Eminent economist Milton Friedman wrote that “inflation is taxation without legislation.” But is inflation even worse than what one of the greatest economists in history stated? Some say it is thievery. Others say it triggers income inequality. Either way, governments have dabbled in currency debasement for centuries. Today, central banks worldwide have printed trillions in new money to cushion the economic blows from the once-in-a-century pandemic. But did this result in a coming fiscal collapse?
In These Times of Inflation
Since the beginning of the COVID-19 public health crisis, the Federal Reserve’s printing press has been working overtime, creating approximately $5 trillion of new money in 16 months. Or, put in another perspective, the United States central bank has printed one-quarter of all U.S. dollars ever produced.
And yet, despite the massive money-printing campaign throughout the coronavirus pandemic, as well as the myriad of supply and demand factors, the Eccles Building still rejects that inflation is a permanent fixture of the post-pandemic economy. Speaking to the House Financial Services Committee, Chair Jerome Powell asserted that inflation, though elevated, would begin to moderate soon.
“By inflation, we mean year after year after year prices go up. If something is a one-time price increase… you wouldn’t react to something that is likely to go away,” he said. “We really do believe that these things will come down of their own accord.”
Does he really believe this nonsense, or is the Fed Chair in denial about inflation? Perhaps the answer to this is that Treasury Secretary Janet Yellen is starting to acknowledge that inflation could be here longer than what the Washington power brokers initially anticipated, even as most recent as May.
“We will have several more months of rapid inflation,” Yellen told CNBC. “So I’m not saying that this is a one-month phenomenon. But I think over the medium term, we’ll see inflation decline back toward normal levels. But, of course, we have to keep a careful eye on it.”
What a difference a few months can make! But how out of touch are these policymakers when so many other contrarians read the same data and watched the same events unfold in real-time?
Or perhaps the motive is a bit more nefarious.
The history of central banking – and even government, for that matter – is an odious affair, comprised of policymakers diluting their currencies to prop up failed regimes and paint an illusion of prosperity. Every time officials initiate their inflation quest, it begins to be a calm ocean of growth, eventually metastasizing into the Weimar Republic or Zimbabwe.
Let’s travel back a bit and explore one of the most common methods of currency dilution: coin clipping.
Coin Clipping: A Primer
For centuries, governments have engaged in currency debasement. Because coins had been the primary medium of exchange for centuries, regimes had employed many practices to either profit by gathering more coins from metal supplies or inflate the currency to pay off debts.
One such method had been “clipping.”
Coin clipping consists of shaving off a small part of a precious metal coin, eventually combining the clippings and melting them into bullion, or creating new coins altogether.
This was a slow burn for governments because it took time to debase coins. They could never undertake this process overnight for a couple of reasons. The public would notice the difference between new and old coins as they circulate. Also, consumers would likely spend their money at a quicker pace to avoid the consequences of inflation.
Of course, sweating and plugging were commonplace, too. The former required placing coins in a bag and shaking it to recover the bits of metal. The latter would see the counterfeit plug a hole in the middle, and the face would be inserted to close the hole (the other method of plugging consisted of sawing the coin in half and taking the metal from the interior).
Is the Federal Reserve’s Inflation Target Real?
Last year, the Federal Reserve announced a new approach to how it responds to higher inflation. The new policy shift would allow the Fed to adopt “average inflation targeting.” This means that the Eccles Building would be more inclined to let inflation run higher than the 2% target rate before raising interest rates in response to the inflationary trend.
“Many find it counterintuitive that the Fed would want to push up inflation,” Powell said in prepared remarks. “However, inflation that is persistently too low can pose serious risks to the economy.”
But how reliable is the 2% target figure anyway? Has it ever been a dependable indicator? Even in today’s challenging environment, where the annual inflation rate is north of five percent, price inflation is closer to nine or ten percent. Still, let’s suppose it is what the government says, the world’s most powerful institution can utilize clever mechanisms to conceal the consequences of expanding the money supply.
Like the U.S. government and how it adjusts its measurement of the consumer price index (CPI), the Fed can easily influence inflation by changing the quantity of money in the broader economy through the buying and selling of assets. The central bank also successfully refrains from debasing the dollar by print demand deposits. Legendary economist Murray Rothbard wrote in The Case Against the Fed:
“At the base of the Fed pyramid, and therefore of the bank system’s creation of ‘money’ in the sense of deposits, is the Fed’s power to print legal tender money. But the Fed tries its best not to print cash but rather to “print” or create demand deposits, checking deposits, out of thin air, since its demand deposits constitute the reserves on top of which the commercial banks can pyramid a multiple creation of bank deposits, or “checkbook money.”
The Fed possesses a diverse array of other tools besides the printing press: open market operations, balance sheet manipulation, and inverted pyramids. Nice work if you can get it!
The U.S. Needs Inflation to Survive
Suffice it to say, the United States government and the broader economy need inflation. The entire system is layered with debt on top of debt. The only way for Republicans and Democrats to get away with their multi-trillion-dollar spending schemes is to tax, borrow, and print. When the voting base becomes fed up with the first two options, administrations need to nudge the Fed to acquire bonds and, thus, add money to the overall system. What happens? A wealth gap intensifies amid skyrocketing prices, reduced purchasing power, and subzero real interest rates. And, yet, this is considered to be prosperity in the world’s largest economy.
This was originally published on Purchasing Power Matters.
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