Inflation Benefits: Myth or Reality?

There are plenty of good five-cent cigars in the country. The trouble is they cost a quarter.
Franklin P. Adams 1881-1960, American Journalist, Humorist

Maximizing Inflation Benefits: Exploring Opportunities

Updated Aug 2023

The most effective approach to explore this subject is through a historical lens. While the article may seem dated, it holds valuable insights that can be applied in the future. It’s crucial to remember that history repeats itself for those who fail to learn from it, but the few who glean lessons from the past are well-prepared to respond when similar situations arise.

Inflation, as defined by the Merriam-Webster online dictionary, refers to an increase in the volume of money and credit concerning available goods and services, leading to a continuous rise in the general price level.

Most of us have experienced the impacts of inflation in some form or another. However, economists and central bankers have defined inflation as an increase in the prices of goods. This is a rather clever way to conceal their actions. If they can expand the money supply while keeping the cost of essential everyday goods, especially those used by the average person, under control, they have effectively achieved their goal. The reason is that most people perceive inflation solely in terms of rising prices.

One method of keeping the prices of everyday goods in check is through the use of substantial subsidies. This practice is prevalent in various sectors, including agriculture, manufacturing, and industry. In a follow-up essay, I will delve into this topic in greater detail, as it would deviate from our current focus.

Inflation does possess some notable advantages. As an investor and trader, I aim to identify the best investment opportunities and maximize my returns, and inflation plays a significant role in this endeavour. However, the drawback of inflation is that, for the most part, it results in the poor becoming even poorer and the unprepared sliding down the socioeconomic ladder by one or two rungs. This is why the saying originated: “The poor get poorer, the rich get richer,” while the middle class often faces financial challenges.

The Unequal Benefits of Inflation: How Astute Investors Thrive

Given that profit-driven individuals are at the banking system’s helm, their inflationary strategies are designed to generate unequal benefits. Typically, if money is inflated and distributed equally, there is no net change since the prices of goods rise in equal proportions to reflect the increase in the money supply. However, central bankers have a different agenda. They aim to inflate as much as possible while redistributing as little as possible of the newly created money, seemingly out of thin air. If you can’t discern their direction, you’ll end up paying the bill. Your wallet, once full, is now three-quarters full, and prices have risen unevenly.

This is precisely what’s happening now. Manufactured goods remain exceedingly affordable, but take a look at housing prices. Commodity prices have surged, making housing unaffordable for many in major cities. Salaries haven’t kept pace with the level of monetary inflation. The only way people can afford homes is because of the artificially controlled, low interest rates, which can deceive many new buyers into taking on debt they can’t truly afford.

Nevertheless, despite these downsides, astute investors can profit immensely by taking the time to understand what’s unfolding.

For instance, an astute investor would have noticed the significant increase in housing prices toward the end of 1999 and early 2000. They would have observed that gold broke its downtrend in 2000 and that basic raw materials followed suit in early 2003. Furthermore, they would have been aware of the trend of increased dollar printing if they had paid attention to the new administration’s proposals. Consequently, a middle-class family could have taken out a mortgage and purchased a house. As its price inflated, they could have potentially secured a loan on their existing house around the end of 2000 or early 2001 and used it to purchase a second home. They might have invested some of their money in gold bullion and some in gold stocks, many of which have surged by over 600% since 2000.

Allow me to provide a concrete example from a New York neighbourhood to illustrate how someone effectively preserved their way of life during this period. I won’t mention specific names. This individual was a taxi driver, and in New York, cab driving can provide a livelihood. He noticed the rising housing prices and purchased his first home in 2000. By mid-2001, his house had appreciated by over 10%, so he took out a second mortgage and acquired another home, which he rented out. By 2002, the values of both his properties were skyrocketing. Consequently, he quit his job, purchased two foreclosure properties, renovated them, and rented them out. To cut a long story short, he eventually sold all the homes and now has enough money to retire comfortably.

So, what did he do? He consulted with knowledgeable individuals to gather as much information as possible about inflation. He also dedicated himself to extensive reading on the topic. It’s worth noting that this individual wasn’t highly educated, but he took the initiative to educate himself. As a result, he shielded himself from the harmful effects of inflation that many of his colleagues are now grappling with.

Let’s now explore the comprehensive range of benefits that inflation can offer. In this world, failing to invest time in educating yourself can come at a steep price.

Investors’ Secret Ally: The Benefits of Inflation

Many Gold enthusiasts secretly welcome inflation. Why, you ask? If they’re anticipating Gold to soar to $800, $1000, or $1500, they’re essentially rooting for inflation. Gold prices are a critical indicator that something is seriously amiss in the banking system, with the money supply spiralling out of control. In the later stages, fear takes hold, propelling Gold prices into the stratosphere as panic sets in, and people seek refuge for their assets.

Similarly, those who have invested in real estate quietly hope for inflation to drive up property prices. Upon closer examination, it becomes evident that inflation benefits astute investors significantly. Even those engaged in the stock market secretly favour inflation. The policies of free money encourage individuals and businesses to take more risks with their investments. Look at the current market; it keeps ascending, but it hasn’t made significant gains when you assess it in terms of robust currencies like the Rand. However, astute investors could discern that the central bankers were on an unrestrained spree, not only driving up Gold prices but also causing a surge in the value of general equities.

The Winners and Losers in the Game of Inflation

These price increases have more than compensated for the inflationary practices of central bankers. However, the only ones who have benefited from this are a select group of elite investors and the associates of central bankers who were privy to this information long before it became public knowledge.

When you think about it, life resembles a vast marketplace, where, in the end, someone must lose for someone else to win. Not everyone can emerge victorious, nor can everyone suffer defeat. The unfortunate reality is that a substantial number of individuals must experience losses to enrich one person. The net result is zero; money isn’t truly lost; it merely transfers from numerous pockets into one substantial one.

When the NASDAQ crashed, everyone believed that trillions of dollars in wealth had vanished. This, however, was a substantial falsehood. Those trillions of dollars merely shifted from hundreds of thousands, if not millions, of pockets into the hands of a select few thousand individuals.

