Thursday, October 21, 2010

Worried About Deflation?

I know that most of the readers of this blog are in a panic about the possibility of deflation (instead of inflation), so I thought I'd better try to allay your worries.

Here, Robert P. Murphy does his usual excellent job of explaining why the threat of deflation is a hoax perpetrated by the Fed and other power brokers who move all the rest of us about by mangling financial markets.

Since the invention of the Fed in 1913, the purchasing power of a dollar has been steadily eroded by inflation.  What $1 used to buy in 1913 now buys less than 10 cents worth of equivalent goods and services.  Now that really is a problem.

Price inflation is a sustained increase in the average of the prices of all goods and services in the economy. Price inflation is a problem because it is a silent but effective form of government theft.

Price inflation occurs if and only if the money supply is inflated first and persistently.  When the federal government runs a deficit --- as it has since time out of mind --- new money injection into the economy finances the government's deficit.  In other words, the federal government purchases real stuff with newly created money.

The newly created money results in general price inflation if the economy is growing at a slower pace than the rate of new money creation.  In simple terms, prices get bid up because the new money is just money, and production of real goods and services hasn't grown enough to keep up with the creation of new money.

Price inflation means the purchasing power of your dollars falls.  You thought you had a dollar of purchasing power, but by next year, you have only 98 cents of purchasing power.  After 10 years of just 2% price inflation each year, you have only 82 cents of purchasing power from every dollar you had 10 years earlier.

In the mean time, the federal government has spent billions of newly created dollars on real stuff without bothering to tell you that they were taxing you with the inflation tax to finance the spending.  Pretty nifty, huh?

Money inflation is exactly what the Fed has been up to for the past 98 years or so.  So now, Bernanke's Fed wants us to believe that even more inflation is necessary to ward off the specter of deflation.  Just why general price deflation would be such a problem is not clear, but we are supposed to be terrified at the prospect.

Pardon me for thinking this way, but I think the real reason the Fed keeps inflating the money supply is because the Fed is a creature of the federal government (i.e, the 545), and the U.S. Treasury is the first and most substantial beneficiary of new money creation.

If you can steal from people without them recognizing they have been robbed, you can probably keep stealing from them indefinitely.  That's what inflation is all about.  And it's not new; it's been around for centuries, all the way back to the days of coin clipping by kings to finance wars.

Of course, if your personal income keeps up with inflation, you probably don't mind.  But what about the rest of us?

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