Inflation Is Theft And Fraud

Monty Pelerin / EconomicNoise.com

Inflation, in a fiat currency world, is inevitable. It is not an economic inevitability but a political one. Politicians like to spend money and buy votes. They don’t like to raise taxes. A central bank makes it possible for them to have the best of all worlds, at least for a time.

The US Fed, with its new QEternity policy, has complied with political wishes. It has chosen to allow the government to continue spending money that it does not have. It has agreed to prop up the government, the economy and financial markets for as long as markets will allow.

Inflation is not an economic event but a political choice. The causes and effects of inflation can be explained by economics, but no true economist would ever advocate such a policy. More than two centuries ago, the Founders of this country understood the importance of sound money. The Constitution defines money in terms of gold and silver, specifically to prevent it from becoming a political tool. Recorded history is replete with examples of governments destroying economies and societies as a result of inflation.

Ludwig von Mises explained the importance of sound money, an importance that our generation likely can no longer understand:

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.

To control and ultimately destroy a society, government must gain control of money. This control enables them to spend beyond their means and engage in wars that would never be fought if they had to be funded. Inflation is a scourge to all but the political class. It is the tool they use to commit theft and fraud.

Theft

Inflation is theft in the sense that it imposes an un-legislated and hidden tax on everyone.

• Consumer incomes are driven up but not necessarily purchasing power. Even if pre-tax purchasing power kept pace (and it generally does not), after-tax purchasing power is diminished because taxpayers are forced into higher tax brackets, paying a higher proportion of their income to the government. After-tax purchasing power is reduced as a result.
• Capital and wealth are stolen. One hundred percent inflation would, on average, double the price of all assets. There is no real gain because your purchasing power has not increased. Yet when you sell these inflated assets, government claims the nominal gain to be real taxes you on it. This theft discourages capital formation and confiscates existing capital. Wages are a function of capital. If capital grows more slowly, so do wages. At some level of capital destruction, wages will begin to fall. The real average weekly wage in this country is lower today than it was in 1966. One of the explanatory variables for this condition is the discouragement of capital formation.

Fraud

Inflation is a pure act of fraud. It is a deliberate attempt to mislead economic actors into making decisions that are incorrect and not in their best interests:

• Keynesianism, from its inception, viewed inflation as beneficial in that it would raise nominal wages. It was assumed to be a way to fool labor unions into believing they were gaining ground as nominal wages increased. It was assumed that workers would be too dumb to see through the monetary fiction.
• Inflation distorts interest rates. Lower interest rates encourage business investments that should not be made and ultimately will not be sustainable. The eventual liquidation of these improper investments causes the recession or bust that always follows a false boom.
• Low interest discourages savings and encourages consumption. Less savings means there is not enough capital to fund the intended business investment. More consumption drives up GDP, a key political measure, although not the well-being of the individual or the society.
• Inflation distorts asset prices, especially financial assets. These distortions produce the wild swings in stock and bond markets. When the inflation eventually recedes, so do the prices of financial assets. Often the drop is dramatic and is viewed as a “crash.”
• The definition of nominal wealth or value ultimately becomes meaningless as the numeraire has no integrity. Candy bars used to cost a nickel in my lifetime. Now they are 75 cents to a dollar. The ingredients of candy bars have not become scarce, nor have the makers become inefficient. It is all inflation!

Inflation benefits the political and wealthy classes at the expense of ordinary citizens. Its effects may be avoidable by the wealthy who can adjust their portfolios in manners that protects against the dishonesty of inflation. Ultimately, inflation increases the size of government and the distortions that plague the economic system. Very high inflation always ends in an economic collapse. As Ludwig von Mises observed:

The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration.

One can feel the euphoria of the takers in today’s society over Obama’s re-election. Similarly one can feel the despair among the productive class who understand the tough economic times that lie ahead.

I was struck by John Aziz’s unequivocal statement regarding hyperinflation (which is emboldened by me):

There are zero cases of gold-denominated hyperinflation in history; gold is naturally scarce.

To those who believe inflation is rare and nothing to fear, there have been plenty of cases of fiat-denominated hyperinflation:

http://www.economicnoise.com/2012/11/16/inflation-is-theft-and-fraud/