It’s a zero-sum game. So, when people decry the downsides of inflation, it’s often because they haven’t taken the time to educate themselves about the various tools available to shield themselves from this insidious economic phenomenon. This once again underscores the saying, “An empty tin makes the most noise.

Inflation: A Harsh Reality, But a Path to Prosperity?

Subtitle: “Navigating the Central Bankers’ Game with a Silent Strategy”

Do I endorse inflation? No, I do not. Do I genuinely believe it’s something great? No, I do not. However, what I think and what can make me or others wealthy are two distinct matters. Central bankers are unlikely to change their ways; they’ve been at this for far too long.

They are masters of the game, and while one day they may stumble, I might be long gone by then. So, instead of being an empty can, shouting loudly about the downsides of inflation, I’d rather be a quiet, full can, basking on a sunny beach with a margarita in hand, engrossed in a good book. I’ll leave the shouting to the empty cans who appear to have plenty of time on their hands.

Ultimately, what truly matters is finding a way to care for oneself and loved ones. If you invest the time to educate yourself about how inflation operates, and how central bankers operate, you can hitch a free ride on their backs and increase your net worth in the process.

by Sol Palha from the tactical investor

In spite of the cost of living, it’s still popular.
Kathleen Norris 1880-1966, American Novelist

Challenging the Notion of Majority Rule: Examining Its Moral Implications

This saying eloquently captures the essence of this subject. While it may be lengthy, I believe you will agree that its message possesses enduring significance.

Next to inflation, majority rule is the most ingenious scheme ever contrived by the government. Most people have never dared to question the basic morality or logic in the assumption that the majority should have power over the minority. A majority of the people in the South once believed in black slavery. Did that make it moral? A lynch mob is majority rule stripped of its fancy trappings and its facade of respectability.

In a community where homosexuals outnumber heterosexuals, should the majority have the right to outlaw sex between married partners of the opposite sex? In a community where atheists outnumber non-atheists, should the majority have the right to outlaw the practice of religion? … a dictatorship allows only a small number of people to interfere with the rights of others, a democracy makes it possible for great numbers of people to impose their will on others — through the force of government. Is an act of aggression more right if carried out by the majority than by a dictator? Since approximately half, the eligible voters vote this means that approximately 75% of the people are ruled by 25% of the people. Robert J. Ringer, American Writer

Inflation Benefits: Gale Bullock

(AKA Ole Bear)

Proprietor, www.pgtigercat.com

RMS Titanic
A Night at the Chicago Lyric Opera? or, Opera is for Sissies….

Have you ever hit a skunk at 70 MPH in a 1994 Lincoln Town Car on I-55 cruising to Chicago to go the Lyric Opera? Your choices are: Yes, No, Mebbe (maybe), and Hell’s Bells — Nah, I don’t like Opera! What’s inflation? More legal tender fiat paper funnie monie chasing fewer goods and services…. aka, Gutenberg Bernanke and his printing press!

Yes, I stunk up the Town Car, but damn those new Kelly Springfield All Season Radials are great…. didn’t hurt ‘em a bit! No, I missed the sucker completely… was that really a 65 MPH zone? Or, Mebbe, but Damn, I was actually doing 85 in an Illinois mandated 65 MPH zone and I didn’t get caught….? Eh? For speeding! Hell’s Bell’s… I would hit a skunk anytime to avoid a night at the opera – Opera’s for Sissies, anyway!

You all see the point here, Don’t You? It is all a matter and manner of Perspective… and ehhhh… Semantics…. Welcome to Fed$peak 101… Welcome to Skunk 101.

Yes, I stunk up the Town Car, but damn those new All-Season Radials are great….

Our friend Nelson Hultberg down in Dallas has penned Invasion of the Mind Snatchers and Economic Meltdown, Secessionist Crackup? Scott Trask at www.mises.org recently penned The Fed’s Predecessors in American History. Andrew Dickson White penned Fiat Money Inflation In France in the mid-1870s. James R. Cook just penned Funny Money. Timeless essays know no century. Inflation is good if you are the one creating it, manipulating it, telling the citizenry that it is under control and to beware the deflationary Bogeyman! It works for creating and waging wars.

Examples are the Continental, the Greenback, the Revolutionary Guillotine French Assignat, and the Federal Reserve Note. The Continental was the silly paper issued by the Continental Congress to finance the American Revolution. When the House of Rothschild wanted something usurious like 20% for financing the War Against Southern American Secession, Mr. Lincoln pulled a Bernanke and did his own Gutenberg creating the Greenback.

The Guillotine Artists of the French Revolution made it a lose thy head crime to own and trade in heavy metal, forcing paper assignats down the Citizens’ gullets, while they wrecked their country for the next two centuries…. Leading to Mr Bonaparte, who mucked things up a bit further.

However, Mr. Jefferson, not utterly asleep at the switch, was able to finance Mr. Bonaparte’s traipse into Russia for a mere $3 million Pieces of Eight, then called in 1803, the U.S. Dollar by the U.S. Constitution. Mr. Monticello, aka President Jefferson, pocketed the Louisiana Purchase, leaving Napoleon with a PUD (Russia) in his hand. This leads to Manifest Destiny, the Teddy Bear Doctrine of Speak Softly, Carry a Big Schtick and the Bushian Doctrine of Pre-Emptive War. Welcome to History 101. History is nothing but the history of money systems anyway. Ask those Romans about the Emperors’ coin clipping…

The Federal Reserve Note financed WWI, WWII, the Korean Conflict, the Vietnam War, and other silly military missives… such as Iraq Crusade I and Iraq Crusade II. This coin clipping has been going on since the Garden of Eden or Paradise Lost. Financing wars is a mere drop in the bucket. Yes to inflation and the moral decay of societies, the great giver of social welfare capital, the keeper of politicians and big government, and all of those that will take care of you… Lemme give you a clue – the Crusades were a total flop!

