Featured Post

The Science of Getting Rich: CHAPTER VII [excerpt] by Wallace D. Wattles #Gratitude

--- Gratitude THE ILLUSTRATIONS GIVEN IN THE LAST CHAPTER will have conveyed to the reader the fact that the first step toward getting ...

Wednesday, September 14, 2011

Straight talk Inflation Money Gold FED government

CAPITALISM & COMMERCE

HOW GOVERNMENT MANIPULATES MONEY AND PRODUCES INFLATION <-- source

by Edward W. Younkins

---
Dr. Younkins is a Professor of Accountancy and Business Administration at Wheeling Jesuit University in West Virginia.
---

Money is the lifeblood of commerce. In order to permit the market to operate, we need to ensure a stable, non-inflationary currency. Inflation invariably distorts the market. There are always different groups in the population being affected dissimilarly by inflation. Inflation leads to a misdirection of production and employment resulting in a misallocation of resources. Money which loses its value through inflation circumvents the mind by destroying the means of economic calculation and planning.

Inflation is caused by printing more money. The government's monetary policies are responsible for this. Keynesian spending policies and ideology and the abolishment of the gold standard have permitted the government to depreciate our currency.

The answer is to eradicate state control of the money supply. We need to divest government of its power to arbitrarily increase or decrease the money supply. In addition, we must build in pressures toward fiscal responsibility by the government with respect to the production of balanced budgets and reduction of debt. The federal government must learn to live within its means – government deficits must be prevented. The establishment of the gold standard will stifle the hidden and deceptive tax of inflation. Inflation could be controlled if government were not able to monetize debt or manipulate reserve requirements.

Defining inflation

Money is a commodity the value of which stems from its usefulness as a medium of exchange. The best money is the one developed through the market system. Since barter has obvious limitations, one commodity (e.g., gold) arises as easier to trade and more useful as a medium of exchange. Exchange rates (i.e., prices) are established between this one commodity and each of the other goods. Historically and pragmatically, a commodity's ability to function as money has been transferred to money substitutes (e.g., the dollar). Honest money is fully backed by commodities like gold.

Inflation, a monetary phenomenon, is an increase in money and credit. Its major consequence is rising prices. Inflation occurs when the economy's aggregate volume of money expenditures grows at a faster rate than its total real output grows. Inflation is thus an increase in the supply of money without a corresponding increase in the supply of goods and services.

Inflation consists of expanding a nation's money supply by adding something other than real money (e.g., gold). Such fiat money, backed only by government decree, produces inflation. If the quantity of money is increased, the purchasing power of the monetary unit declines and the quantity of goods and services that can be purchased for one unit of this money also decreases. When government expands the quantity of paper money, the purchasing power of the monetary unit drops and prices rise. After the new money has been added to the economy, the total wealth produced is not any greater than it was previously. With added money now being spent, but with no additional goods and services to spend it on, prices will rise. In the U.S., it is only the federal government and government recognized banks that can print money and/or create new dollar credit.

Why does the government inflate?

Inflation is a dishonest and deliberate policy and tool of politicians who do not wish to reduce their spending. The government « creates » new money in order to cover what it spends in excess of its income. The existence of an unbalanced budget is a frequent reason for the government to print more money. When more is spent than is raised by taxes, the government makes up the difference with fiat money. The basic cause of inflation is the government's unwillingness to cut its spending plans or to raise the funds it desires by increasing taxation or by borrowing from the public.

Politicians want to spend but they do not want to raise taxes. Because higher taxes are unpopular, inflation commonly becomes the answer to deficit financing. When the government prints more money, people don't have to pay additional taxes, but ultimately they realize that dollars are not worth what they were previously. Monetary debasement is a scheme in which government force is used to take wealth from people and spend it. When the government makes new money and spends it, the effect on prices and the supply of goods and services is no different than when a private counterfeiter does so.

Exorbitant government expenditures are often the result of government efforts to redistribute income and wealth. Inflation can be connected to the appearance of the welfare state. Political leaders, confident in their own abilities, rationality, ability to control nature and society, and to produce continual progress, use government force to redistribute wealth in their compassionate efforts to achieve economic equality. Additional dollars, created through the printing press and credit expansion, enable the government to spend more and support more « deserving » non-producers than it could otherwise.

Inflation transfers wealth from creditors to debtors of which the federal government is the largest. Debtors make payment with currency that is worth less than when the debt was assumed. Inflation repudiates government debt at the same time that it depreciates the purchasing power of the debt.

How the government inflates

The government has several ways of increasing the money supply. Expansion of the money stock is carried out by monetizing federal debt, by Federal Reserve « open market operations, » and by credit expansion through commercial bank loans to private borrowers.

