Competitive Devaluation: Hidden Wars, Middle Class Destroyed

Competitive Devaluation: Currency Wars, Working Class Ruined

June 30, 2024

In the shadowy world of global finance, a silent war rages on – one that decimates savings erodes purchasing power, and slowly but surely destroys the middle class. This insidious conflict is known as competitive devaluation, whereby nations deliberately weaken their currencies to gain short-term economic advantages. At its core lies the corrosive force of inflation, a hidden Silent killer tax that has robbed the US dollar of 90% of its value over the past century, leaving a trail of economic devastation.

To truly grasp the magnitude of this crisis, we must first understand the nature of money itself. As the ancient Sumerian philosopher Ur-Nammu (c. 2100 BC) wisely observed, “The measure of a society’s wealth is not in its gold but in the stability of its medium of exchange.” This profound insight uttered millennia ago rings more accurate than ever in our modern fiat currencies and central banking era.

The erosion of the dollar’s purchasing power is not a natural phenomenon but a result of deliberate policy choices. Since the establishment of the Federal Reserve in 1913, the US dollar has been on a steady downward trajectory. What could once buy a house now barely covers a month’s rent in many cities. This is not progress; it is a form of economic warfare waged against the citizens who form society’s backbone.

The Invisible Pickpocket: Inflation’s Double Taxation

The renowned economist Milton Friedman famously stated, “Inflation is taxation without legislation.” This succinct observation cuts to the heart of the matter. Inflation is a silent, regressive tax that disproportionately affects the middle and working classes. While the wealthy can hedge against inflation through investments in tangible assets, the average citizen watches helplessly as their hard-earned savings evaporate.

To illustrate the insidious nature of inflation, consider the following example:

In 1950, the median home price in the United States was approximately $7,400. Adjusted for inflation, that would equal about $80,000 in today’s dollars. However, the median home price in 2021 was around $374,900 – more than four times higher than the inflation-adjusted 1950 price. This stark disparity reveals how inflation has outpaced wage growth, making homeownership increasingly unattainable for many Americans.

The double taxation effect of inflation compounds this injustice. Citizens pay income taxes on their earnings, only to see the remaining purchasing power of those dollars steadily decline. It’s akin to being pickpocketed twice – once by the taxman and again by the invisible hand of inflation.

Esther Duflo, the 2019 Nobel laureate in Economics, astutely noted, “The poor pay twice for everything.” While her research focused on developing economies, this principle applies equally to the erosion of the middle class in developed nations. The inflationary environment forces individuals to work longer hours, take on multiple jobs, and delay retirement – effectively creating a form of economic servitude.

The Psychological Toll: Fear, Despair, and Short-Term Thinking

The psychological toll of this hidden war cannot be overstated. As the 12th-century Islamic scholar Al-Ghazali wrote in his treatise “The Revival of Religious Sciences,” “The debasement of currency is an act of injustice that breeds despair in the hearts of the people.” This ancient wisdom resonates deeply in our modern context, where millions grapple with financial anxiety and a growing sense of economic insecurity.

The mass psychology of inflation creates a self-reinforcing cycle of fear and short-term thinking. As people lose faith in the stability of their currency, they are more likely to engage in speculative behavior or hoard goods—actions that can further exacerbate inflationary pressures. The Roman historian Tacitus observed this phenomenon during Emperor Nero’s reign, noting, “The debasement of the currency under Nero was a cause of much social unrest and contributed to the eventual fall of Rome.”

Technical analysis of long-term currency trends reveals a disturbing pattern of competitive devaluation among major economies. Central banks engage in a race to the bottom, each seeking to boost exports and stimulate domestic growth at the expense of their trading partners. This zero-sum game ultimately leaves all participants worse off, as the benefits of cheaper exports are offset by the increased cost of imports and the erosion of domestic purchasing power.

The Blindfolds of Bias: How We Ignore the Inflation Monster

Numerous cognitive biases blind policymakers and citizens alike to the dangers of inflation. The normalcy bias leads many to believe that the current system, despite its flaws, is sustainable simply because it has persisted for decades. The optimism bias causes individuals to underestimate the long-term effects of inflation on their finances. Perhaps most insidiously, the framing effect allows central banks and governments to present inflationary policies as necessary for “economic growth” or “full employment,” obscuring the actual costs to society.

As the 18th-century French economist Richard Cantillon observed, “Inflation does not affect all persons and all commodities equally and at the same time.” This insight, known as the Cantillon Effect, explains how those closest to the source of newly created money benefit at the expense of those furthest away. This means that large corporations and financial institutions reap the rewards of expansionary monetary policy while ordinary citizens bear the brunt of rising prices.

The long-term consequences of this hidden war are dire. As inflation erodes savings and makes long-term financial planning increasingly difficult, retirement becomes a luxury afforded to few. The medieval Islamic scholar Ibn Khaldun presciently wrote in his 14th-century work “The Muqaddimah,” “When the currency is debased, it leads to the ruin of civilization.” In our modern context, this “ruin” manifests as a widening wealth gap, social unrest, and the hollowing out of the middle class.

From Outrage to Action: Rethinking Our Monetary Future

The injustice of this system is so profound that some, like the author of this essay, argue that it warrants severe consequences for the lawmakers and central bankers responsible. While such extreme measures are neither practical nor desirable in a civilized society, the sentiment reflects the deep-seated anger and frustration felt by many who see their economic prospects dimming with each passing year.

A more constructive approach would be to radically rethink our monetary system and the role of central banks. In his work “The Denationalization of Money,” Austrian economist Friedrich Hayek proposed allowing private currencies to compete with government-issued money. While controversial, such ideas challenge us to imagine alternatives to the ever-expanding fiat money supply paradigm.

In conclusion, the hidden war of competitive devaluation and inflation represents one of the greatest economic injustices of our time. It is a system that rewards financial speculation over productive labour, short-term thinking over long-term stability, and the few at the expense of the many. As the ancient Chinese philosopher Lao Tzu wisely counselled, “He who knows he has enough is rich.” In a world of endless money printing and erosion of purchasing power, this simple truth becomes increasingly difficult to realize.

The path forward requires fundamentally reevaluating our monetary system, greater transparency in central banking practices, and a renewed focus on preserving currency’s value as a store of wealth. Only by addressing the root causes of inflation and competitive devaluation can we hope to rebuild a robust middle class and create an economic system that truly serves the interests of all citizens.

As we grapple with these challenges, let us heed the words of the 20th-century American economist Henry Hazlitt: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” It is time to look beyond the short-term gains of inflationary policies and consider the long-term consequences for society.

The hidden war of competitive devaluation may not be fought with tanks and missiles, but its casualties are no less accurate. The destruction of savings, the erosion of purchasing power, and the slow death of the middle class are wounds that cut deep into the fabric of society. A war must be recognized, understood, and ultimately ended to build a more just and prosperous future for all.