The proof? Israel and the PLO — these folks will be killing each other — after Armageddon! Inflation is the central bankers’ means to ensure the Ponzi shell game continues as debt service is serviced like a perfumed, bosomed lady of the night as more patrons seek the heavenly pleasures of more debt in the bed of luscious night. For if the debt be repaid, the money supply would thus contract, making illegitimate…. All those stealth Johns and Tricksters of the Night (central bankers, hint … hint). Baron Rothschild, the founder of the Banking Cartel, said something to the effect that given the ability to print money, he could control any government. Smart Dude!

The Continental became worthless paper…. So too the Greenback for most of its life, and so too the FRN… the world’s ultimate Ponzi Shell Game. We’ll all know the jig is up when a good lady of the night will not accept the Buck for a Buck… but demands a little heavy metal on the side for a slide, Klyde. Prostitution has a reputation of being the oldest profession….? Probably is, but I suspect that the moneychangers, the politicians mentioned in the Bible and the clipping of the coins of the realm evolved in that self-same… goodnight. Dear Reader, did you make the connection? Central Bankers are nothing but prostitutes… and since most are men, that means male prostitutes — of their money systems.

No, I missed the sucker completely… or Ode to John Denver!

Again, this viewpoint is a matter of perspective. Suppose Joe Six-Pack and Sally SUV believe that their new SUVs are great investments purchased by adding more debt on their real estate, which has been making them rich, and they are watching the FED rig the DOW by Mike Bolser’s work at www.gata.org on how the repurchase agreements aid Wall Street being suspended by a slender FRN. In that case, all is well in LA LA Land, aka Main Street America.

Who cares about inflation when we are rolling in the dough…. Who cares if our groceries, utilities, gasoline, insurance, and other goods and services cost more paper? We’re rich and rolling in the dough. Our appraiser just said our house was worth $500,000 on our refinance, and gosh golly, we only paid $250,000 for it three years ago. Thank you, realty appraiser and www.appraisalinstitute.org for all your Delphi Scams, AVMs, and drive-by (drive-by or drive-by-bye!) appraisals on our realty over the past three years. Can you make it $600,000 this time next year? Thank you, Lord Jumpin’ Jesus Raines at Fannie Mae, for Credit Scoring (aka Credit Scouring) and for teaching the world about two-tiered structured finance (aka two-teared structured finance). Should Joe and Sally live in the several county areas surrounding and inside Denver with a 15-year high on Foreclosure

Flood, Composer and singer John Denver probably say it best in Rocky Mountain High! —Rocky Mountain High…. Colorado! I don’t foresee many ladies of the night in Denver accepting real estate 4^th and 5^th Deeds of Trust as chattel promises to pay for their services in such a micro realty market. Perhaps I did miss this skunk completely? But who’s the Huckleberry?

Mebbe, but Damn, I was actually doing 85 in an Illinois-mandated 65 MPH zone…

Illinois is the Land of Lincoln. Chicago is considering passing another $1 tax on packs of cigarettes. Interstate speed limits on I-55 from St. Louis to Chicago are 65 MPH. We hit Illinois at Louisiana, MO at the Mississippi River on US Highway 54 for our December 2003 pilgrimage to the Lyric Opera in Chicago. Illinois is a trip. It is one of the most agricultural and rural states in the Great Mid-West, yet it has the cultural centre of the Mid-West at Chicago on lower Lake Michigan. It is the home of www.appraisalinstitute.org.

Chicago rivals New York City in the world of opera as well as the European Capitals. Some of the best opera singers on the planet tour through the Lyric Opera. Some Illinois politicians are in the hot seat for political trickery and taking nice folks’ money. Mebbe inflation of the money supply by the monetary charlatans Bernanke, McTeer, Greenspan et al., the fleet elite Ponzi-ists at the Federal Reserve, do deserve some credit and faith for the City of Chicago and the State of Illinois. It costs me more to go to the Lyric Opera now than it did five years ago.

Now I won’t even get near an aeroplane, Columbia Regional Airport, or Midway Airport in Cicero… because of monetary policy, which creates Fatherland Insecurity, the shredding of the Constitution and the Bill of Rights… If I don’t take my tobacco, I buy a new bridge over the Chicago River. I suppose the opportunity to hear world-class opera in Chicago, costing me more, making me more self-reliant to drive my 1994 Lincoln Town Car, avoiding Mr. Ashcroft’s Gestapo, paying for higher food, lodging, opera tickets, and gasoline… is worth the erosion of my money.

Besides, CNBC, the Wall Street Journal, Peoples Investor Daily, and the Government (BLS, aka Bureau of Lying Spats) tell me I am rich. Hummm…. Maybe I missed the skunk on I-55… but I have a sick feeling that Social Security should be more appropriately called Social Insecurity, and maybe the City of Chicago should go ahead and pass a $100 tax per pack on cigarettes. Perhaps the City of Chicago also plans to tell Daniel Barenboim how to conduct the Chicago Symphony and play his Steinway next!!??

Inflation is good. When folks are rich, you can tax their assets to death — as long as the ladies of the night accept 4^th and 5^th Deeds of Trust on real estate as chattel payment for services… play some Eine Kline Nachtmusik for me, á la Mozart! – With all those notes, if you don’t know how to listen, the fleecing is a great trick or treat, is it not, Joe Six-Pack and Sally SUV? Big Grin!

Hell’s Bells — Nah, I wouldn’t say I like Opera… It is for Sissies….

Perhaps, my friends, you all are forgetting the Parable of I-55 and the Skunk…. You hit it, you stink… You miss it; you may miss other stuff… You can’t remember hitting or missing it? — you were driving too fast… not paying attention! So, if you don’t like opera…. Listen to Billy Ray Cyrus and that trash from Nashville, Achy Breaky Heart.