In America, the Federal Reserve System currently has control of the issuance of unbacked currency. The government's demonetization of gold established government-sanctioned paper as the exclusive medium of exchange. The government blocked holders of paper money from protecting themselves from the ravages of inflation when it denied American citizens the freedom to select gold in preference to inflatable fractional reserve money. Essentially, all the government has to do when it wants to spend more money than has been collected in taxes is to borrow non-existent money from the Federal Reserve through the issuance of government securities. This new money is spent and deposited in banks thereby becoming the fractional reserve for even more unbacked money. New money creation builds on itself and snowballs. The only limits to the money supply are arbitrary reserve requirements on banks (i.e., the reserves in cash that a commercial bank holds against deposits) and debt limits established by Congress.

The Treasury seldom sells government bonds directly to the Federal Reserve. Rather, the Federal Reserve purchases bonds on the open market thus giving the Treasury room to sell its bonds on the market. The result is the same even though the mechanics make the process a bit less obvious.

When the Federal Reserve buys government securities on the open market it expands the supply of money and credit. Using a cashier's check, the Fed pays for the securities with its private holdings. The seller, in turn, deposits the check in a commercial bank. This increases the bank's reserve balance of cash thus enabling it to lend out several times the amount of the deposit. Production of fractional reserve money merely requires a journal entry crediting a borrower with a sum of money and issuing a deposit receipt in this amount. Commercial banks thus can increase the quantity of money by lending several times as much as the amounts deposited by their customers in their accounts. The use of fractional reserves clearly demonstrates the fraudulent nature of lending claims to mythical property.


« Inflation is a dishonest and deliberate policy and tool of politicians who do not wish to reduce their spending. The government "creates" new money in order to cover what it spends in excess of its income. »



Money should be backed by a 100 percent reserve of what is used to back it. If the government were unable to monetize its debt or manipulate reserve requirements, then obstacles to inflation would be in place. Under a 100 percent gold reserve standard or system, there would be little or no inflation since prices would depend on the existing supply of gold. With the inability to expand the volume of money and credit at will, the political evil of inflation would no longer be able to be perpetrated by agents of the U.S. Treasury and officials of the Federal Reserve System.
Losers and winners

Inflation is a type of tax that falls on each citizen in the form of higher prices for what he purchases. It is analogous to a sales tax on all goods and services. Inflation levies a tax on all who have money or have money owed to them. Like taxes, inflation distorts prices, changes production patterns, transfers wealth from savers to spenders, discourages saving and investment, and stifles individual initiative.

A particularly evil form of taxation, inflation does not affect people in proportion to their income or wealth. Its incidence depends on the business or industry in which one works, the elasticity of demand for different commodities, the specific forms in which a person holds his assets and debts, etc. There is no way for the government to create new dollars or bank credit so that each person will benefit equally and simultaneously.

Inflation starts with government expansion of the money supply that immediately creates benefits for some persons while producing losses for others. Commonly, individuals on fixed incomes and owners of bonds, loans, and savings accounts suffer losses while borrowers and property owners enjoy gains.

Some individuals have the advantage of receiving the newly created currency and bank credit sooner than others. Such persons are able to buy more than they could previously or to offer higher prices for goods and services they desire. People who receive the new money and credit first receive a temporary benefit at the expense of others who receive the new money or credit later. Those receiving the new money or credit first have greater income and thus can purchase many goods and services at prices that existed at the beginning of the inflation. The first groups spend their money when prices have gone up least (or not at all) and the last groups consume and pay when prices have increased the most.

When the first recipients of the new dollar offer higher prices, prices tend to be raised by the suppliers of the goods and services for which higher prices had been offered. Shifts in income and wealth are generated by the increased number of dollars. Those who receive unexpectedly high prices for their commodities benefit from the inflation. They experience « windfall » profits at the expense of holders of monetary assets (i.e., dollars and assets fixed in number of dollars).

The influx of new fiat money permits people who gain access to it early to buy at yesterday's prices. However, there are others to whom the new money arrives much later. They are forced to pay higher prices than they did previously for some or nearly all of the goods and services they desire to buy. The last recipients of the new money pay higher prices while their incomes remain constant or do not go up proportionately with prices.

Inflation tends to initially create more employment. It is likely to at first increase sales and selling prices at a faster rate than it increases expenses. Nevertheless, this effect is fleeting and occurs only when and if inflation is unanticipated. When individuals begin to expect inflation, they will make compensating adjustments and demands thus causing costs to catch up with selling prices. Wages, interest, and raw materials prices increase as fast (if not faster) than a product's retail price, profit margins narrow, and the businessman realizes that his profits have been illusory.

At each stage of the sequence of transactions by which the new money works its way through the economy, the advantage of receiving additional dollars declines. Those who receive it much later must adapt to a situation in which the items they want are increasingly more expensive.

Inflation produces false market signals

Inflation falsifies economic calculations and accounting profits and leads businessmen to make errors. Inflation misdirects production so that scarce resources are dedicated to inappropriate projects. Illusory profits deceive producers, invite malproduction and malinvestments and make planning a nightmare. The initial aura of prosperity dissipates as prices go up, wages lag, and business decisions brought about by false market signals produce bad results.

