Why Inflation is Theft

By Dr. Ron Paul

Inflation is TheftWhen I talk to many teenagers and grade schoolers, they seem to have no problem comprehending the fact that if  you just create a lot of money, it’ll be like Monopoly money and it won’t have value. Governments do that for all kinds of reasons, especially to enhance political power to fight wars we shouldn’t be fighting or to pass welfare programs that aren’t deserved.

When you print that money, the value of that dollar has to go down, and then one of the consequences of inflating the money will be higher prices. But there are a lot of other problems, too, with inflating. It causes a business   cycle, it causes financial bubbles and it causes a lot of economic distortions and unemployment. But in a nutshell, inflation is very simple. When governments create new money out of thin air, you have inflation.

Inflation is Immoral

Inflation is immoral because it’s theft. Think about it this way: If you or I  had a printing press and we could print the money just like the government does, we would be arrested and put in jail for a long, long time because we’d have stolen value — we’re pretending these pieces of paper are worth something. The Founders understood this very clearly, and that’s why they said in the Constitution that you can’t emit mills of credit, which is paper money, because they knew what runaway inflation is like.

Inflating is immoral in the sense that it steals value. If you double the money supply and your prices go up twice as much, it’s an invisible hidden tax. But the real immorality here is that some people pay higher prices than others. So if you’re [Read more...]

Experimental (Reckless) Monetary Policy

Monetary PolicyIn the following article Bill Bonner makes some excellent points about the problem with the current monetary policy. The first is that it is totally ludicrous to try to buy real goods with fake money. It has to cause distortions in the overall economy. “People make different decisions when they can borrow for practically nothing… “ Secondly, once it gets started, without some form of real recovery it will be impossible to stop. Kind of like a drug addict. The withdrawal will be painful and won’t happen until something forces the FED’s hand.  And thirdly also just like drug addicts and unsuccessful people the world over the FED is taking a short term view. It is a proven fact that the most successful people take a long term view. Doctors are willing to spend many years studying before they ever earn a penny but eventually they are well rewarded for their forbearance. And looking at the other side of the long term view… just because penalties have not yet been assessed doesn’t mean they don’t exist. When conditions change the FED will have to find buyers for all this debt  they are creating and where will they come from? ~Tim McMahon,editor

Between Improbable and Impossible

by Bill Bonner

“Buying Real things with Fake Money…”

Stock market investors don’t seem to know or care that the main thing propping up their investments is the same thing that will ultimately destroy them. And that the longer the situation continues the bigger the mess will be when it finally blows up.

We’re talking, of course, about Fed, Bank of England, Bank of Japan and People’s Bank of China monetary policy. It is “experimental.” It is “bold.” It is also reckless and potentially catastrophic.

Lending money at negative real interest rates creates grotesque distortions in the market.

Savers get nothing for their trouble. In fact, they lose money in real (inflation-adjusted) terms. So they shift to speculating on stocks. The stock market goes higher… but it is not a market you can trust.

It is being driven by the [Read more...]

Why Inflation is U.S. Hottest Export

Last week, we  went to São Paulo, Brazil. There, too, we found taxi drivers who knew a lot  more about monetary crises than the typical US economist. Said one:

I remember. I was just a kid.  But my father would call and tell us to run to the grocery store. He had just  been paid. We’d dash for the grocery story, meet him there and buy everything  we could. We spent every cent in just a few minutes.

exporting inflationOur friend  was recalling what it was like in the late 1980s in Brazil. The government had  caused inflation… then hyperinflation. Prices rose so fast that as soon as  people got some cash they ran to the grocery store to spend it.

Later, there  was no point. In 1990, hyperinflation in Brazil reached 30,000%. What cost 1 real  (the Brazilian currency) in 1980 cost 1 trillion in 1997. The hyperinflation  wiped out the middle class… and wiped the shelves clean.

“It’s hard to  run a business when [Read more...]

Stimulate the Economy? Please Don’t!

Personally, I would love to see the inflation rate stay between 1 and 2% or better yet between 0% and 1%. Why? In the long run low inflation rates benefit everyone, as people can accurately judge their future costs and make sound business (or family management) decisions. In addition to making planning easier it also promotes saving because people know that the money they put away will be worth the same amount (plus interest) as that which they saved in the first place. High savings results in stability in times of need, and it provides capital for industry which generates wealth as new things are produced.

Stimulate the Economy

This Stimulant (Inflation) is for your own good.

But why save if the value of the money you are putting away is eroding? In a recent article titled The Impact of Inflation on Savings I explained how inflation is like a leak in your savings bucket and so your incentive to fill the bucket is decreased the bigger the leak in the bucket. With a slow leak you figure you can fill it faster than it will leak out but with a fast leak, you may decide to not bother filling it at all or dump out the bucket into something else (like gold or oil or another currency that isn’t inflating). [Read more...]