Nobody considered you worthy enough to teach you to appreciate opera or the Money Issue. That’s what inflation is all about at the Federal Reserve, Bubba! These rascals have been controlling the educational system from grade school to the university level since 1913 and making sure that their pundit economists get Nobel prizes in economics and that all the American economists visit the ladies of the night at the Federal Reserve, so they can pontificate on the good sex of monetary policy, inflating the un-Holy Hell out of the money system, aka the BUX, to steal your wealth and savings. It keeps the politicians in office, erodes the U.S. Constitution and that silly Bill of Rights and protects the Bank of Rome and the House of Rothschild.

Inflation provides the vehicle for the social welfare capital state in the process of wealth destruction. Inflation ensures that the debt service may be paid. For Alas, Poor Yorick, if the money system contracts in a deflationary spiral, the debt service will not be paid… hence the jig, the Ponzi Shell Game of the central banker charlatans is up. The inflation mechanism is the Mandrake Mechanism of creating money out of thin air by adding more debt behind the money system… smoke and mirrors… an illusion of wealth, power as a Nation, and prosperity. If you read Dr Antal Fekete’s work, you will understand that low-interest rates and deflation through debt payoff put pinholes in the prophylaxis of the central bankers’ skunk… Interest rates tender the present worth of debt much, much higher than it used to be. It’s a hard concept to get…. But once the pin-prick is in the Trojan, you will understand how the Horse really works.

Conclusion Remarks…. Hitting a Skunk with a Deuce and a Quarter?

1970 Buick Electra 225, aka, Deuce and a Quarter… I drive a 1970 Deuce and a Quarter. In 1970, my Deuce stickered and retailed at your local Buick GM Dealer for about $4,900+ as a Deuce Custom with a 455 with a 4-barrel carb, electric windows, power seats, AT, PB, PS, AT, vinyl top, fender skirts, electric trunk release, AM/FM, and AC. You didn’t get radial tires then, but you did get the fancy Naugahyde interior, speed alert (before cruise control), plush carpet, armrests on the front seat and metallic paint with real Honest-to-God lead in it — go price a GM Buick Electra in today’s legal tender fiat funny monie….

1994 Lincoln Town Car… Given the choice of hitting the Federal Reserve skunk with a 1994 Lincoln Town Car… or a real Deuce and a Quarter… I should prefer the Deuce to hit the Skunk…. When I hit a skunk in a Deuce…. I don’t need silly FED RESERVE mandated airbags… (aka the ability to control industry or crush it…) Buy a Deuce today… if you can find one (heavy metal…. Hint…hint…) Inflation does have some serious benefits and a few pitfalls… for the downside, go talk to your parents about the social welfare state of affairs, the Federal Reserve and Bureau of Lying Spats robbing them blindly on increases to their Social Security checks. Mother-in-law (aka Miss Melanie Bear) just got notice of a $2/month increase in her Social Security check, but an increase in her Medicare deduction. You all, see how this works, Don’t You? It is all a matter and manner of Perspective… and ehhhh… Semantics…. Welcome to Fed$peak and Skunk 101. Answer to Question: True and False, depending on your perspective, whether or not you own and drive… a 1970 Deuce and a Quarter for hitting skunks.

Inflation Benefits by Chris Sanders

Principal, SandersResearch.com
Buy others for news. Buy us for judgment.

Does inflation have some profound positive benefits?

The view of many economists that inflation can be a good thing is, from an economic point of view, unobjectionable. Indeed, it is hard to see why, from a theoretical standpoint, it should be at all controversial. Inflation in the sense that it is most commonly understood, is just a way of looking at changes in the prices of traded goods and services. Higher prices are welcome from those selling those goods and services. And that is precisely the point. Whether or not it is “good” depends really on who is receiving it and who is paying those higher prices.

Nevertheless, problems are associated with this way of looking at things because changes in goods and services prices do not represent inflation or deflation. These are correctly understood to be states of change in the value of money, which is very different from changes in the prices of goods and services. All the consumer price index tells you is how profits are shifting in the markets for goods and services. It tells you nothing about the value of the unit of account.

This point is far from academic. It has been correctly pointed out over the years by several observers that by arbitrarily excluding changes in the prices of certain assets, conventional inflation measures only capture part of the change in monetary value. In the modern American economy, this can be readily seen in action. Money in its modern format can be exchanged for bananas or stocks, which is to say that stocks and bananas are substitutes for one another.

Over the last ten years or so it has been fashionable on Wall Street to talk about deflation, as in “China is exporting deflation because of its low wages.” At the same time, the price we have had to pay for future earnings of the S&P 500 has soared. Do low or falling wages represent deflation? Not necessarily. They may be symptomatic of it, but they are not proof.

Inflation’s Complex Landscape: Legal, Ethical, and Practical Aspects

A more serious discussion of inflation requires examining its legal, institutional, ethical and moral dimensions. It is not for nothing that in ancient times, the priestly caste monopolised the business of money, and the truth of the matter is that, in some ways, things have not changed much. Because money has varied functions as a medium of exchange, a unit of account, and a store of value, it is necessary to be dependable. That is the reason and in my opinion, the only reason why gold is attractive as money. Because of its unique characteristics, it is reliable.

That is why inflation is problematic and why even those who argue that it can be positive base their conclusions conditionally on inflation being both moderate and predictable. This may well be so throughout the ordinary business cycle, but it is far from obvious, at least to me, that it is so or even can be so over a long credit cycle. The reason for this is that such cycles are long. To get a feel for this consider: the last time the US economy was in a similar position as it is in today was some thirty-five years ago. Does anyone seriously think that the Federal Reserve has a planning horizon that long? In the mid-‘80s, Paul Volcker was asked why he had done such and so, and he replied that in central banking, one deal with yesterday’s problems today, not with tomorrow’s, or words to that effect. This was nothing more than an honest description of the realities of politics.

The Political Roots of Inflation: A Century of Monetary Policy and Consequences

Indeed, the real problems with inflation flow from politics because there is no more political act than granting the right to issue money. Today, we are living with the consequences of the Federal Reserve Act of 1912, which created the Federal Reserve System, a collection of private corporations owned by the very institutions that it supposedly regulates and which profit from the money monopoly that Congress granted the Fed.

