This credit money is only a shadow of what commodity money is. "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."-- John Maynard Keynes, The Economic Consequences of the Peace, 1920

Inflation:  An Unknown Quantity

If you were to do a quick scan of the internet, you would find varying view points on all sides of the subject of inflation.  Definitions will vary...  Some will tell you that inflation has to do with high prices, and more refined definitions will claim that it is an increase in the demand on the goods of a market, without a corresponding increase in production.  If you were to ask the same question on the street, you would find even more ignorance and confusion on the subject.  Even worse, you will find that the cause of inflation is yet more difficult for the educated and the uneducated alike to define (this should be expected since one cannot know the cause without knowing what it is.)  How can this be?  We have had hundreds of years of economic history to study the matter, yet our best minds seem perplexed by it.  Even in modern libertarian movements, you will be hard pressed to find a good definition and remedy for this economic anomaly.  It has been whitewashed from our collective consciousness by those who seek to keep us ignorant on the subject.

An elderly gentleman railed against the high price for lemons in a public grocery store to me one morning:  

"I can't believe how expensive lemons are these days!" He said.  "I remember when I was a kid, lemons were 25 cents a bushel, and now they are 50 cents a piece," he went on, while I nodded.  "Do you know why that is?" He asked me (of all people.)

"Inflation," I responded...  "Causing prices to ever increase."

"Yes," the elderly gentleman retorted...  "And it started with FDR.  FDR was the biggest communist this country has ever known, and I am amazed at how many people do not know this.  He was the President who took us off of the gold standard and confiscated the private holdings of all Americans, and we have had inflation ever since."

Seeing that the man was very enthusiastic, I didn't interrupt and let him continue...

"Most people can't remember it, but I do," he exclaimed. "I remember government officials from the NRA throwing out our milk and burning our crops...  I remember because I lived it."

 The effects of inflation are widespread, and felt throughout the economy by each and every one of us every single day.  From an old man in a grocery store to the CEO of Wal-mart, inflation is a scourge that should not go unnoticed.  But the reality is that we have become so accustomed to its effects that we scarcely give it a thought or a nod.  Like fish in a bowl, we become used to our cramped surroundings, forgetting that we once lived in a vast ocean.  The slow march of inflation is tolerated by some of us, and ignored by the majority of us, until the day of reckoning.  Like a slick Ponzi scheme, we go along with it so long as we think that we can profit, but as soon as the whole system falls apart we are clamoring for our money back and crying for someone's head.

 "Every Congressman, every Senator knows precisely what causes inflation...but can't, [won't] support the drastic reforms to stop it [repeal of the Federal Reserve Act] because it could cost him his job." -- Robert A. Heinlein, Expanded Universe   

The government, and its regulated friends in the media, love to play semantic games with all of their nasty little secrets.  They brainwash the public into thinking that inflation is its own symptom (rising prices.)  For if the public knew that the real cause of real inflation lies in the debasement, by government, of the public money, they might develop concern for their hard earned dollars and take it out on government officials come election day.  By defining inflation as "rising prices", the government can lay blame for it on their citizens and the business sector, giving government an excuse to pass legislation regulating the private sectors of the economy (every tyrants dream.)  As a consequence, the Federal Reserve is now seen as a remedy for inflation, as opposed to a cause for it; thus the public now views the Federal Reserve System as their savior from inflation when in reality this system is the very root and cause of all of their economic woes.  Without the Fed control over the economy, the public is told, inflation would become rampant and the economy would fall into ruin.  The valiant government can then swoop in and save us all from the evil business sector, through price controls and regulation, who, according to government, is price gouging the public, thus government comes off looking all of the part of the public servant and hero, while covering up its own fraud.  They can literally define it away.  This is the reason for the vast ignorance on the subject by the citizens of this country, and for the false pretense of our media and learned institutions.  

