It All Goes Back to Inflation. Please please please read this, it is of the utmost importance.
Shane February 28th, 2008
Inflation is the most amazing thing ever. It drives our lives unlike anything else, yet few of us understand it, economists will lie to you about it, and even people who claim to understand it, will disagree on it.
This is because, according to this book that I am currently reading, people are always trying to cheat the system. According to the author, the ‘new’ economists (the book was originally written in the 1940s) will promote bad economic principles, for various reasons. The author cites Ludwig Von Mises as a source, who is also often cited by Ron Paul.
What is happening is that our system is built on crap, lots and lots of crap, all designed to help specific groups, and not the general populace. Amazing really. I used to argue on a forum with a recently graduated (Dartmouth) Economist, and he would state things as fact, but according to this book, Ron Paul, the Ludwig Von Mises institute, and many other *truely* Free Market Economists, he is wrong.
This kid tried to tell me, for months and months, that inflation was good. By design, it pushes people to invest their money. What amazed me most, (I have written about this before) is that the government wants inflation, and our system is designed this way. It is truly amazing. Ok wait, lets start GeekMode™ for a second here:
We are, no joke, living in The Matrix. You there, reading this article. You are living in a dreamworld, a prison for your mind. You are a slave. Like everyone else you were born into bondage. Into a prison that you cannot taste or see or touch. A prison for your mind.
Ok lets end GeekMode™.
It is true, all dorkiness aside. You were born into a prison. You don’t realize it, but you were. We all were.
The first thing to learn is that the idea that prices always go up - that is not natural. Prices can go up for natural reasons, but the idea that they always go up, every year, is part of our economic system. It is designed that way. They want prices to go up. Why?
As the book says ‘Inflation is designed to deceive labor (the average worker) by reducing REAL wages (that is, wages in relation to purchasing power) by increasing prices.’
Key word: deceive.
There are a few key concepts here. Money is just a number, not real wealth. If the government printed a godzillian dollars, and gave everyone say, a million dollars for nothing, what would happen?
At first, people would go nuts, they would buy things at normal prices. But quickly, shops would run out of goods. Any business, seeing products flying out the door, will raise prices, to hopefully still sell all of their goods, but at the highest price possible. So prices start to go up. Eventually, the prices would go up to a point that people who were living at the same standard they were before they received the million dollars. Now a loaf of bread is $20, a car is $100,000. People think they are rich, but they are not. Their real wealth has not changed, they just have more paper notes in their pocket.
Inflating the system does not make people more wealthy, it just changes the numbers. This is another key concept. Until the money has been in circulation awhile, prices are normal, so the people who first receive the money will actually end up with more stuff. By the time the government gives the last million to the last citizen, the prices have increased, and the citizen gets nothing extra, actually, that person will actually be able to buy less than they did before, while the people who got their million first, end up with more stuff at the end.
People like me, the blue collar workers of America, we are the last ones to get the million.
Some people will say ‘but inflation hurts everyone, the prices go up for the rich people too’. This is true, sort of. The final trick is that people who can afford to invest their money, and make interest off of their investment, will keep pace with, or even out pace, inflation. Those who can invest the highest proportion of their salary into something will do the best. So Bill Gates will be hurt less than some guy making $200,000 a year, even though they both invest their money. Someone making $20,000 a year, who cannot invest at all, gets hurt the most.
The system is designed so that there is always more and more money being added to the pool, and by the nature of how it works, that money will not flow to the poorest, it will always flow upwards, to the rich. The repercussions of adding money to the system is most felt by those who receive none of the new money.
Yet, those people do not usually notice, until inflation gets bad, which is it right now. Why would there be a lot of money being added to the pool right now? What does the government need lots of money for?
War. Wartime seems to create economic growth, but in reality, it creates inflation. At first it helps, because jobs are added to companies that have military contracts. Those new employees go out and buy groceries, houses, cars. Local businesses see an increase in demand, business is booming they say… but then the prices start to go up, and anyone not getting a raise or rich enough to invest, will now make less money. You, me, and everyone else is paying for Iraq, every time we pay more for gas, food, everything. Inflation is a big part of the higher gas prices, make no mistake.