The creation of the Fed represented the triumph of expedience over principle and of partisan profit over national interest, so what else is new? The Trusts that the Fed’s creation was nominally meant to control were granted ownership of the Fed. The demand of some reformers of the day that the trusts should not be allowed to control the nation’s money but that the government should do so was met by Congress in the breech: Congress nominally accepted the responsibility and then delegated it back to the Trusts. And that is where matters still rest.

The significance of this to the question before us here is that this laid the groundwork for a changed attitude toward debt and inflation both amongst the captains of industry and in society generally, and the Fed’s primary role during the 30s became that of debt accommodation. To be sure, this was at first exercised with circumspection, but after America emerged unchallenged for all intents and purposes from the Second World War, circumspection crumbled. The result was Nixon’s expedient abrogation of America’s international treaty obligation, and expedience has governed national monetary and fiscal policy since, as it has for a century at least.

Monopoly Control, Public Asset Looting, and the Role of Inflationary Debt Accommodation by the Fed

That experience has led to the progressive consolidation of monopoly control over industry after industry and the wholesale looting of public assets on a scale not seen since the land grabs in the Republic’s early days. Monopoly control over the monetary system has made the financing of all this with debt ultimately backed by the obligation of citizens to pay taxes, which is to say, with other people’s money. Another way of putting this is that in monetary terms, this has been financed by inflationary debt accommodation by the Fed.

The Fed’s ability to do this rests on the degree of prevailing popular belief in the legal fiction that it is independent of political control and that it will perform its duties in a proper fiduciary manner. This is the most transparent fiction and has resulted in laughable expedients by the Fed and the government over the years to maintain its “credibility.” So, for instance, in the early ‘80s, when house price inflation was soaring, it was dropped from the inflation indices in favour of “imputed rents” that were not flying. Hedonic pricing was another wheeze that has allowed the harnessing of Moore’s Law in computer performance to the price indices.

The Treasury, together with the Fed, seeks to control the prices of gold, exchange rates and so on, but piously intone that targeting asset prices (i.e. stocks) when they are going up is improper, but supporting them when they go down is responsible behaviour. The Fed has “granted” to its owners the right to self-regulate their market derivatives businesses, which is to say, to value their balance sheets, in flagrant disregard of its Congressional Charter, and promoted the extension of this right to include credit derivatives under the terms of the new Basel II Accord.

The Fed, Asset Prices, and the Complex Dynamics of Economic Inequality

I doubt that even JP Morgan, who reportedly once told a friend that he lost sleep at night worrying about an antitrust suit being brought against him, would have, in his wildest dreams, imagined that he and his kind could, never mind would, get away with this. That the Bushes and the Rubins of our world are getting away with this and with much else besides says volumes.

It is no accident, of course, that corporate profits have soared as the Fed has pushed interest rates toward zero and the administration has opened the bond floodgates. Workers have not participated in this, and wages are stagnant. Jobs are being created, but the Fed’s inflationary debt accommodation flows straight through to the bottom line in other countries. The Wall Street euphemism for this is that this is higher “productivity,” but this is nonsense in any economically meaningful sense of the term. When one looks at personal debt statistics in the United States, it is not “productivity” that comes to mind but “predatory lending.” This is a straightforward inflationary siphoning of money from one end of the economic spectrum into the pockets of the other end.

So, gentlemen, in answer to the question at hand, I can only answer: it depends on which end of that spectrum you are.

© 2004 Chris Sanders
Principal, SandersResearch.com
Email

Inflation Benefits by George J. Paulos

Editor/Publisher
Alternatives for Financial Freedom
Proprietor, www.freebuck.com

Inflation: It’s Not Just a Good Idea, It’s the Law.

The law in question is the Federal Reserve Act of 1913. By giving a small cartel of bankers the exclusive right to create unlimited money and credit, the Act virtually guaranteed long-term price inflation. Since 1913, the US dollar has lost almost 95% of its purchasing power. This loss in purchasing power is a direct result of a massive increase in the supply of money that has occurred since the founding of the Fed.

Historically, spokespeople for the Federal Reserve always maintained an illusion that the Fed was dedicated to fighting the forces of inflation using its power to set short-term interest rates. Nowadays, there is not even a pretence of fighting inflation. Fed governors have now declared deflation, a fall in the money supply and general price levels, to be public enemy number one. Recently, Fed governor Bernanke stunned the world by admitting that the central bank could and would use the power of the mythical money printing press to create inflation if necessary. Fed Chairman Greenspan publicly lamented that “an unwelcome fall in inflation” would be disastrous to the economy. What is an “unwelcome fall in inflation” anyway? I would gladly welcome deflationary relief against sharply rising energy, food, insurance, housing, and medical costs. Why is it to my advantage to pay more for everything that I buy?

To be fair, Messrs. Greenspan and Bernanke have something to worry about. The massive increase in “money” that I mentioned at the beginning of this essay was a little misleading. The Fed actually creates relatively little money in the sense of the dollar bills that you hold in your wallet. That is a true fiat currency. Created from a printing press and backed by nothing, these bills at least have some tangible reality and carry no hidden obligations or interest liabilities. Most of what we call money that is carried in bank accounts, money market funds, brokerage accounts, etc. are just credits.

There are few, if any, actual bills backing any of this “money.” Money today is almost entirely a balance sheet entry. The money that you and I hold in our various accounts is actually just somebody else’s debt. These debts are packaged as securities and traded as money. They come in the form of Treasury bills, commercial paper, repurchase agreements, and a menagerie of other exotic debt securities that people and institutions accept as payment in lieu of actual cash. Since these are all just debts, they pose the two fundamental characteristics of debt: interest payments and maturity. All issuers of these securities are obligated to pay interest and to reimburse the creditor full face value at maturity. So what happens if some of the issuers of these debt securities default on their obligations? Big Trouble.