 With inflation as well as with taxation, it is the citizens who must foot the total bill. The distinguishing mark of inflation, when considered as a method of filling the vaults of the Treasury, is that it distributes the burden in a most unfair way, overcharging those who are least able to bear it.-- Von Mises,  New York World Telegram & Sun, May 7, 1951.    

Adding to these vagaries, are the special classifications of inflation that you will find in an economics textbook: price inflation, cost push inflation, etc. But rest assured that there is only one real form of inflation in the modern economy and that is monetary inflation. Though shortages can cause a run on a product base (increased demand), thus causing an increase in prices (price inflation), this form of inflation is usually short lived, and often a direct consequence of government meddling, e.g., monetary inflation.

So what is a good definition of monetary inflation?  Put simply (all other things being equal) it is an increase in the levels of fiat currency and credit, or the debasement of coin, without a corresponding rise in production, thus inflation is a form of theft perpetrated against the people by the government through the stealing of  production, devaluing everyone's money through an increase in average price levels in the long-term aggregate.  It is basic supply and demand economics.  The increase in the supply of money and money substitutes (credit) cause a corresponding increase in the demand for real products (an increase in the demand for production without an increase in actual production,) thus causing the price of that production to rise.  In modern society, and a country like the United States, inflation is mostly caused by the expansion of credit and deposit currency, i.e., the setting of discount rates by the Federal Reserve and the witling away of bank reserves, thus expanding credit and debt throughout the economy.  We are, after all, a credit and check society.   By understanding this definition, you will have knowledge that one person in ten thousand has, so by all means spend this capital by putting your economics professor to shame.

Some more little understood aspects of inflation are its general effects upon the population.  Most go about their busy and distracted lives without paying much thought to the prices of certain commodities and services that they buy.  The slow decay of their pensions, savings accounts, and social security accounts are barely noticed, and easily hidden.  The greatest effects of inflation are felt most by those members of our economy known as creditors.  Anyone who is owed a debt of some kind, such as pensions, social security, insurance, and savings accounts is a creditor, and due to inflation is paid back in devalued dollars.  Debtors are the sector within society that benefit the most from inflation, for their debt is owed in constantly devalued dollars, thus they now owe less than before and pay back their debts to their creditors in devalued dollars.  Don't think for a moment that this means that credit card companies will be hit hard by inflation, while you (their debtor) will end up smelling like a rose.  No, inflation will effect the widest sector of creditors (middle class and the poor) the most, which means that your social security benefits, Medicare benefits, pensions, 401K's, and savings accounts will be hit the hardest.   Modern American society has been converted into a creditor society, where nearly everyone owns insurance, accepts some form of government assistance, and saves for their retirement through banks and stock certificates.

You and I, as individuals, can, by borrowing, live beyond our means, but for only a limited period of time.  Why, then, should we think that collectively, as a nation, we're not bound by that same limitation?  We must act today in order to preserve tomorrow.-- Ronald Reagan  

Anyone who owns US dollars is a creditor of the US government, who promises to pay its debts with even more debt.  The modern dollar is nothing more than a credit instrument backed by debt.  Unlike its predecessor, if you tried to collect a dollar's weight in gold from the US treasury, you would be laughed at and sent away with nothing but monopoly money in your pockets.  The fact is that the dollar is no longer backed by anything other than US bonds (monetizing the debt,) which are nothing more than debt instruments; thus it is backed with a promise to pay you in more debt.  You have been fooled into accepting the debt of the US government as your money.  This has created an ideal environment for the bankers (debtors) that have now gained a primacy of power and control over the economy at the expense of everyone else.  When you open up a bank account, you are in fact opening up a credit line and handing your money over to an institution that is not obligated in the least to pay you back, as many during the Great Depression found out.  

