By contrast, in an inflationary environment, whether it’s 10-15% (the real number in the US right now), or 100% per year as in countries like Venezuela and Zimbabwe, or the 2% the Fed advocates, currency debasement discourages people from saving. And if you don’t save, you can’t build capital. And if you don’t build capital, you can’t make investments and you can’t improve the standard of living.
by Doug Casey
International Man: Recently, there have been whispers about the Fed raising its official inflation target above 2%.
But before we get into that, we should define our terms.
What is the proper way to think of inflation and the Fed itself?
Doug Casey: First of all, the word “inflation” should be viewed as a verb, not as a noun. Inflation is an increase in the amount of money. This is why Bitcoin—which may have other issues as a money—is inflation-proof; it’s a mathematical certainty that no more than 21 million will ever exist. There are absolutely no limits to the supply of fiat dollars, however.
Inflation is one of the most misused words; few even think about the word’s actual meaning. What is inflation? “Well, that’s prices going up.” No, it’s not. To say that is to confuse cause and effect. Inflation is an increase in the money supply. “Inflation”, a rise is the general price level, results when the money supply is increased by more than real wealth increases.
Do you think I’m just making an obvious, common-sense point? Au contraire. For instance, the Wall Street Journal of Feb 13 featured an article entitled “Inflation Is Falling, and Where It Lands Depends on These Three Things.” In the opinion of the clueless reporter, the three things are “goods, shelter, and other services.” Nowhere does she reference the money supply as the cause of inflation. It’s what she was taught in school, and she stupidly perpetuates the notion.
Prices go up as a result of money printing. But most people believe inflation comes from out of nowhere, like a freak storm. They appear to think it has no specific cause—unless it’s blamed on the butcher, the baker, or an evil oil company. It never occurs to them that central banks—the Fed in the US—are directly responsible for creating money, causing prices to rise. In fact, in a perversion of reality, the public seems to believe The Fed “fights” inflation, because that’s what the Fed says. This is the opposite of the truth.
The Fed inflates the currency by buying the debt of the US government. When the Fed buys US government debt, it credits the US government’s bank accounts at commercial banks with Federal Reserve notes. The government can then write checks to pay for what it wishes.
At this point, however, the US government is approaching terminal bankruptcy with a federal debt of $31.5 trillion and $181 trillion of unfunded liabilities.
Most US government spending in the future won’t be funded through taxes or borrowing from the commercial markets. And certainly not by selling debt to foreign governments, who recognize it’s the unsecured liability of a bankrupt entity. They’re trying to get rid of it. How, therefore, will the federal government fund its spending from here on? Mostly by selling their debt to the Federal Reserve.
It’s actually worse than that, because we have a fractional reserve banking system where not only is there no distinction between savings accounts and checking accounts, but banks can loan out the same dollar numerous times, which compounds the problem.
I’m sorry to give short attention to many concepts here. That’s why books are written…
International Man: What do you make of the Fed’s arbitrary target of a 2% rise in the general price level? Why not 3% or higher?
Doug Casey: The Federal Reserve has been trying to create a little bit of inflation because, they say, “A little bit of inflation is good.” No, it’s not. Even a little bit of inflation is deadly poisonous. For two reasons: It creates the business cycle. And it destroys the value of savings—and saving is the basis of capital creation. People who say that a little inflation is a good thing are dangerous fools.
We should also remember that the US government’s official inflation numbers are very questionable. In my view, they’re only marginally more reliable than their equivalent in Argentina—a country whose numbers are completely political and laughably inaccurate.
They’ve come up with 2% as the correct amount to debase the currency every year. An oblivious and poorly educated public has been propagandized into believing that makes sense.
It doesn’t. The amount and value of money should be determined by the market, not by a bureaucracy.
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