Inflation…The Simple Explanation Is Theft
Inflation is theft. It is a simple concept that a single mother and a retiree understand…but a PhD in Keynesian Economics probably does not. Examples:
In 1971 take $1,000 in crisp new $20 bills and place them in a safe while watching President Nixon blame speculators for the loss of Fort Knox gold. (He “temporarily” severed the last connection between gold and the U.S. dollar.) Spend those dollars in 2016 and you will feel ripped off because they would have bought most of a car in 1971, and in 2016 they might buy only four tires.
Take $400,000 and purchase an airplane in 1971. Today that $400,000 will purchase the helmet for an F-35.
A cup of coffee in 1971 probably cost about $0.25. Today it is $2.00.
Dollars buy less because of inflation, but what causes the inflation? Creating dollars from nothing (fractional reserve banking), which increases the total number of dollars in circulation, causes consumer price inflation by reducing the value of each dollar that existed prior to the legalized counterfeiting. There is more to the story but this is the simple answer.
Why would commercial bankers create dollars from nothing? Because it pays so well! If you could sell washing machines and had a zero cost of production, your profits would be higher. If you could loan dollars and your cost to obtain them was zero, your interest earnings would be larger.
Why would the Federal Reserve create dollars from nothing, thereby devaluing all existing dollars, and use those dollars for QE programs to purchase dodgy assets from banks? They created dollars from nothing so they could bail out bankers. Socialize losses (spread the inflation across all dollar holders) and privatize profits (increase bank profits and banker bonuses) has worked for centuries. It also works for the European Central Bank, Bank of Japan, Swiss Central Bank, and the Bank of England.
From Steve Saville – an astute economist:
“Regardless of whether it is implemented via an emperor surreptitiously reducing the precious-metal content of the coinage or by the banking system (the central bank and the commercial banks) creating new currency deposits out of nothing, monetary inflation is a method of forcibly transferring wealth from the rest of the economy to the first users of the new or debased money. In other words, it is a form of theft.”
Repeat: Inflation “is a form of theft.”
Central banks want more inflation and often complain there is insufficient inflation in the financial system. Inflation is theft that benefits bankers.
Governments want more inflation because it benefits governments.
Individuals who save money currently earn perhaps 1% on their savings. The increase in U.S. consumer price inflation, as we all know, is far more than 1% per year. Hence, the low interest rates created by the Federal Reserve forcibly extract a huge sum each year from savers, insurance companies, and pension funds for the benefit of … bankers and governments. Estimates of the cost of such “financial repression” suggest that perhaps $300 billion is lost each year.
Inflation is a form of theft. Keynes understood it nearly a century ago when he said, “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
Inflation sucks away a piece of your savings every year. Hyperinflation does the same every day, which is why it is so destructive.
Historically fiat currencies have been inflated into worthlessness as they have been devalued toward their intrinsic value of zero. This has been clear for three centuries, but the theft remains successful so “printing currencies” and inflation of the currency in circulation are still used aggressively.
From Benjamin S. Bernanke: “By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.”
Regardless of who is elected President, regardless of what escalation of war occurs in the Middle-East, regardless of how much corruption exists in the world, debt will increase, currencies will be devalued, and fiat currencies will decline in purchasing power – UNTIL THE SYSTEM RESETS.
As they say, forewarned is forearmed.
The Deviant Investor
Gary Christenson is the owner and writer for the popular and contrarian investment site Deviant Investor and the author of the book, “Gold Value and Gold Prices 1971 – 2021.” He is a retired accountant and business manager with 30 years of experience studying markets, investing, and trading. He writes about investing, gold, silver, the economy and central banking.