That is the evil little secret of inflation:  a few benefit while a vast majority is being fleeced.  It is a cancer that is easily diagnosed in some sectors, while more subtle and unnoticed in others.  Its effects are so widespread and so seemingly diverse that its chaos is easily misdiagnosed, masked and attributed to something else.  It may be apparently beneficial in some sectors (stock bubbles,) while much more pernicious and unwanted in others.  Either way it is detrimental to a majority, while benefiting a small minority of government thieves and their Wall Street friends.  The masses (middle class) always loses in this exchange, but are easily fooled into thinking that they are benefiting in the short-term, or even that they are the ones to blame for it all, i.e., they are framed by their government for its crimes against society.

It would be a serious blunder to neglect the fact that inflation also generates forces which tend toward capital consumption. One of its consequences is that it falsifies economic calculation and accounting. It produces the phenomenon of illusory or apparent profits.-- Ludwig Von Mises

One symptom of inflation will manifest itself in rampant fraud and dishonesty throughout the general accounting methods of weak companies.  In an inflationary market, profits will tend to be vastly overstated, which leads to an increase in the price of company stocks as market participants rush out to buy all of the over valued stocks that they can find.  We witnessed this orgy in the 90's stock market bubble and the many exorbitantly stated profits of the dotcoms, and the failures of seemingly strong companies, such as Enron and Worldcom.  Overall, if no other factors effect them, prices across the entire economy will tend to be overstated, leading toward undue speculation and frenzied spending patterns, e.g., the current housing bubble.

 The advocates of public control cannot do without inflation. They need it in order to finance their policy of reckless spending and of lavishly subsidizing and bribing the voters.-- Ludwig Von Mises             

The most important reason for inflation is in growing the power and scope of  the federal government.  Governments relying on the taxes collected from its citizens are always leaner than they would like, and the collection of taxes can only go so far in the equation without causing political upheaval.  A better solution arises when government can seemingly manufacture money from thin air, and then bribe its constituents with programs and promises, while funding its wars.  It doesn't matter which political party occupies the Whitehouse the M.O. is always the same...  Expand credit and spend more on vote-pandering programs.  Create a bloated bureaucracy by which government can fleece and steal, while its constituents beg for more.  The government comes off as the benevolent grandparent, who is willing to spoil its grandchildren until they are rotten.  Keep them distracted with all of the candy and toys, and they will fail to notice the danger that lurks just around the corner.  They will even go to war for you, but the evil secret of the matter is that it is all smoke and mirrors, and what appears to be candy is actually poison.  Our founding fathers would be shocked to see the size and scope of the current Federal government.  Surely, the tyranny of King George would pale in comparison.      

Inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism.-- Ludwig Von Mises

There are generally two methods used by governments for dealing with this Frankenstein monster that they have created:  first, they can allow the economy to collapse under the weight of its ever mounting debt, or, second, it can encourage the expansion of credit and debt across the economy, flooding it with ever more money, thus staving off an economic collapse in the short-term aggregate, leading toward a hyper-inflated and collapsed currency in the long-term.  Our government appears to be in line with the latter.  The Federal Reserve seems content to mask all of its major economic inflationary concerns by pumping the economy with more debt and credit, which will eventually lead toward the ruin of the US dollar.  The dollar exhibited extreme weakness throughout most of 2003 when it fell in value compared to most of the major world currencies.  Iraq reportedly attempted to get off of the dollar standard, and China has recently followed suit.  No longer considered the most stable currency, the US dollar is losing ground to the world.  The government, by pumping the economy with money and maintaining unprecedented trade deficits, is hoping that overseas markets will recognize the US dollar as the standard bearer, but this charade cannot go on forever.  The dollar is showing major signs of weakness, and foreign countries are increasingly hedging their bets against it, while the dollar's counter balance (gold) soars in value.  Compound all of this with the facts that more dollars are owned by foreigners than Americans, and that there is far more debt than dollars to ever pay it off, and you have a recipe for disaster.

(The above graph represents a general change in price levels and not necessarily inflation, which just shows the bias that I've been discussing in the media and press.  Though in the short-term prices can be effected by several things, in the long-term aggregate an increase in average price levels is indicative of inflation.)