Why Money Printing Makes You Poorer

Here is an excellent article by Bill Bonner on the announcement that Japan made that they are going to crank up the printing press and eliminate the deflation that has been plaguing their economy over the last twenty years. In it he explains the effects of money printing both short term and longer term. He also debunks the idea of where demand actually comes from. He says, “People always want stuff. Demand is infinite. Government doesn’t have to stimulate it. What really matters is buying power.”~Tim McMahon, editor

Why Money Printing Makes You Poorer

Printing MoneyLast week, Japan announced that it would undertake a bold and radical experiment. After 23 years of on-again, off-again deflation, the new government decided it had had enough of things getting cheaper. The Bank of Japan will now obediently monetize debt until inflation reaches 2%. This, the country’s central bankers believe, will encourage people to spend. The economy will take off.

Why is it better for people to spend more tomorrow than they want to spend today? Why is it better for prices to go up 2% than to go down 2%? Why is an economy that “takes off” better than one that sits calmly on the runway?

Those questions will have to wait for another day; no one bothers to ask today. Economists say the secret to prosperity is to stimulate demand. Anything that stimulates demand is thought to be a good thing. It doesn’t seem to matter that this proposition is transparent poppycock. People always want stuff. Demand is infinite. Government doesn’t have to stimulate it. What really matters is buying power. And buying power is limited. The authorities try to get around this problem by printing money. Then, with this new money in hand, it is almost as though people had real demand!

The Demand Delusion

But that’s what is so breathtaking and so funny about this time we live in. Who really believes you can increase demand… and make people wealthier… by just printing up money? Who really believes you can [Read more...]

What are “Foreign Exchange Reserves”?

Will the U.S. Dollar Be Replaced as the World’s Reserve Currency?

Foreign Exchange Reserves are foreign money held by International banks for use in international trade and in an effort to diversify their holdings and hedge against the inflation of their own currency. The most common items bought and sold with their foreign exchange reserves are oil and gold. Up until 1944 the asset of choice was gold and it was used as the medium of exchange between countries to settle their debts. But in July 1944, delegates from the 44 Allied nations gathered in Bretton Woods, New Hampshire., and made the U.S. dollar  the reserve currency of the world. At that time, the dollar was pegged at $35 per ounce and thus rather than exchanging gold, the countries were able to exchange dollars, which at the time was considered “as good as gold”.

Foreign Exchange ReservesBut because of its reserve status the U.S. was able to pretend that the Dollar was still worth $35 per ounce of gold while quietly inflating its currency and thus eventually France called the United States’ bluff and demanded gold at $35 per ounce and Nixon was forced to admit that the Dollar was no longer worth $35 per ounce and he “closed the gold window” and the last link between the dollar and gold was severed.

But Nixon had another trick up his sleeve [Read more...]

Civil Liberties Rest Upon Sound Money

Sound Money = Freedom

Over the years I have written many times about the necessity of sound money to base our economy on and the results of wanton reckless money creation that will alway result in inflation and a worthless currency either sooner or later. I’ve told you about how inflation affects you, and how the Money Supply affects Inflation and Who Inflation Hurts the Most. I also spoken at length about the value of gold as the Timeless Inflation Hedge and how Gold is Still Money.

Today, Wendy McElroy, author of The Art of Being Free shares a deep and fascinating research on all the main issues we face: the loss of security in the name of security, the state’s role in strangling economic opportunity, the petty central-planning that has regimented every aspect of life and the loss of basic civil liberties.

The best way to fight back, she says, is to find and build freedom for ourselves. We must discover the art of being free. The last chapter alone has been called “one of the most inspired and inspiring pleas for real-life liberty ever penned”. Here we have a manual on not only what is wrong with the world but also for how to refuse to be beaten back by our overlords.

McElroy is a member of the editorial advisory board of Laissez Faire Books. In today’s article she will show us how modern “Fiat” currency is no longer a store of value but has become a vehicle of plunder. And how freedom is function of reliable currency and the less reliable the money the less free we are as well. You can see a current example of this in yesterday’s article on Financial Trend Forecaster- Trends: Argentina’s Finances Going Bust Again?.

The idea of government guaranteeing the quality of money is “the sickest joke in economic history. Governments have always robbed their subjects by debasing the currency, but this abuse, in recent years, has burst all bounds of decency and sanity.”

 

Civil liberties require sound money. And nothing ensures the quality of a commodity as surely as competition.

Civil Liberties Rest Upon Sound Money

by Wendy McElroy

Sound Money

Privately Minted California Gold Money

“Fiat” is money with no intrinsic value beyond whatever an issuing government is able to enforce. When it enjoys a monopoly as currency, fiat inevitably turns the free market functions of money inside out. Instead of being a store of value, the currency becomes a point of plunder through monetary policies such as quantitative easing. Instead of greasing society as a medium of exchange, the currency acts as a powerful tool of social control. The second harm is far less frequently discussed than inflation, but it is devastating. The personal freedoms that we know as “civil liberties” rest upon sound money.

In his classic book The Theory of Money and Credit (1912), the Austrian economist Ludwig von Mises argues, [Read more...]

Will Greece Follow Iceland or Weimar Germany?