The quirky design of the Federal Reserve System makes it relatively inefficient at creating and distributing cash-type money, but in coordination with member banks, it is fabulously efficient at creating debt. This is called “fractional reserve banking,” and it allows your local bank to make gobs of new money via lending, all mediated and facilitated by the Fed. Fractional reserve banking is like a pyramid scheme (remember Mr Ponzi?). The system works fine if only a few people try to cash in. But like all pyramid schemes, it needs a constant flow of new funds to keep the game going. Since almost all of the money in existence carries a compound interest rate, the supply of new cash or debt must increase by at least as much as the interest expense to support the system. This is where inflation comes from. Don’t believe me? Look at the chart of M3 broad money supply.

Since 1960, there has hardly been a single year when this broad measure of money materially declined. This is good because it allowed the money game to continue and the country to prosper and grow. Should the money supply start to decline, there would not be enough money to pay interest expenses, so debts would start to default at an increasing rate. Since debt is also money, disappearing debt will shrink the money supply in a vicious circle. This is what Greenspan and Bernanke are so worried about. They MUST keep inflation above a minimum level to ensure the proper functioning of the monetary system. It’s not their fault; they did not design the system.

Looking at the above money supply chart, Eagle eyes may see a little “hook” at the end of the graph. Is that a downturn in the most recent money supply data? Let’s zoom in and see.

Yes, it’s true. M3 money supply has been contracting since September 2003. The other money measures, M1, MZM, and M2, are also contracting. What’s worse is that money velocity is falling also, making the existing money stock less potent. If this trend continues, there will be trouble in the US economy. This is because the US is incredibly indebted at all levels. Personal, corporate, municipal, state and federal debt are at record levels and increasing. Increasing debt requires increasing money to service the debt. If insufficient money is available for debt service, much debt will default and the economy will spiral downward.

Why is the money supply falling? It seems that nobody really knows for sure but there are probably a number of causes relating to overcapacity, global competition, trade deficits, bubbles bursting, etc. Maybe the country can’t take on any more debt.

What is the Fed to do? Unfortunately, they have already exhausted almost all the tools to “reinflate” the system. They have reduced interest rates to near-record low levels in an effort to entice even more borrowing. But as we have seen, more borrowing only increases the strain on the system and the Fed is near the end of its effectiveness using its conventional policy tools. They have threatened to go “unconventional” using untried and aggressive tactics but this will only further weaken an already battered US dollar and may destabilize financial markets. The Fed is in a box, and there is little left for them to do except to jawbone the economy into recovery.

It seems that we are near an endgame of some sort. Some people think that it will end in hyperinflation and those who argue for deflation. It’s possible that we may experience both simultaneously in different markets. The debt situation can only be resolved by either depreciating the currency (inflation) or liquidating the debt (deflation). Investors must prepare for either scenario. This is why many thoughtful advisors are stressing the need for some precious metals and hard assets as part of a sound portfolio. These are the few asset classes that will weather this storm.

George J. Paulos
Editor/Publisher
Alternatives for Financial Freedom
Proprietor, www.freebuck.com
Email
Copyright © 2004 George J. Paulos, All rights reserved

Inflation Benefits: Views from Grant Noble

Publisher
www.tradestars.com

I believe we are shifting from gold to TIPS or inflation-adjusted bonds as the reserve of choice for the world central banks. That’s why talk of them running out of gold is nonsense because they will sell it all and a weakening economy will take care of the rest. Factoring out inflation and the fall of the dollar, gold has been in a bear market since last February and will continue to be in one until there is a collapse in the world banking system.

We will not repeat the 1970s because there is too much debt around. (In the 1970s, inflation and lack of deficits made debt a much smaller % of the world economy, so leverage in commodities and ignoring bonds was possible—not today!) The situation is very similar to the early 1930s—after a stock boom and massive debt accumulation due to 70 years of prosperity and government wars, there was a great struggle for liquidity, and the first asset sold was gold. Gold went down under $17 an ounce in 1931 and then doubled to $35 in 1934 revaluation. Gold didn’t recover until the Bank of England repudiated the gold standard in September 1931.

My research over 300 years shows that gold is not the asset to own in a financial debt crisis (vs. an inflation boom after debts have been liquidated) until the very end. I do believe gold is heading back near 1000 sometime after this year, but it looks like it will get to a dollar/inflation-adjusted bottom near 300 before that happens.

Inflation Benefits by Alan Lunt

Contributor
Tactical Investor

It was an honour to be asked by Sol to contribute to the discussion, as I am an unknown. Before I entered the markets, I spent 27 years farming and seven years on and off in forestry, cutting trees off at ground level. I learnt a cartload. From forestry, it was that there are 2 perilous times: the first is when you are learning, and the second is when you know how. From farming, it gained firsthand knowledge of how inflation works in a primary industry. On 3 separate occasions, I saw the value of my farm double in the space of 2 years and saw it halve in value once. Those are not conditions of stability, which are needed in order to make sound business judgments, particularly from a long-term perspective.

I define inflation as an increase in monetary aggregates, an increase in volume and an unsustainable condition. When an animal dies on a farm, if it is not disposed of quickly, it inflates into a putrid, rotten, seething mess before it collapses into nothingness. It is a natural cycle, one that cannot be tampered with. In monetary inflation, there comes a point when inflation will implode on itself, too.

All the increase in the value of my farm did was give me the ability to borrow more so I could pay for the rise in costs; it did nothing like the same orders of magnitude to my income. Inflation stole my profitability. It is a sneak thief, a plunderer and a slowly tightening vice. At some point, the production of goods has to become profitable, or production ceases. The laws of diminishing returns turn into a race for economies of scale. Inflation causes farm prices to rise, but the value of what comes off the land does not increase. All that has happened is one more sole out there looking for work and one more deserted dwelling.

I saw, I felt, but I didn’t understand the dynamics of inflation. My learning came when I was a practical farmer. Does this mean that now I have to face dangerous times? I think the answer is yes. I look around this town and see house prices that are doubled from this time two years ago. The house is still the same, it has not earned t its increase in value, the owners are happy, but what they don’t see is that the value of their cash money has been cut in half in relation to house prices. We do not measure money against things, we measure things against money. What is constant? What is the one thing that does measure money?

