Charles Hugh Smith explains why inflation is essential to an economy such as ours - because without it, that system would collapse. It's a very important article, in that it traces the connections between the availability of easy credit and low-cost debt (i.e. low interest rates) and the structure of the economy as a whole. Without the first, the second cannot exist in its present form.
Many others have explained why inflation is part-and-parcel of the status quo. In the simplest terms, where's why inflation is essential:
1. Our economy and financial system are totally dependent on the expansion of credit/debt. Banks make money by issuing new loans, and financiers make money by buying and selling debt and instruments that leverage debt. Consumers can only buy big-ticket items with credit.
As a thought experiment, let's consider what would happen to the US economy and financial system if credit was outlawed and the economy was a cash-only marketplace. The government couldn't run deficits by borrowing money, no one could buy a vehicle except with cash, banks could no longer issue $19 of new loans for every $1 of cash they held.
We all know what would happen: the economy and financial system would both crash. Imagine the horrors of living solely on earnings and having to laboriously save up cash to buy a car or home.
2. The problem with credit/debt is it accrues interest. The more we borrow, the more interest we owe. If our income doesn't rise, at some point all our discretionary income--what's left over after paying taxes and essentials--is devoted to debt service, and we can't borrow more. At that point, the economy slides into recession.
. . .
Inflation slowly reduces the burden of debt by raising wages while keeping the debt unchanged. For example, back when $2,000 a month was a decent salary, a $600/month home mortgage placed a strict limit on the household's spending.
Fast-forward two decades of "modest" inflation and the average full-time wage has doubled to over $4,000 a month. Voila, the mortgage payment has remained the same (or perhaps been reduced via refinancing) and now the $600 monthly nut isn't much of a burden. In fact, the monthly nut for the new pick-up truck is larger than the home mortgage.
In a truly steady-state economy, wages would only rise with increases in productivity. With productivity increases dawdling along around 1% per year, that's a modest and unevenly distributed increase in earnings. Systemic inflation is a much more reliable and broad-based way of reducing the burdens of existing debt.
A back-of-the-envelope calculation based on official inflation is that 2/3 of the wage increases are inflation-driven and perhaps 1/3 or less is the result of increasing productivity.
We now see why inflation is absolutely essential to a credit-dependent economy and financial system. Without inflation, consumers and the state soon max out their income and are unable to borrow and spend more.
What about savers, you ask? They're sacrificed to support inflation's erosion of the currency's value.
. . .
Once inflation heats up, the system starts breaking down as soaring interest rates stifle borrowing. Central banks and private banks can issue new credit, but if few can afford to borrow more, the economy spirals into recession.
With rates rising, the income pump of refinancing is shut down.
. . .
In summary, here's the problem: the system only functions with Goldilocks moderate inflation but that is no longer possible given the changing tides of globalization, financialization, real-world inflation and rising global risks. This leaves those in charge of the status quo system that benefits the few at the expense of the many with no sustainable option other than doing more of what's failed until it fails spectacularly.
There's more at the link. I highly recommend reading the entire article.
I think this is very important information for anyone who doesn't understand why the financial authorities initially permitted higher inflation rates to arise, and are now seeking to curb them. The first was a mistake, and the second is compounding the error, because both are perpetuating an economy built on massive, almost unbelievable levels of debt. Indeed, our national debt (both government and private) is now so massive that there's literally no way it can ever be paid off if our currency remains stable. The only way it can conceivably be settled is to inflate the dollar to the extent needed to pay off old (i.e. non-inflated) debt with inflated dollars. The fact that this will also destroy the value of the dollar as we know it doesn't bother the authorities. They painted us into this corner, and themselves along with us, and they're going to find a way out of that corner no matter how much it costs us - just as long as their yardarms are clear at the end of it all.
Peter
Our money system was designed to slowly transfer ownership of everything to the financial class, via loans, defaults, and inflation. It's working as planned. Ergo, any successful reset will need to totally remake the financial system and ownership to gut and marginalize the financial class. Obviously, they will not want to go along with it, so they will need to be "fixed" or expelled. Can you imagine a banker-type being told "look, it's work at the steel mill or starve...." Glorius!
ReplyDeleteSounds like nonsense to me.
ReplyDeleteInflation isn't necessary for a credit-based system, because eventually loans get paid off. Then new loans can be issued to someone else. Interest payments don't last forever, but only until the debt is paid off. Interest should just cover the time-value of money (i.e., the opportunity cost of what that money could otherwise be used for), not inflation. Productivity increases are the ONLY way people should get paid more.
Inflation is just a way for governments with printing presses to steal money from savers and reduce the impact of governmental debt.
Historically all such economic systems have a finite end and now we are reaching that end. Ponzi schemes always get out of control, politicians and others benefiting from the system will always kick the can down the road until they can't.
ReplyDeleteAn inflation-based economy is a pure Ponzi scheme.
ReplyDeleteIt's like trying to mansplain to some poor boob that the only way to build a ship is with a certain amount of water leaking into it every year, as if that's never going to become a problem, and then telling people that pumping it out would make the ship unstable.
Nature's solution, to both approaches, in 3, 2, ...
It'll collapse anyway, though.
ReplyDeleteIt depends on perpetual growth of the economy, which isn't possible.
Not if but when.