And thanks to the death of many Unions, people do not get a ‘cost of living raise’ anymore. As Henry Hazlitt states in ‘Economics In One Lesson’:
What they (the people inflating the system) forget is that labor has itself become sophisticated: that the big unions employ labor economists who know about index numbers, and that labor is not deceived.
But labor is deceived, remember this book was written in the 40s. As unions declined, it became every man for himself, and since none of us are taught monetary policy in high school (you did notice we all go to government run schools, right?) we never see the trick.
You there, the person who slogged through this long winded article! We are just slaves. Why is it almost impossible for the average American to survive on one paycheck? Did the government really do anything at all by raising minimum wage? That raise you received this year, that made you feel good, are you really richer than you were last year?
Ultimately there are ways that the government disguises inflation. Inflation is hard to measure, and of course, Reagan took housing out of the calculations in the 80s. The money that inflated housing prices had to come from somewhere, right? Yet how can the inflation numbers still say 3% or 4% per year? 
There are other ways, but there is enough to digest here already.
Hazlitt says, even the most hardened Economists find it impossible to factor inflation into everything. When we hear on TV that the economy grew 4% last year, do we remember that inflation was 4%, so that we really did not grow at all? When the stock market goes up and up and up, do we remember that without our inflationary system is artificially boosting those numbers, and that much of the money pushing the stock market to ever higher numbers is slowly, quietly, being sucked from the Average American? When we get a 4% raise, do we remember that we really are only treading water, and not really getting ahead? When the politicians and economists say they do not understand why the rich poor gap is widening so fast, will they think of inflation? No, no one does. Even professional economists will forget, and that is why the system works.
This system only came about in 1913. Ever heard the phrase ‘the Roaring 20s’? I would think it is not coincidental that this system was put in place in 1913, and within 20 years, the US had a huge boom in its economy, and then a HUGE bust. Booms and busts, sound familiar?
You were born into a prison. One that you cannot taste or see or touch. A prison. For your mind.
GeekMode™ is so much fun.
- Economy
- Comments(17)
Right on! Go forth & teach the children about monetary policy. My advice to the choir: Buy durable. Buy non-perishable. Buy portable. Spend cash, buy wealth.
1) Why do the U.S. still have -compared to countries like Russia (10%+)- such a low inflation rate? Wouldnt the “prison guards” aka the people in power aka the rich people aka the evil rather aim for a higher rate to feed their greed asap? Or is it just to bedazzle the blue collar workers so that they dont notice in time that they are bleeding dry?
2) So you say “the people who first receive the money” are the rich ones so they dont suffer that much from inflation? How does that work in reality? Do they put millions of fresh printed dollars into trucks at the Bureau of Engraving and Printing which drive in a cloak-and-dagger-operation directly to Bill Gates etc?
Tom, first, please let me point out that Free Market ideas absolutely, in no way advocate Inflationary monetary policies. I just want to point this out, because when I was arguing with Roark on this, I never realized that he claims to be a Libertarian, yet advocates inflationary policies. Is he, and are you, being taught this in college?
The US under-reports its inflation, even Roark admitted this. Ron Paul claims it also, he feels they are not reporting inflation correctly.
And you are exactly right. When inflation gets too high, people start to notice, and complain, which is exactly what is happening right now in America. People are talking about prices. When the rise is slow, it is insidious, and people don’t realize things are getting more expensive, and when they do they think ‘well i make more than I did 5 years ago too.’ but don’t make the connection that it also means they are not *really* wealthier than they were 5 years ago.
When prices jump over a period of months, people start to pay attention. This is what is happening in America right now. 3% inflation my ass.
The people who first receive the money are the ones (in our system) that are taking out loans. Who borrows the most money?
Ahem - how is the US paying for Iraq again?
Tom, I am starting to think you just don’t like agreeing with me.
I think what is happening is that people are being taught the Free Market ideas that benefit the governments and the corporations, not the parts the benefit the average citizen. The book I am reading is completely Free Market, andif things were really run the way the guy describes, I would vote for it.
He points out that the inflationary policies, subsidies, price caps, etc. all end up causing problems, and that if the government let the market take over, there would be almost zero unemployment - with no unemployment, you don’t need a minimum wage. These are pieces of the puzzle that I don’t hear people talking about.