I view Sir Alan Greenspan as the world’s most powerful man. His decisions affect the globe. His open spigot policy is harming commodity nations. He has increased liquidity to such an extent globally that the world is sloshing around in paper money. That money must find a home, to date, it is stocks and property. Also, the ingrained psyche demands that money be spent before it loses value.

Each country has an individual business cycle, and Keynesian Theory demands a loosening of liquidity by the country’s central bank affected by business weakness. In New Zealand, the business cycle was not in trouble, we were coming off a currency low, and there was no need for added liquidity. But the money pump from the Fed spilt over into this country. The flight of US dollars poured money in. That money has found a home here and property. Prices have rocketed. In communication with Dr Brash, the past Reserve Bank Governor, he told me “that he thought a little inflation was not bad”.

That may be true when you are being paid in a local currency, but when your income is from the international markets and you are battling currency rises, any cost inflation increase is destructive. Greenspan’s policy is slowly but surely destroying our primary sector. Money is coming here because we are a commodity-based nation, and that same money is destroying the base it came here looking for. When that money leaves again, it will leave a spent carcass and people wondering what on earth happened. It will leave a debased currency.

Is inflation a good thing? I view it as destructive, insidious, mercurial, hidden and most of all debilitating. Gold is the only weapon we have for protection.

Inflation Benefits: Views from Antal E. Fekete

Professor Emeritus
Memorial University of Newfoundland

The chief beneficial effect of inflation, ironically, is deflation. Of course, this is contrary to the designs of the inflationists who in 1971, advised the government of the United States to destroy the gold standard. They justified inflation as “the lesser of two evils.” They abhorred deflation, a beast they admittedly could not control, but thought that inflation was a tame beast that they could. Their utter failure to grasp that the destruction of the gold standard would, albeit with a lag, cause deflation once the pendulum swung the other way has landed the world in the present precarious position. Their policies have made the Kondratieff long-wave cycle, consisting of alternating inflationary and deflationary spirals, get out of control. It was criminal negligence of gigantic proportions on the part of the inflationists that they have never investigated the more remote consequences of the destruction of the gold standard.

Of course, the inflationists realized that their anti-gold policies would destabilize the dollar and unleash speculators in the foreign exchange market. They welcomed this as a helpful development and recommended the manipulation of monetary and fiscal policy to save the dollar from immediate and complete destruction. They did not realise that their anti-gold policies would destabilize the interest-rate structure and unleash speculators in the bond market.

Interest rates, no less than foreign exchange rates, were stable under the gold standard. Speculation in the bond market, no less than in the foreign exchange market, was non-existent. Only benign arbitrage kept foreign exchange and interest rates stable in the face of temporary disturbances such as crop failures or earthquakes.

No inquiry was held into the consequences of gyrating interest rates on the world economy. In particular, the deflationary danger inherent in a prolonged fall of interest rates was completely ignored. The point is still not widely appreciated, and the world is totally oblivious of the mortal danger of a depression that might come about as a delayed side result of the destruction of the gold standard thirty years earlier. Economists of the current vintage have been trained to parrot the slogan that “the gold standard was the direct cause of depression.” This is the exact opposite of the truth, as the following discussion will reveal.

Bond speculation is no zero-sum game. Virtually all speculators are on the long side of the bond market. They follow the lead of the Fed in buying the bond (or interest-rate derivatives). The Fed makes bull speculation in bonds risk-free through its open-market operations. The question arises: who is on the short side? Why, the producers, of course. They are passive participants, whether they like it or not, with their capital at stake, who stand to lose as the interest rate falls. Literally, they have no choice in the matter. They are the sitting ducks in this unconscionable shoot-out arranged for the benefit of speculators by deliberate government policy.

Moreover, the producers are pretty unaware of what’s going on. In particular, they are utterly oblivious to the fact that they are being served up as the sacrificial lamb on the altar of government omnipotence. Bond speculation aided and abetted by the government is responsible for denuding producers of their capital and transferring their wealth to the bond speculators in unprecedented profits. As the producers lose their money, the domino effect of falling firms paralyzes the economy, causing unemployment and collapsing prices.

The present deflation caused by inflation is most conspicuous in Japan. It should be our signal heralding the coming depression. We should heed the warning and stabilize the interest-rate structure forthwith by opening the U.S. Mint to the free and unlimited coinage of gold. If we fail to do this, then we may have to pay a terrible price as history’s worst depression will engulf the world economy, wiping out prosperity.

Inflation Benefits by Ed Bugos

Editor
www.goldenbar.com

Does the Policy of Inflation Have Positive Benefits?
None its Proponents Would Admit To

Debating that question from a Contrarian point of view (i.e. that it does) is a tall order for me because I’ve argued relentlessly – as many of my peers have – that inflation has, at best, no benefit and at worst, enormous negative consequences. Though I’ve considered many of the alleged benefits, I’ve discovered none that could qualify as a real economic or social gain (for the purpose of brevity, we’ll assume the reader accepts the definition of inflation solely as it applies to the growth of money and credit – rather than prices or a price level).

At any rate, mine is a controversial position today, because it implies in absolute terms that even the slightest change in the supply of money is “undesirable.” While undesirable may be a good word to conform to the common lay interpretation of that concept, it is exactly the wrong word to describe a sound objection to the policy of inflation.

Untenable or futile might be better. Lacking any utility would be accurate. However, claiming that inflation is undesirable is technically incorrect because many people desire it. Implicit in that fact is that they think they can obtain a benefit, and for some time, they probably can. It’s merely a matter of being in the right place in line. The real trouble is keeping your home.

Real estate developers routinely tell me how they love inflation – because their properties increase in value while developing them. There must be gold bulls that, underneath the surface at least, secretly worship inflation because they own a few gold stocks or like to hoard bullion, despite what they say in public (Kudlow is an exception). The same applies to many industries and segments of the economy. Most people must think they benefit from the inflation of the money supply on one level or another, or else there would be no sustainable mandate for it in a democracy.