Just imagine to borrow money you didn't pay interest but a loan origination fee and then were held accountable to a timeline for making payments. However, you lose your job and default on a house where you have paid 50% of the loan, you get 50% of the proceeds of the sales. NO INTEREST (Sorry Mind Your Own Business, but setting the time value of money requires an interest rate everyone agrees on, at the ustajob the Financial folks told me it was 26% - the greedy will always inflate it)
ReplyDeleteI read in another article that US productivity has improved 2% on average for the last 50 years, we should be working half as hard, not twice as hard. Starting pay in my area is under $9/hour. Using BLS CPI calculator min wage in 1981 is around $11/hr (been a while since I did the math). People ask why don't young people want to work anymore? Get a Big Mac at McD, close to $11 for a meal. Take out taxes, don't forget to add cost of commute and the fact most of these are part time jobs. People don't like being taken advantage of.
However, most people are willing to become debt slaves. Point of Paragraph 1 is it should be much easier to save for a car, but a home and take a vacation. Instead most employers pat themselves on the back for paying better than Min Wage and can't do the math a High School Junior can work out.
The financial sector is draining the economy faster and with more style than a group of vampires in a blood bank. History shows this trend every time with money, eventually the government begins to debase the currency. Hard assets and things good to trade. Don't forget we are at war with Russia (financial but we seem to want kinetic) and China is probably waiting for the right time to make their move. BRICS is going to a money (backed by gold) system. What happens when China wants us to pay in gold and not fiat bucks. What if the US Govt makes good on debts by selling public land, you know, the ones with oil and minerals (Like Wyoming). Not difficult to take our electric grid down either. Need a few dedicated sniper teams, not EMP. How many military aged males of Asian origin have crossed the Southern boarder?
Biden's bought the goats, do you have the rope?
Why do we (the government)need to borrow our own money from banks that do not have the money but prints it out of thin air? Print as needed and eliminate banking fractional reserve lending. Make the banks match time deposits to the appropriate timed loan.
ReplyDeleteCurrency inflation is BS for the purpose of cheating you, it is official counterfeiting. Government legislators can't cast magic spells to make useful things like oil or food appear out of thin air. Paper slips with the pictures of government employees printed on it do not make their magic work.
ReplyDeleteCredit is not dependent on currency inflation or fractional reserve. You can loan your gold coins to somebody, who can spend them making something, eventually selling enough of what they made to trade it back for more coins (interest).
Currency inflation is a tax on people who save currency. The middle class saves in currency, while the rich save in stocks, bonds, and land. Currency inflation is a tax on the middle class, collected by Congress using deficit spending, and spent by Congress with cronies like arms makers whose stocks are owned by the rich.
Hyperinflating the currency does not "pay off the debt", it does the opposite, it defaults on that debt.
The booms and busts of the business cycle are caused by currency inflation, which lies about how much capital is available. In a boom entrepreneurs start new projects, which go bust because the real assets are not available to complete the new projects. Queen Victoria was on a gold standard; there were booms and busts before and after, but not during.
The blog post was satire ....right?
ReplyDeleteMoney is a tool that individuals and societies can use. Some people excel at handling money but...they should not be the ones making the end point decisions, as they typically can only see the bottom line and have no idea what lies beyond. Imagine a country taken over by buggy whip makers, and the whole purpose of the country is changed so it only concentrates on making newer, bigger, and better buddy whips.
ReplyDeleteInflation is nothing but a hidden tax. It can't exist when currency is based on a hard commodity like gold and silver because money can't be magically created. People who say inflation is good an necessary are either idiots or propagandists for the criminals in power. It was Lenin who said the way to crush the bourgeoisie...us...is to grind tem between the millstones of inflation and taxation. And that is exactly what's happening.
ReplyDeleteHapsburg Spain has entered the chat to disagree with you.
Deleteevmick, NOT satire. When Spain started importing huge amounts of gold from the New World they had huge inflation. Their economy did not grow, but the money supply did. People with the new gold were willing to throw more of it around to get limited goods and thus inflation.
ReplyDeleteSeveral things going on, but fundamentally we have fiat currency (paper backed by a promise but no assets) that the government prints as needed for a spendthrift congress. Another issue is how much is being taken from businesses and the middle class (taxes) and given to others (Welfare, Social Security and Sinecure jobs). Over 50% of people now get some or all of their income from the Govt. Social Security is not sustainable on present course (subject of numerous articles)
Govt measures health of economy using GDP, but Govt spending is ~40% of GDP in US. Other areas go down, Govt go up and look, no recession. Problem is Govt spending is a maintenance cost to society, but not a source of growth. What percentage of our national income should go to Govt, which we do need some? Debate, Debate, Debate. Peter has pointed out 9% goes to transportation and currently 19% is going to Healthcare. (If we spend 19% on Healthcare, greatest in the world, shouldn't we be the healthiest?)
Purpose of my rant above is to point out how destructive debt is AND to point out that Middle and Lower classes have not benefited from improvements in productivity for last 5 decades. Look up concept of debt slavery as well. (We do need to move capital from those who have to those who can make use of it but our current method only produces slavery. Book - And Forgive Them Their Debts - will make you see the subject quite differently)
As you learn about some of these issues I think you'll see this article not as satirical but eye opening.
"setting the time value of money requires an interest rate everyone agrees on"
ReplyDeleteOnly that the borrower and lender agree on. It's a contract.