Do you really think inflationary policies are good? Doesn’t it make you wonder that central banking and inflationary policies are not Free Market at all, yet you are being taught (I assume, since Roark is) that central banking is the best solution? Doesn’t it make you wonder why real libertarians disagree? Inflation benefits the government, and screws the people.
Free Market ideas, it turns out, are not really a scam like I thought, it is just that the governments are only advocating the policies that benefit them. Keep inflation, but get rid of tariffs etc etc.
I have a quote from the book, I am going to post it on the site right now, as a new post.
You should be happy, I am reading a book on Free Market Economics, and love it. I laughed my ass off though when I got to inflation, because the author hates it even more than i do! Roark is either being fooled, or is part of the system, and does not want to rock the boat.
@dmb - I have also read some tips like what you said - spend money, buy wealth. Saving cash during a bad inflationary period is bad. Buy something that will inflate in value as inflation gets bad, and your ‘wealth’ does not drop like it would if you had kept the cash.
Thomas points to an important question (#2): So you say “the people who first receive the money” are the rich ones so they dont suffer that much from inflation? How does that work in reality?
A: Money is created when it is borrowed from a bank. This mostly happens when a) you get a mortgage or education loan, b) your employer expands the business, or c) the government starts a new spending program. If you can’t borrow at a good rate (or get paid by those who can), you will pay more of the cost of inflation.
(note: Money is destroyed when the principal is payed down, but to afford the added interest without massive cuts, society as a whole must consistently increase our borrowing in future periods. Inflationary borrowing policy is the driving force behind unsustainable economic growth. Think about this every time you see news about record-’breaking’ business figures.)
I have to do more research on the part about who gets the money first. I had read it in an article that described how banking came about, and why banks and governments started inflating currencies. Hundreds of years ago, a government would just print cash notes, take them out and buy goods, and obviously since that money was just getting into circulation, it had not inflated prices yet, so the person was paying non-inflated prices. once that money had circulated, the prices went up, and although everyone had more money, the prices had gone up to compensate by the time the average citizen had received some of it (if they even did…)
It would see that the biggest borrowers are the ones benefiting most from inflation. Big corporations, and governments. Like I said, I have to do more research on it though.
What I really wonder though, is why ask about that part of it? It is a minor issue with inflation. To me the big problem is that the poor can never get ahead. Why are ‘Free Market Economists’ being taught that only some of the Free Market ideals? Unions are bad, minimum wage is bad, welfare is bad… but suspiciously the two Economists I know seem to think that Central banking and inflationary systems are good. Yet if you read articles or books by true Libertarians, they would say that inflationary monetary policies are the worst possible way to control the system.
Why ask about the idea about people getting the money first reaping the most benefits? To me, it is like walking into the rubble of 9/11 the day after and saying ‘hey! someone broke a desk here! what a waste!’
The HUGE issue is that inflation is a horrible, horrible policy. Read my next post on it, the quote by the author of the book I am reading pretty much sums it up. He does not just say that inflationary policies are bad, he says they promote fascism, they destroy economies, etc etc.
I never said ” Unions are bad, minimum wage is bad, welfare is bad”…well except for the minnimum wage thingy. Uber-strong unions CAN mess up an economy same goes for an extensive welfare system. I have no opinion on central banking yet since my knowledge on monetary policy is more than limited, it´almost zero, lol……That´s why I asked you those questions, I didnt say “You stupid mofo, you´re plain wrong because of *insert gazillion reasons here*”. My questions were a bit sarcastic though due to the fact that I didnt like the way you promoted your ideas…or better: the ideas of this certain author.
Hmm, how did I present the ideas offensively? I will re-read it. I have been trying to not let my emotions come through in my writing, but then again, it is a blog…
To me, inflation is the biggest issue facing our societies. So I do get a little fired up about it…
THe book blew me away because the guy promotes Free Market ideas - and I agree with them. The book makes sense. What blew me away though was that Roark is so 100% certain he understands economics perfectly, yet real Libertarians would laugh at him for advocating an inflationary monetary policy.
