It’s not just inflation that is theft.
It is painfully self-evident that our financial system doesn’t just enable theft, it is theft by nature and design. If you doubt this, please follow along.
Inflation is theft, but we accept inflation because we’ve been persuaded it benefits us. Here’s
the basic story: our financial system creates new credit money (i.e.
debt) in quantities that are only limited by the appetites of borrowers
and the value of assets they buy with freshly borrowed money.
If this expansion of credit money exceeds the actual growth rate of the real economy, inflation results.
Since our economy is ultimately based on expanding debt in every
sector (government, corporations, households), inflation is a good thing
because it enables borrowers to pay back old debt with cheaper money.
For example, if J.Q. Citizen makes $50,000 a year and owes $50,000
on his fixed-rate mortgage, what happens if inflation jumps 100%?
Assuming J.Q.’s wages rise along with prices, his earnings jump to
$100,000 while mortgage remains at $50,000. Though prices of everything
else have also doubled, the debt remains fixed, making it much easier
for J.Q. to service the mortgage. Before inflation, it might have taken
ten days of earnings to make enough money to pay the mortgage payment;
after inflation, it only takes five days’ wages to make the payment.
This apparent benefit evaporates if wages do not rise along with the price of goods and services. If
earned income stagnates during inflation, the purchasing power of wages
declines. If it took two days’ earning to pay for groceries and
gasoline before inflation, now it takes three days’ wages. The wage earner is measurably poorer thanks to inflation. How much poorer? Take a look: (chart by Doug Short)
Using the governments’ flawed consumer price index (CPI), household
income has declined over 7%. But this understates inflation in a number
of ways; as several readers pointed out after reading What’s Up with Inflation? (July
25, 2013), such calculations of inflation do not track the reduction in
package contents that mask the fact that our dollars are purchasing
less goods even though the package remains unchanged: the cereal box is
the same size as last year but the quantity of corn flakes has declined.
There are other reasons to be skeptical of official measures of
inflation. As I note in the above link, how can healthcare be 18% of the
GDP but only 7% in the CPI’s weighting scheme?
The obvious fact is that inflation is stealing purchasing power
from every household with earned income, for the simple reason that
wages are not rising in tandem with prices.
In 19th century Britain, the price of bread remained stable for
most of the century: the price of a loaf of bread in 1890 was the same
as it was in 1850. Any increase in wages in a no-inflation environment
means the wage earner’s purchasing power has increased. In an
inflationary financial system, as earned income stagnates, everyone
without access to credit and leverage loses purchasing power, i.e.
becomes poorer.
The advent of unlimited credit and leverage enabled new and less overt forms of expropriation, otherwise known as theft.
Let’s say that two traders enter a great trading fair seeking to
buy goods to sell elsewhere for a fat profit. That is, after all, the
purpose of the capitalist fair: to enable buyers and sellers to mutually
profit.
One trader uses the time-honored method of letters of credit: he
buys and sells during the fair by exchanging letters of credit which are
settled at the end of the fair via payment of balances due with gold or
silver.
Ultimately, the trader’s purchases are limited by the amount of silver/gold (i.e. real money) he possesses.
Trader #2 has access to leveraged credit, meaning that he has
borrowed 100 units of gold with a mere 10 units of gold and the promise
of paying interest on the borrowed 90 units.
This trader can buy 10 times more goods than Trader #1, and thus
reap 10 times more profit. After paying 10% in interest, Trader #2 reaps
9 times more profit based on the credit-funded expansion of his claim
on resources.
The issuance of paper money is an even more astonishing shortcut claim on real-world resources. Trader
#3 brings a printing press to the fair and prints off “money” which is a
claim on resources. The paper is intrinsically worthless, but if
sellers at the fair accept its claimed value, then they exchange real
resources for this claim of value.
Needless to say, those with access to leveraged credit and the
issuance of fiat money have the power to make claims on resources
without actually having produced anything of value or earned tangible
forms of wealth.
Those with political power and wealth naturally have monopolies on
the issuance of credit and paper money, as these enable the acquisition
of real wealth without actually having to produce or earn the wealth.
This system is intrinsically unstable, as the financial
claims of credit and fiat money on limited real-world resources and
wealth eventually exceed real-world resources, and the system of claims
collapses in a heap. Though this end-state can easily be predicted, the
actual moment of collapse is not predictable, as those holding power
have a vast menu of ways to mask their expropriation and keep the game
going.
For example, quantitative easing (QE), which is ultimately the
issuance of unlimited credit and leverage to the chosen few at the top
of the heap of financial thievery: Are We Investing or Are We Just Dodging Thieves? (July 29, 2013).
“The first panacea for a mismanaged nation is inflation of the
currency; the second is war. Both bring a temporary prosperity; both
bring a permanent ruin. But both are the refuge of political and
economic opportunists.” Ernest Hemingway, The Next War
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