whenever politicians decide it’s time to buy votes from certain “underserved” demographics. That is, the government can skew normal buy-sell decision-making, hurting most while “helping” some.
Capitalism needs regulation; it’s human nature to get the most for the least if possible. Honesty should be enforced; integrity should be enforced; quality and purity should be enforced; contracts should be clear and honest, particularly in employment, one of the areas where politicians (most of whom are economic idiots) like to meddle for votes. Our public servants are failing to act as partners in the success, safety and comfort of citizens, which means conditions of honesty across all contracts, short and long, and across all elected and appointed offices. Otherwise, they act as the least trustworthy manipulators of the lives of citizens for the gain of… politicians and government.
Our economy – the actions of daily life, growth and advancement – has been turned into a competition with government to survive. We haven’t even discussed the credit-card “vig” we all must pay, now, to banking consortiums, nor the legalization of drugs. Surely ours is a form of “Democratcy” that we should export to other countries… God forbid.