College students, it seems, are being taught biased, incorrect information. OR, he knows exactly how things really work, and is just part of the system. Oh no I feel another Matrix quote coming on…
You truly think inflation is a bad thing? Inflation is just another tool used to manipulate money. Capitalism is run by consumer confidence, remember that. Now if the tool of inflation is put to use correctly, stimulating the economy, lowering the “value” of unpaid debt, and most importantly, deceiving the population that the economy is growing, then it is not just a beneficial stimulus, but an absolutely necessary element of our free market system.
Also, please don’t combine pathos with economic ideas, it makes you sound like an idiot.
Notice how simple Rico’s argument seems. That’s exactly how it’s portrayed for the first 4 years of undergraduate economics in the US and UK. Is it propaganda, ignorance, or wishful thinking? Probably a little of each.
Systematic inflation is a form of money illusion (especially when that inflation is hidden behind a ‘free market’ mechanism like the debt market. Tomas Rico seems to truly understand that. Yes, inflation could be seen as a necessary element for our particular brand of growth/consumer confidence driven markets - but only people like Mr. Rico think that is a good thing. After all, most caring economists would say that a ‘good’ free market system doesn’t attempt to deceive the market at every turn - and certainly doesn’t attach value to growth when the only consequence of growth is self-annihilation.
I’ve done my duty in shooting holes thru the previous unthinking comment. As a economist and a teacher, I can’t say enough that some ideas are too dangerous to go unchallenged (see intelligent design; climate change denial; Jesus being the son of God, not the sun of God; etc…)
Hi! I just stumbled upon this article and I’m right there with you. I really have nothing to add the the critique of inflation, but I just wanted to let you, and anyone else, know that there is still a school out there that teaches the true free-market approach to their economists. I graduated a few years back from Hillsdale College located in south-central Michigan. I got all this while I was pursuing my political economics degree there. I got to read this Hazlitt book for a class, as well as “What Has the Government Done to Our Money?” by Murray Rothbard, another fantastic Austrian. (The full text can be downloaded free here: http://www.mises.org/Money.asp ) The book, if I remember correctly, gives a really good history on the evolution of fractional reserve banking, inflation, and it will tell you who the guys to profit from inflation are. Happy reading!
I have a ton more resources if you’re interested in learning more about how interventionism in general creates defunct and self-destructive economies. Anyway, enjoyed the rant and I look forward to reading more of them.
Thanks for the comment Johnny. I am bookmarking that Rothbard book, I have read about him on lewrockwell.com. Feel free to post any links to more resources, I am always looking for more to read.
what’s most heinous is the way in which the US govt publishes the most white-washed statistics
please see http://www.shadowstats.com/ - this guy has all the details on how various economic indicators are often misleading, at best
you can see a comparison chart of various measures of inflation, specifically the official measures of the US govt in 1983 and 1998 compared to now: http://maxopedia.org/real-2008-inflation-rate-from-shadow-government-statistics
Max that is a very cool website, it is too bad that he charges for a subscription :/
The info that he gives out for free is interesting though - but can he prove it, I wonder?
“In his speech last week, Bernanke finally admitted that the weakness in the dollar was contributing to both higher inflation and elevated inflation expectations. This stands in stark contrast to his recent testimony in front of the House Banking Committee, where in response to a question asked by U.S. Rep. Ron Paul, Bernanke confidently declared that the weakness of the dollar only affected Americans who travel abroad. It is amazing how little attention this complete reversal received.”
Source: http://www.contrarianprofits.com/articles/the-fed%e2%80%99s-strong-dollar-policy-actually-isn%e2%80%99t-so-strong/3066
“A: Money is created when it is borrowed from a bank. This mostly happens when a) you get a mortgage or education loan, b) your employer expands the business, or c) the government starts a new spending program. If you can’t borrow at a good rate (or get paid by those who can), you will pay more of the cost of inflation.”
Biggest fallacy ever. That is only 1 way money exists. That is how money exists as debt, and that is why the economy is so bad.
When money exists as value, it is not created by borrowing. That was how money existed before 1913 — when the Fed was created.
The true role of money is to serve as a common medium of exchange — a representation of the total value in a given economy.
I think that 90% of us who know money as debt today also know that money hasn’t always been debt. Schools teach about money as value, a medium of exchange, and a store of value… not money as debt.