Wednesday, April 13, 2011

The Inflation Beast

There is a nice piece out from the Mises Institute today titled:

The Fed Obliterates the Savings Ethic

I won’t review all the details here; go have a read for yourself.  But the point is that when our government, via the Federal Reserve System, creates more money (there are several ways it can do this) it has the predictable effect of making existing money worth less – and perhaps, eventually, worthless.

This has, in turn, a predictable effect on how we tend to behave economically.  It becomes counter-productive to save dollars “for a rainy day” (more in the article on this) because you notice that the dollars you are holding are decreasing in purchasing power – you have probably noticed some of that lately.

Correctly speaking, inflation is the act of creating additional money or its equivalent.  Prices increases, per se, are not inflation.  You will often hear the talking heads and their kin speak of someone increasing prices as inflation.  Unfortunately, the word has been used this way for so long that it has taken on this misleading connotation.

Strictly speaking, general money prices increases are the predictable, eventual result of inflation.  The Federal Reserve intends to create constant, moderate inflation – although it has often gotten our of control.

This is based on the faulty economic views of J. M. Keynes.  The economic theories of Keynes have become the unquestioned orthodoxy of most governments today.  There is a rich abundance of literature which displays the failings of Keynes’ views, which are generally ignored by those in power.  Keynes’ views support government control of money, and government control of money is government control of people.  Thus, it is not surprising that those in power are likely to say, along with Richard Nixon, “We are all Keynesians now.”

It is interesting to think of what would most likely be the case if governments did not control money.  People trading freely would – as they have done in the past – generally settle on some commodity or commodities to use as a medium of exchange.  Precious metals have been the historic pattern in this, because it is almost impossible to increase their supply enough to be inflationary.

In this kind of setting, you might decide to save some money, whatever money might be.  If the economy grew, and the supply of goods and services continued to increase, your money would gradually become more valuable.  You would have an incentive to save “for a rainy day.”

As things now stand, government policy in regard to money encourages people to consume – which is what governments want because this is what Keynes said made economies grow.  But notice how this comes back to create an even more, and ever more, powerful state.  When people do not save, they become more dependent on government, giving government an excuse to grab more power.

So to sum up:  government controls money and maintains a policy of inflation.  Inflation discourages savings.  Lack of savings makes more people demand help from the government.  This increases the power of government.

Free people cannot tolerate this for long, or they soon will not be free.  We are probably not significantly free people in this regard even now.  The only question is whether or not it is too late to do anything about it.

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