Why does the government bother taxing us at all?  Well, the answer is that they don't really have to, but inflationary pressures require that they do.  After all, they don't really need the money from taxation...  They can just pull money out of the air (monetizing the debt) and create as much of it as they like.  The 1984 Grace Commission put together by Ronald Reagan concluded that  "...100% of what is collected is absorbed solely by interest on the Federal Debt...  All individual tax revenues are gone before one nickel is spent on the services that taxpayers expect from government."  Yet the size and power of the Federal bureaucracy has increased exponentially year after year.  The income tax is a form of control over those that can least afford to pay it (the middle class and the poor,) and is a means used by the government for removing money from the bloated economy, and thus relieving inflationary pressures.  It is no accident that the Federal Reserve and the Income Tax were nearly founded simultaneously.  Taxation is a method of control used by the debtor bankers over their unknowing creditors.  As long as the tax payers don't wake up and realize that they are creditors owed trillions by their oppressors, then the debtors can continue taking their spoils to the bank.  Interestingly enough, there was an article featured in a 1946 issue of American Affairs written by Beardsley Ruml, who at the time was Chairmen of the Federal Reserve Bank in New York.  In this article entitled: "Taxes for Revenue Are Obsolete", he laid out the real goal of inflation, and that was to manipulate price levels and to mask inflation.          

What will become of the bloated American economy?  One can plumb the depths of history to find countless examples from the central-banking-fiat-money-coin-debasement trash heap, such as the Roman Empire, whose financially dilapidated final years made it ripe for the Visigoths' picking, Germany in the 1920's, or Argentina, but the best example lies in 18th century France and their very own version of Alan Greenspan:  John Law.  He became the premiere banker in the world at the time by establishing a central bank, and pumping the French economy with ever increasing amounts of credit and debt.  He defined the term "easy money".  He created a booming debt-backed stock market and economy, and was proclaimed a wizard and worshipped as a financial God.  Like Greenspan, he believed that the modern economy called for a State-run perpetual boom, and that the word "bust" was never to be heard from again.  Dishonesty and corruption soared, as the unearned fortunes of Frenchmen were being forged (does this remind you of anything?).  Mania ensued as the French public remained heavily confident that things would go well into the foreseeable future, and all would retire into relative prosperity.  But soon that all-encompassing tamer of irrational markets reared its ugly head and the inflationary debt-bubble burst, the hyperinflation of the national currency ensued, and fortunes were wiped out.  A destitute Law fled to Holland in 1721, and this is what he had to say:   “Last year I was the richest individual who ever lived, today I have nothing, not even enough to keep alive.”  Maybe Greenspan's retirement won't be so cushy after all?

Inflation is the true opium of the people and it is administered to them by anticapitalist governments and parties.-- Von Mises

So why hasn't the dollar collapsed over the past three decades, despite all of the debt and credit expansion mania created by the Fed?  After all, the increase in general price levels over the years have been slow and steady, and except for a few instances, appear to be well contained by the maestros at the Fed.  Such is the illusion created by the confusion of price levels and inflation (which is an increase in money, debt, and credit, and not necessarily an increase in general price levels.)  There is more than one cause for an increase in general price levels, such as a real increase in the demand for products and services due to perfectly natural reasons (scarcity, quality, or demographics,) which have nothing to do with inflation; thus we can conclude from this that natural market tendencies can be pulling price levels downward, while inflation increases.  Both inflation and price levels are not always related, and this is the danger that is posed by confusing the two.  The Fed as well as the public can falsely believe that because price levels are not totally out of hand, that inflation is under control and the economy is healthy.  Murray N. Rothbard (preeminent Austrian school economist) noticed this fact and said:  "The fact that general prices were more or less stable during the 1920s told most economists that there was no inflationary threat, and therefore the events of the great depression caught them completely unaware" (America's Great Depression, Mises Institute, 2001 [1963], p. 153).  As you can see, the whole idea of using a Consumer Price Index to help gauge inflation is severely flawed.  This is why modern economists seem to be so completely lost and inept, and have bought hook, line, and sinker the government propaganda on the issue.  An accurate measure of inflation would involve data concerning the average rise in the money supply and credit expansion, and based on these measurements the numbers are unprecedented.