Yet most of these benefits are largely self-interested and illusory. Or at least I claim they are.

For, in a time where even some of the most ardent hard money types accept a degree of inflation as for one reason or another necessary or beneficial, or not worth disputing, where inflation has reigned almost year in and year out for more than a century, and where most economists both public and private impute some degree of validity to the concept, the assertion that inflation confers no economic benefit on society must also sound relatively reactionary, or outdated.

Are we to believe that everyone else has got it wrong? How arrogant!

Well, there’s more. The fact that everyone has got it wrong is partly deliberated. The theoretical framework for most policy is either Monetarist or Keynesian on some level. Indeed, our argument is that the credibility of the theoretical constructs used to justify inflationary policies rests not with their validity, but rather with their convenience to the interests of the proponents of easy social policies, which don’t benefit anyone. If making that charge is arrogant, so be it.

We live in a world governed by the market’s laws, which refuses to accept the market’s discipline. Instead, we’ve erected massive institutions to challenge or control the market. Through shared interests, we have come to get their flawed theories and related alchemy.

But rather than reiterating the Libertarian and Austrian School argument that inflation confers no benefit whatsoever in the first place, I’d like to point out instead that I’ve found few instances where even the proponents of inflation (in terms of money and credit) are willing to argue directly that it confers a true economic benefit.

It seems their preferred strategy is to ignore such arguments and redefine the concept of inflation such that it is okay to despise it without arguing against an expansion in money/credit.

In other words, because inflation is generally defined as currency debasement or a quickening pace of increase in the general price level rather than an increase in money supply, the debate over the benefits (or drawbacks) of money supply expansions loses explicit relevance.

Notwithstanding, rationalizations exist. The following benefits are commonly cited:

We need a lender of last resort
2.       A growing economy needs more money (suggesting a positive impact on productivity)
3.       Price stability (ironically)
4.       Credit / monetary cycles can last indefinitely
5.       Markets need liquidity
6.       Everyone should have the opportunity to own a house
7.       The socialist’s goal of achieving full employment on its terms rather than the market’s
8.       Money supply as a general tool of economic policy

Forgive some of the overlaps. For example, numbers 2, 3, 5, 6, 7, and 8 are inherently the same because they all suggest that money is part of society’s productive capital (as opposed to merely the medium of exchange). Nevertheless, these seemingly positive rationalizations differ markedly from the benefits that the policy proponents aim for.

Once it is seen that the theoretical support for the veracity or efficacy of the rationalizations above breaks down easily, we’re left wondering either the government is dumb or those aren’t the real reasons they prefer the policy of inflation.

Of all the various groups that favour inflation policy for its perceived benefits, the two most influential sectors are the nation’s banking system and government.

The positive direct benefits that governments actually believe they can obtain (but never reasonably can and never admit to aiming for) are generally recognized as follows:

Policy exculpation and utility in sustaining deficit spending generally
2.       The financing of programs incapable of passing taxpayer scrutiny
3.       The financing of election campaigns (by using it as champagne for the economy)
4.       The financing of emergencies such as war is seen as a productive use of inflation policy
5.       Growing the dependency of society on the welfare-warfare state
6.       Wealth redistribution to bureaucrats, politicians, regulators, and/or unions
7.       Empire building

Some of the benefits a banking cartel might secretly strive for from inflation are:

Control over wealth and its redistribution to financial sector/banking czars
2. The subsidization of extravagant lending practices (and fractional reserve banking)
3. The concentration of power (since centralization is required to sustain any inflation policy)

However, just like the real estate developer would only admit to desiring inflation in confidence, these influential groups aren’t likely to accept to these particular benefits any time soon for fear of implicating themselves and undermining the credibility of the fallacious theories they peddle.

Instead, they pretend that the growth in money supply is but a byproduct of economic progress and growing wealth. They attribute credit to the market system for inducing the creation of money all on its own as if it could be sustained without a central bank to influence and alter values (i.e. to control/postpone the consequences) and as if the government’s spending demands caused none of it. They readily attribute credit to the central bank for stimulating expansion in employment through its manipulation of interest rates (the price of credit). Socialist governments, in particular, tend to promote the benefits of inflation for everyone but themselves.

Thus, they justify inflation by lying to you about the nature of the benefits it produces (because the wealth is denominated in a currency that ultimately devalues according to the laws of supply and demand and the basic theory of the value of money), but rarely claim to pursue any of the more insidious self-interested benefits gold bugs claim they strive for via the policy.

For instance, in the paragraph before last, the reality is the opposite; the market should be credited for producing any real recovery, and central banks should be blamed for their influence in the market of sustaining a policy of below-market interest rate levels – easy money – leading to the creation of too much money (and credit), which undermines the market’s potential to efficiently satisfy society’s true needs.

In conclusion, it is the monetarist idea that is victorious in so far as the academic world does not attribute any significance to the most significant single influence on the value of the currency and, consequently, on the price structure of the economy – the growth of money and credit. In such an environment of denial, the question of the benefits of inflation is incidental to the fantastic claim that inflation is low or nonexistent.

In my view, this path is chosen because we are, in fact in the 21^st century. The nature of information has changed; people should be increasingly less easily fooled, and perhaps it is easier to argue something is black when it’s white than to argue the veracity of some of the traditional but increasingly discredited rationalizations in favour of the inflation policy.

But the question remains: if even the benefits that inflation’s proponents secretly pursue confer no true or sustainable benefit, why has the policy lasted so long, and why is it still so popular?

Either our basic argument is incorrect, or the proponents of inflation are too dumb to understand the consequences of their actions, or they are flat-out enemies of money and, consequently, the free market. If our argument is sound, the remaining two options are sobering thoughts.

Originally published in Sept 2004, this work has undergone several revisions throughout the years, with the most recent update completed in August 2023.