Inflation

The official rate of price inflation in the United States is hovering between 2 and 3% per year. Anyone who buys gasoline, electricity, food, or housing (in short almost everyone) knows however that the prices of consumer staples are rising much faster than that.

In the early '90s, Federal Reserve Chairman Alan Greenspan ran into a bit of a problem. Despite his wisdom and tight reign on the monetary supply, consumer price levels were creeping up. Consumer confidence was flagging so there was only one rational thing to do.

He convinced the US Government to change the way it measures consumer prices so that reported Consumer Price Index (CPI) increases would be about 7% less than the true increases. He hoped this ruse would buy him enough time to get monetary inflation in check before too many people noticed.

Four years later, monetary inflation has increased, and US consumers are feeling its effects at the pump and the grocery store. By now, all US consumers know that prices are rising, but what does that specifically mean for you?

Well, I'm sure you intend to send the kids to college and eventually retire - maybe even take a cruise or a trip to Europe some day. If you've been industrious enough, you may already be able to afford these things.

If you are like most Americans, though, you are still in the industrious phase where you are struggling to build that wealth so you can enjoy the fruits of your labor sometime in the future.

Before you can build wealth, of course, you need to earn enough to cover basic subsistence: food, shelter, electricity, and gas to get to work. Once your paycheck covers these needs you can make some investments and save some for the future.

Imagine, though, you are in the position of millions of Americans just barely covering the bases. Say you make $100 per day. According to some estimates of the true (as opposed to government-measured) CPI, just to stay at the same standard of living you'll have to make $110 per day next year.

That doesn't sound too bad. After all, that just requires a $1.25 an hour raise. But, if the CPI continues to rise, you'll have to make $121 per day the next year and $133 the year after that.

In fact, to stay at the exact same standard of living you are at right now, your salary will have to double within the next 7 years. Remember, that's before you have a chance to put any away for the future.

Do you think your current income will double by 2014?

There is a thief that lives in your pocket. With deft fingers he reaches in your wallet and slowly removes its contents. Day after day he drains the purchasing power of the money you sweated to earn.

The thief is named inflation and he's relentless. He takes the power of your wallet, your checking account, and your savings. He makes eight hours of work tomorrow worth less than the eight hours you put in today. He makes you a fool for saving, and says, "spend, spend, spend for if you don't spend it, I will take it!"

Inflation is crafty in his theft. He doesn't take all your purchasing power at once; he bleeds it slowly and steadily, counting on a general naiveté of money machinations to prevent the call for his head. He hides his theft in a snowstorm of official-looking reports and statistics.

Inflation is egalitarian in his theft. Whether a man has 10 dollars or 10 million dollars, he'll take six cents out of each dollar this year. He taxes each man in direct proportion to the amount of money he holds.

In distributing that money, however, inflation is the lowest type of thief. He takes the 60 cents from the poor man and the 600,000 dollars from the rich man and gives it all to the rich man less a few pennies for administrative expenses. Even when the rich man pays the wages of the poor man, inflation has again stolen a little of its value by the time poor man gets his hands on it.

Who is inflation and where did he come from? In times gone by, inflation was born on a printing press and in the counting houses of kings. Today, with a stroke of a pen and the clicking of a computer keyboard in a central bank he springs to life.

In simplest terms, inflation is too few dollars chasing too few goods. In more technical terms, inflation is the result of a total money supply that has become undocked from the total goods and services produced. He owes his entire existence to money masters who have convinced themselves that the process of moving money from hand to hand and around the world is too messy to happen without their meddling.

Who are these money masters? They are lonely, twisted practitioners of the dismal science of economics, confident in their ability to succeed in a task which is beyond the capability of any group of men. With religious fervor they hold tight to their beliefs despite thousands of years of failure, and each quarter proudly proclaim, "this time, we got it right."

But, it is only by chance that they actually make a correct decision. You see, to truly succeed, they must divine what every man, woman, child, business, corporation, investor, fund, speculator, government, nation, group, and natural force will do today, tomorrow, next week, and on into the future. By its very definition this is an impossible task, but prognostication is only part of the job.

Once the money masters compile their assumptions about assumptions, they must attempt to guide their ship down a narrow channel bounded on one side by confidence in the money they create and destroy, and on the other side by investments they have made in the infamously ravenous governments of the world. Any errors in navigation will take months to detect and years to correct.

We call the minor excursions from the center of the channel boom and bust, expansion and recession. The rocky shores of this narrow canal, however, have been littered in the modern history of the world with millions of bodies and the rusting hulks of states which put the wrong captains at the monetary helm. Mass starvation, destruction of irreplaceable art and architecture, and violations of basic human rights are but a few of the atrocities committed by governments around the world as it became apparent that their ship was about to run aground.

Throughout history, common man, not his government nor the central bank, has pulled himself up by the bootstraps, reignited a system of trade and monetary exchange using the means and money most palatable to him, and forged ahead. Until, that is, a new government asserted its sovereignty over him, and convinced him, by force or by reason, to accept their currency as the coin of the realm.

With that, the cycle begins anew, with the sly thief named inflation as the only herald of things to come.

Since the dawn of fractional reserve banking and government issuance of fiat currency, economies have frequently collapsed due to hyperinflation.

Just since the 1980s, Angola, Argentina, Belarus, Bolivia, Bosnia-Herzegovina, Brazil, Georgia, Israel, Madagascar, Nicaragua, Peru, Poland, Romania, Russia, Turkey, Ukraine, Yugoslavia, and Zaire have battled bouts of hyperinflation. Zimbabwe is projected to have inflation anywhere from 11,000% to 1.5M% in 2007.

Here's a snapshot of life in Zimbabwe on June 30, 2007.

"I popped out for a Z$25,000 loaf of bread last Friday. It had gone up to Z$30,000 dollars. I ran home for the extra, ran back to the shop - and the price of my loaf had risen to Z$44,000."

Hyperinflation is a very serious and omnipresent threat. Despite the assurances of governments and central banks, a system built on fractional reserve banking and fiat currency is very fragile.

The answer? Sound money, of course.

"Operation Reduce Prices" in Zimbabwe had a dramatic affect. It rolled back the hyperinflation about 10 whole days. What are people with wads of worthless cash going to do when government thugs enforce ridiculously low prices on the shelves?

An economic nightmare::

Photograph: Bishop Asare/EPA

The charge to relieve the shop owners of their merchandise with no compensation was lead by the government officials and police who are in charge of enforcing Mugabe's asinine price controls. Those officials turned right around and sold their ill-gotten gains on the black market for closer to what the products are really worth.

How deep were the government-imposed discounts? Car dealers with brand-new $US 30,000 cars were forced to sell the cars at the official exchange rate of $Z 250:$US 1 rather than the black market rate of $Z 100,000:$US 1.

Those $30,000 cars sold for $US 61.

If a shop-keeper refuses to sell because it's uneconomic, the best they can hope for is that their wares will be peacefully seized by the government. More often, though, Mugabe sends his "Green Bomber" youth corps in to rough up the shop keeper, take him into custody, and then seize the goods.

But, this kind of thing only happens in backwards, third-world countries.

On a totally unrelated note, the US Federal Reserve is busy expanding the total supply of US dollars at 10-14% year over year. Much of this increase is being sold to foreign governments, the reason that the dollar is at an all-time low against the Pound and the Euro.

What do you think will happen when all this low-power money comes home to roost in the US?