The View From 1776

The Inflation Tax

The Fed continues blithely to ignore the destructive inflationary impact of excessively expanding the money supply.

Posted by .(JavaScript must be enabled to view this email address) on 04/28 at 07:05 PM
  1. The problem in part, is fractional banking that requires asset value stay high. With a 10 to 1 loan to asset ratio, in order for a bank to be "sound," it has to keep the asset value stable or rising. Since there is always some risk of assets falling, inflation was to be kept at 1-2% so that assets would rise in value (as counted in dollars).

    The Fed is torn now between causing a recession and deflation that would destroy asset value and inflation which destroys buying power and weakens the dollar.

    They, so far, have opted for inflation while they try to inflate things back so banks appear to be sound again. Remember that part of the problem was not the 10 to 1 ratio of assets to loans but often 50 to 1 asset value for derivatives. Thus, a drop in underlying assets for a derivative meant a 50 time loss of derivative value.

    They are unable to control inflation if they are to shore up assets as priced in dollars with inflation.

    Take a home. It is filled with copper, concrete, lumber, roofing, etc. If they can inflation the cost of all the things that go into a home to where building a new home is higher than a used home, they can boost the value of the assets (homes) used as collateral for loans.

    This is the result of a credit expansion based society and it is why, since 1971, inflation has run higher than before. Inflation has to be high enough to keep assets high enough that the financial institutions can keep loaning more and more out in a Ponzi scheme manner to keep the image of growth. This has also required the government change how inflation is reported to keep GDP looking better than it is when adjusted for inflation.

    Shadow Government Statistics tracks real adjusted GDP using "real inflation" by simply calculating it the way the government use to calculate it.

    As you can see by the chart (3rd one down) we have only had one positive quarter since 2000. We have funded almost all growth with inflation and deficit spending by consumers, cities, states, and the Federal Government.

    Yet, there are only two choices, according to Von Mises, when you have a credit expansion economy, Correct early voluntarily, and suffer a little or delay it. If you delay it, you make it much worse when it collapses on it own.

    We are near collapse and that means that even if we voluntarily ended it (raise rates, end inflation, save, pay down debt, etc.) we will still have a deep and long recession or depression.

    So, we are delaying it. The American people with an almost zero saving rate aren't prepared for a recession of any length. The interesting thing is that they are starting to save, to pay down debt, to reduce spending on their own. This may create a self-fulfilling prophecy where the fear of recession and saving causes a recession that keeps getting deeper as tax revenues from sales taxes drop in cities and states.

    They, in turn, start laying off and cutting spending causing companies that depend on them for spending to have to lay off and cut spending. This in turn reduces spending by those laid off employees, which causes another down cycle in tax revenues.

    Think about the 70's and a decade of the DOW moving sideways. People, due to inflation, that sold a hundred bushel of wheat, or 100 shares of one stock and bought the index, lost buying power the longer they held the index. And, if they had bought at one of the down cycles and sold at one of the up cycles, they may have still lost buying power. Interestingly, they still had to pay capital gains tax, even though they lost buying power because "the price was higher."

    Inflation destroys wealth while creating the impression of higher value through inflated dollars.

    Yet, end inflation and our financial system will collapse and a new system will have to be designed. Fractional banking does have "growth advantages" but, also carries great risk of being abused. If you are going to use this scheme to create more growth, it has to be tightly regulated to prevent unethical and unwise use of it.

    Basically, you deposit $1,000 and get interest on that deposit. The bank gets to loan out $10,000 and collect interest on 10 loans at higher rates than what they pay you and out of that pay your interest and pocket the rest.

    That is why Rothschild said that if you gave him control of the money supply, he didn't care who made the laws. His one son that started the Bank of England with fractional banking began it with $50,000 and with a few years was a multi millionaire. You can do that when you collect interest on 10 loans for every deposit people make with you.
    Posted by JanPBurr  on  04/30  at  10:02 AM
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