Inflation – What It Is, What It Isn’t, And Who’s Responsible For It

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Inflation – What It Is, What It Isn’t, And Who’s Responsible For It

By: Kelsey Williams | Wed, Feb 15, 2017


Inflation is the debasement of money by the government. PERIOD.

It is NOT a general increase in the level of prices for goods and services.

The above statements are critical to an understanding and correct interpretation
of events which are happening today – or expected to happen – that are casually
attributable to inflation. So, let’s go one step further.

There is only one cause of inflation: government. The term government also
includes central banks, especially the US Federal Reserve Bank.

Inflation is not caused by “greedy” businesses, excessive wage demands, or
accelerated consumer spending. Even government’s own propensity to spend, as
reckless as it is, does not cause inflation. And that does not contradict my
earlier statement that government is the only cause of inflation. They are.
But not because of their spending habits.

Economic growth does not lead to higher inflation. There are statements made
often that imply a link between growth in our economy and inflation. And that
we have to “manage the growth” so the economy doesn’t “grow too quickly” and “trigger
higher inflation”. These statements are false and misleading.

Also, inflation will not “accelerate over the next couple of years due to
higher energy prices and stronger wage growth that leads firms to raise prices”…Gus
Faucher/PNC Bank/WSJ (It is possible that inflation will accelerate over the
next couple of years, but it can’t/won’t be for the reasons stated.)

So how does the government cause inflation? It’s time for a bit of history…

Early ruling monarchs would ‘clip’ small pieces of the coins they accumulated
through taxes and other levies against their subjects.

The clipped pieces were melted down and fabricated into new coins. All of
the coins were then returned to circulation. And all were assumed to be equal
in value. As the process evolved, and more and more clipped coins showed up
in circulation, people became more outwardly suspicious and concerned. Thus,
the ruling powers began altering/reducing the precious metal content of the
coins. This lowered the cost to fabricate and issue new coins. No need to clip
the coins anymore.

From the above example it is not hard to see how anything (grains and other
commodities for example) used as money could be altered in some way to satisfy
the whims of government. But a process such as this was cumbersome and inconvenient.
Of course it was. What a shame. There had to be a better way. And there was.

Enter: Paper Money

With the advent of the printing press (moveable type) and continued improvements
to the mechanics of replicating words and numbers in an easily recognizable
fashion, paper money was now in vogue – big time.

However, people viewed the new ‘money’ with healthy skepticism and coins with
precious (or semi-precious) metal content continued to circulate alongside
the new paper money. Hence, it was necessary, at least initially, for government
to maintain a link of some kind between money of known value vs. money
of no value (in order to encourage its use).

Over time, eventually, that link was severed; partially at first, then completely.
And it was done by fiat (a decree or order of government).

Not only does our money today have no intrinsic value, it is inflated (and
therefore debased) continuously and ongoing through subtle and more sophisticated
ways such as fractional-reserve banking and expansion of credit. The printing
press is still at the core and is humming 24/7 but the digital age has ushered
in new and ingenious ways to fool the people.

Government causes inflation by expanding the supply of money and credit.
And that expansion of the money supply cheapens the value of all the money.
Which is precisely why, over time, the US dollar continues to lose value. It
takes more dollars today to purchase what could have been purchased ten years
ago, twenty years ago, etc. And it has been going on for over one hundred years.
It dates back to the origin of The Federal Reserve Bank in 1913.

What most people refer to as ‘inflation’ or its causes are neither. They are
the effects of inflation. The “increase in the general level of goods
and services” are results of the inflation that was already created.

More history… The Arab Oil Embargo in 1973 and the demands for more money
for oil which led to the formation of the Organization Of Petroleum Exporting
Countries (OPEC) followed close behind then President Nixon’s severance of
all ties of the US dollar to Gold. The underlying fact of the matter was that
the dollars which they were receiving for their oil were worth less (not quite
‘worthless’) and had been losing value for several decades. And the price had
been fixed for decades.

To understand this better, imagine that you were a company selling widgets
for $1 each and according to your contract you cannot receive any more than
that. Fast forward twenty or thirty years. You are still selling lots of widgets
and still receiving $1 for each one you sell. But your costs over the years
have continued to climb. And it also costs you more for everything you buy
to maintain your standard of living. And it’s not just you. Everyone is paying
more for everything. Yet, on an ongoing, year-to-year basis, things seem reasonably
normal. But prices now are rising more frequently and the rate of increase
is higher than before. What is going on?

The effects of inflation are showing up. Those effects can be very subtle
at first, or not noticed at all. But at some point in time the cumulative effects
of inflation become more obvious and everyone starts acting differently. Businesses
try to plan for it and individuals invest with inflation in mind.

If your dollars were freely convertible into equivalent amounts of gold based
on the prices in effect at the time of your original contract to produce widgets
– or sell barrels of oil – then you could just exchange your dollars for gold.
Which is exactly what happened. Foreign governments in the late sixties began
to demand the gold to which they were legally entitled. And countries which
produced and sold oil wanted a higher price for their oil. Wouldn’t you?

As people become more aware of the effects of inflation they start looking
for reasons. And for guilty parties. Government is quick to act of course.
They start by implementing wage and price controls. This is like setting the
stove burner on ‘high’ and putting a lid on the pot with no release for the
pressure. And they talk a lot.

They have talked enough over the past thirty years to frighten us into thinking
that our own spending and saving habits are the problem. Sometimes the blame
is directed at foreign countries and their currencies (China/Yuan for example).

Our sense of ‘unfairness’ over China’s attempts to weaken the Yuan seem to
be misplaced. We criticize them for doing the same things the US government
and Federal Reserve have been doing for over one hundred years.

The inflation (expansion of the supply of money and credit) produced by the
Federal Reserve is deliberate and intentional. And ongoing. The effects of
that inflation are volatile and unpredictable.

Even with the hugely, inflationary response of the Federal Reserve in 2008
and afterwards we did not see the “obvious substantial increase in the general
level of prices for goods and services” that some expected and predicted. But
we did see a resurgence of higher prices for financial assets like stocks and
real estate.

During the seventies, prices
for basic necessities
were rising on a weekly, even daily, basis. But
things eventually settled down and we had an extended period of stability
and relative US dollar strength for a couple of decades.

And yet, the effects of inflation are very clear. How much are you paying
for things today compared to fifteen years ago? Ten years ago?

As time marches on, the effects of government inflation will become more extreme
and more unpredictable. And the loss of purchasing power of the US dollar will
reflect that.


Kelsey Williams
Kelsey’s Gold Facts

Kelsey Williams is retired (2005) and living in Southern Utah. He has forty-five
years experience in the financial services industry. In 1972 he acquired his
first “real” money by exchanging some depreciating paper dollars for gold and
silver coins. The U.S. dollar price of gold at that time was less than $70/oz
and silver at $1.60/oz. He advised clients professionally between 1975-80 regarding
similar acquisitions and has always counseled his clients throughout his financial
planning career to maintain positions in gold. He enjoys swimming, reading,
writing, and listening to music.

Copyright © 2017 Kelsey Williams

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Published at Wed, 15 Feb 2017 08:52:11 +0000

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