Another factor in keeping the dollar afloat over the past few decades has been the diabolical manipulation of gold supplies by the central banks of the world.  It is common knowledge among historians that most of the gold supplies of the people were stolen by their governments and hoarded by European and Wall Street banking cronies.  Why?  Because gold is the money of choice by anyone who cares to safeguard their wealth and savings from inflation, and this poses a problem to central bankers and their debt-backed-inflated fiat currencies.  So for years central bankers have been hoarding gold reserves, and whenever the price of gold gets a little out of hand, or they are confronted with an economic crisis, they merely dishoard some of their vast gold reserves in order to increase the supply and deflate the price of gold, inflating the value of their fiat currencies.  The result has been that gold is greatly understated in value, while keeping the dollar from total collapse.  This trend cannot go on forever, however, for soon gold will sky rocket in price as the central planners of government economy are held aghast.  This power of the Fed and other world central banks is a well-kept secret that they don't want you to know about.  If you did, you might be tempted to hoard gold as they have.  But it is easily seen on their balance sheets, and it was briefly mentioned by Alan Greenspan a few years ago.  What do the money powers choose to use as their money of choice??  That's right, gold...  And that is why they don't want you to know that they prefer tangible assets over their own fiat currencies.

China's central bank recently dumped the American dollar as their standard, and is now eyeing gold as the best alternative investment.  It would appear that China isn't falling for America's Ponzi scheme, and is seeking to replace much of its American debt-based economy with a much safer gold-backed one.  As for now, they are smarter than the rest of the world, but expect the rest of the world to follow suit and the game will be up for central banks and their fake economies, unless the American military has something to do about it.  You can expect China to continue to engorge themselves on America's ridiculous trade policies (150 billion dollar trade deficits) while sticking it to the Fed.  Rumor has it that Saddam Hussein tried the same thing, but to no success thanks to our vast military might.  

One anomaly has been noticed concerning all of the many cases where inflation has ravaged an economy throughout history, and that is that no two instances, though caused by the same affliction and showing similar symptoms, are manifested in the same means to an end.  Some economies inflated quickly and deflated quickly within a few years, while others languished on for many years before they were finished.  There are many factors that determine and fuel an economy, and no economist can account for them all, but one thing is for sure:  every Ponzi scheme runs out of steam and crashes to a bitter end.  The fact is that the American economy has shown great instability over the past hundred years, where we have witnessed far more booms and busts than is perfectly natural.

A truly inflation-free economy would spur savings and growth, be free of business cycles, restrict government power, and restore living standards. To reduce inflation by defining it away, on the other hand, is like eliminating debased coinage by readjusting the scales. It's something only government would do.-- Llewellyn H. Rockwell jr.

The Fed and the government have done a decent job of masking the effects of their inflationary policies by artificially inflating the value of the dollar, and by flooding the world with these bloated dollars, via trade deficits, pumping the economy with expanding debt and credit, giving away billions of dollars in foreign aid, and through the bail outs of many of their Wall Street cronies by the IMF and world banks.  In essence,  they have turned the world into their unwitting accomplice, keeping the debt express going until there shall be a major derailment.  The caboose and all of its mounting debt will inevitably come crashing in on the engineer some day.  The US is not as isolated as other inflationary economies have been in the past.  When the debt and credit monster became too harrowing for the Fed to handle, they simply expanded it to all of the world, and thus kept the fraud inching forward longer than anyone could have predicted.  Also, the Fed has had a lot of help from demographic trends (Baby Boom generation,) which have kept the economy afloat despite its shaky foundation, but make no mistake:  this game cannot go on forever.  These demographic trends are changing fast, and just as Japan was on top of the world in the 80's, fifteen years after their inflationary bubble burst they are still in a state of depressed economy.            

by Ryan Bradfield