Inflation dampens producers' incentives to save and invest in production facilities. As a result, less is produced. Furthermore, since there has been less production, there is less to consume, save, and invest. What's more, with less saved and invested currently, there will be less produced in the future for individuals to consume, save, and invest. The increasing uncertainty of profits discourages new investment to a greater degree than what the overall increase in profits due to inflation does to encourage investments. Investment, employment, and production are misdirected by inflation, and ultimately they are all discouraged by it.

When the government expands the money supply to finance its debts or to create economic prosperity, the result is higher prices. People have more dollars but the dollar loses its purchasing power. Inflation reduces the value of the currency and the amount of that reduction is used by the government to pay its debts. When monetary authorities inflate and depreciate money, people are forced to accept it at face value and in full payment. The federal government, as a huge debtor, benefits greatly from monetary depreciation. When monetary value declines, lenders suffer losses in purchasing power while borrowers (like the government) gain a like amount. Creditors are defrauded when debtors discharge their debts by exchanging inferior money.

When progressive tax rates are unadjusted for inflation, the increase in the nominal value of wages places individuals in progressively higher tax brackets thus permitting the government to collect a larger proportion of income and assets. By denying inflation adjustments, the state can also exact more taxes from businesses. Higher taxes are paid when depreciation and other production costs are understated and profits are overstated.

Oftentimes, when the government wants to stimulate the economy, it gets the Federal Reserve System to reduce interest rates. To do this, it must create more spendable money. Interest rates are decreased by increasing the supply of loanable funds. This can be done by getting the central bank to purchase government securities or by directly monetizing debt (i.e., by simply printing more money). When monetary authorities expand the quantity of money and credit, they cause interest rates to initially fall. Businesses are lured into expanding by the lower interest rates. As a result land, labor, and capital are bid up. After a while, lenders will catch on and want a real return. After the new money has flowed through the economy, rates will return to normal and mistakes will be evident.

Inflation deters saving and investment and promotes a search for alternatives to saving during the inflation. Why work hard, save, and invest if the purchasing power of dollars saved is expected to fall? People attempt to identify and acquire a real store of value in the form of non-monetary or hard assets such as precious metals, diamonds, real estate, machinery and equipment, and rare items such as stamps, antique furniture, art works, books, coins, firearms, etc. People will save and invest little, if any, unless they are confident that their property will be safe and that their savings and money will retain its purchasing power.

Not recognizing the government's own responsibility for inflation, politicians assign the blame to the private sector and advocate the use of price controls to fight inflation. They fail to understand that price controls cannot stop or even slow down inflation. All these controls can do is reduce profit margins, discourage production, and create shortages. Furthermore, and most importantly, they do not understand that price controls represent the antithesis of economic freedom.

Real monetary reform

Traditionally, the gold standard has been used to tie the value of money to something more constant and stable than the capricious desires of government officials. Such an impersonal protection is needed to restrain the actions of those who hold a legal monopoly on the creation of money. Under the gold standard, the quantity of the money supply is independent of the policies of government bureaucrats and politicians. Gold represents value uncontrolled by government. The gold standard takes decisions regarding the quantity of money out of the hands of politicians.

Making paper money redeemable in gold keeps the government from arbitrarily increasing the money supply. Not only does full redeemability of the currency unit restrict government power, it also supports public confidence in money, allows market forces to work, and protects citizens from disguised taxation through monetary inflation.

The gold standard provides a market-based medium of exchange and stable monetary system through which men can exchange and save the results of their labor. This monetary stability will force the government to abstain from monetary depreciation. Not only would the government have to stop inflating, it would also be forced to balance its budget and eliminate many welfare programs. Under a gold standard, politicians cannot spend more unless they raise taxes.

Under the gold standard, all claims to gold (i.e., dollars) are receipts for gold and are fully convertible into a specific amount of gold. Money and credit expansion is brought to a sudden halt when government and banks have to redeem their notes in gold. Redemptions would be a chief obstacle to government's unlimited money creation and spending.

Under the gold standard, banks and individuals would be able to make loans, but they would be limited to the amounts savers had accumulated and were making available for lending purposes. The gold standard's requirement of fully convertible money would keep more than one claim to the same money from occurring.

Because of its natural attributes and relative scarcity, gold has long served as a dependable medium of exchange. The quantity of gold changes very slowly over time. Consequently, currencies fully backed by gold are susceptible to only a negligible rate of inflation. There has been a gradual increase in the store of gold with the annual increase in the world stock usually amounting to between 1.5 and 3 percent. Over time, the total gold stockpile held by central banks and individuals has always increased and has never decreased.

If gold was money, there would be a negligible price level increase when more gold is mined, refined, and processed and an even slighter decrease as some gold is removed from the monetary realm to be used in industry, dentistry, jewelry, etc.

Some are concerned that new annual supplies of gold will be insufficient to carry on the growing amounts and value of world trade. Gold, a hard currency, may have a new production rate that may not keep pace with economic growth. This really presents no problem. The existing quantity of money is always enough to conduct the existing volume of trade. Some deflation may be inevitable, but this simply means that overall prices will be lower.

No comments:

Post a Comment