In Iceland the bankers were told to stuff it. In Weimar Germany they resorted to the printing press. Which model will modern day Greece follow?

It seems that the words Weimar Germany and Hyperinflation are almost synonymous. The Weimar Republic (Das Weimarer Republik in German) is the name of the democratic government which was established in 1919 when Germany was defeated in WWI and Emperor Wilhelm II abdicated the throne. The problem came from the War repairations that were foisted upon Germany by the winners and the growing internal unrest which was allowing the Nazi’s to gain a foothold. In an effort to pay their debts, promote full employment, and fight back against growing competitive restrictions from France, the government took to the printing presses. Because of the lack of alternatives they continued on this course longer than most and ended up with a hyperinflation of historic proportions. See What is Hyperinflation? for a complete list of other epic hyperinflations.

Today we have Greece in a similar position to Germany in 1919 with one major difference, Greece doesn’t control its own money supply because they are tied to the Euro and Germany is deathly afraid of another hyperinflation.  Today’s article by Jeff Thomas of International Man compares the similarities between Weimar Germany and Modern Day Greece.

Weimar Greece

By Jeff Thomas

In 1919, the Treaty of Versailles was signed as a peace agreement after World War I. Under the treaty, Germany accepted that they had caused the war and therefore were obligated to pay reparations to the tune of US $31.4 billion (US $442 billion in today’s money). This was deemed excessive by many economists at the time, and should have taken roughly seventy years to pay. Incredibly, Germany did pay, and doing so took them more than ninety years, with the final payment being made in October 2010.

Greece Euro Weimar, GermanyNot surprisingly, most Germans at the time (and until the present day) have regarded the treaty as the brutal gouging by the victors of the war.

Today, the shoe, as they say, is on the other foot. The debt owed by Greece is in the neighbourhood of US $345 billion (reports vary). The likelihood of eventual repayment is very slim indeed. And, not surprisingly, the Greek people feel the same way the German people did following the signing of the Treaty of Versailles. Correspondingly, events in Greece bear similarities to those seen in Germany in the 1920′s.

Will we be looking at a repeat of Weimar Germany for Greece in the coming years?

The first developments will most assuredly occur in connection with the new Greek government. It most certainly is not in the interests of Greek politicians to recommend to the Greek people that [Read more...]

What is the Significance of the Fiat Currency?

Last month in an article entitled What Is Fiat Currency? we told you that “Fiat currency is a term that is used to describe a currency which is created by “fiat” or “arbitrary order or decree” of the government.”  This month we would like to talk a little about the significance of Fiat currency. ~ Tim McMahon, editor.

Fiat Currency

Currency that is declared by a government to be a legal tender is referred to as a ‘Fiat Currency’. This type of currency owes its value strictly to the government’s acceptance of it for paying taxes and requiring its acceptance for “all debts public and private”. It is not backed by reserves or any physical commodity and is defined as nonconvertible paper money made legal tender by a government decree. It has no intrinsic value and is based on faith, as compared to the olden days, when most currencies were based on physical commodities like gold or silver.

Today, all of the currencies in the world are fiat money. Examples include: the U.S. dollar, the Japanese Yen, the British Pound, the Euro, etc. Not being linked to physical reserves, there is great risk of Fiat Currency losing value either gradually through inflation or rapidly through hyperinflation.

A Short History of the Fiat System

  1. In the early eleventh century, Chinese Song Dynasty issued paper money subject to be redeemed for gold after three years. They were never redeemed, resulting in inflation due to a loss of confidence in the issuing authorities.

Result: The System was abandoned.

  1. The twentieth century began with several countries experimenting with fiat currency. Most countries controlled the money-printing through their governments, but began massive printing due to high military expenses incurred during the First World War.

Result: The teens and twenties are littered with countries that experienced hyperinflation including: [Read more...]

What You Need to Know About the Federal Reserve System

The Federal Reserve System

If you saw the HBO movie “Too Big to Fail,” you may have the notion that the Federal Reserve System, commonly known as The Fed, deals with high level banking issues that have worldwide implications. And you would be right. But The Fed also regulates banking functions that affect individual Americans, ranging from regulating debit card overdraft fees and limiting gift card fees to issuing U.S. Treasury savings bonds.

History of the Federal Reserve

The Founding Fathers were cautious about establishing a central bank, thinking that it would encourage irresponsible borrowing by the government. As a result, America functioned without a central bank throughout the eighteenth and nineteenth centuries. In fact, it was not until 1913 that Congress created The Fed by passing the Federal Reserve Act, which was signed into law by President Woodrow Wilson.

What Does the Fed Do?

The Federal ReserveThe Fed is charged with three major functions: open market operations, regulating the discount rate and setting reserve requirements. Open market operations refer to the buying and selling of securities of the United States government and federal agencies. The discount rate is the interest rate charged to commercial banks and other financial institutions when they borrow from the Federal Reserve Bank. Reserve requirements are the legally required minimum amounts of reserve funds that banks and other depository institutions must keep in reserve to back up deposits held by their customers. [Read more...]