Wednesday, December 7th, 2016 MST

Inflation is good for you

Wheel Barrow of MoneyIt’s little wonder that so few people in the United States and Europe can think straight about basic economics with the constant flow of misinformation coming from the media and universities.  Here’s an interesting piece out of Scotland from an Oxford and Harvard trained editor titled “When inflation could be good for you.

This one is interesting because it contains a bit of a head fake to start off.  When I first saw the title, I expected an immediate launch into an economic fallacy, but its author actually states the opposite:

“So could an inflationary inoculation work in economics, providing strong medicine for a serious economic ailment?

“With our economics strongly influenced by the experiences of the 1970s, the answer tends to be ‘no’. Inflation feeds on itself, workers chase higher wages to keep up with prices, costs spiral, companies lose the confidence to invest, and anyone on a fixed income – notably, pensioners – are the ones who suffer most.”

I guess by leading off with a little bit of truth, readers are expected to let their guards down in order to accept the information that follows.  When he states that “the the answer tends to be no,” we are immediately back on alert that fallacies are soon to follow.

But first he gives another nugget of truth:

“While interest rates remain at a historic low, with the base rate still at 0.5% and expected to stay there for a while yet, that means a negative real interest rate.

“To put it simply, the interest you get on holding money in a savings account is not enough to stop the value of your savings eroding.”

But he then uses this to conclude that a real negative interest rate policy is good because it encourages people to consume and not save their money.

“If inflation is officially encouraged to go a bit higher, real interest rates would fall, and people’s expectations of falling value of their savings could encourage them not to save but to get consuming again.”

So here we are again with the classic fallacy that consumption is the basis for economic growth. The idea that the only thing standing between us and a rip roaring economy is that we just need to stop saving and buy stuff. And if we really want to be prosperous, then we go into debt to buy stuff that we don’t really need.

This is, of course, complete nonsense.  Savings and production are the basis for economic growth. Standards of living are raised via increased productivity.  The more efficiently goods can be produced, the lower their cost. Wealth and financial independence are achieved by being productive and consuming less than you produce, not the opposite.

If this concept is not intuitively obvious, I highly recommend reading the first part of Irwin Schiff’s cartoon book “How an economy grows and why it doesn’t (Download PDF)“.  Schiff derives from first principles – or actually three men on an island – how an economy actually grows. Once you “get it,” the hazy concept of economic growth comes into sharp focus.

Ultimately the cry for more consumption is another attempt to kick the can down the road and extend the Ponzi central banking/fiat money scheme.  Particularly if we can extend it long enough to bail out the Too Big to Fails:

“Then, why-oh-why would we want to penalise thrift and savings, to encourage consumer demand, when excessive consumerism is precisely what got us into this mess?

“The answer is that – to misuse a political slogan from 2010 – we’re all in this together. Responsible behavior may have to be penalised so that savers, alongside everyone else, can get out of the current economic predicament.”

And there you have it.  If we allow our failed banking system to actually go bankrupt, it would result in a major recession.  So in order to muddle through this, the banks must be made whole again at the expense of the prudent folks who lived within their means.

And just in case those folks start getting any ideas about opting out of this arrangement, he states that:

“There’s not a savings product on the mainstream market that matches the current rate of inflation.”

But the last time I checked, gold has been doing exactly that and more for the last eleven years.

2 Responses to “Inflation is good for you”

  1. Bullion Syndicate

    I fear for the Starbucks drinkers, the yuppy middle class, the clueless westerners. There is no way that the United States and its crowd of cronies can fiscally and morally uphold the fiat matrix we are in. We have runaway inflation that is ballooning the number of printed dollars in circulation, while eroding each unit’s value, and the Starbucks drinkers keep drinking their Starbucks! Nothing to see here, everything’s under control!

    In the meantime, our ipod-addicted society continues to demand the latest in consumer electronic wizardry at the lowest possible prices. We have child-laborers slaving away for pennies per hour to sate the greedy masses, and yet we complain about jobs being shipped overseas. Regardless of how we got here, the problem now is that the market has determined that there are people willing to work for dirt-cheap wages and there is no way that middle-class America can compete economically with that.

    We Americans have it so easy and we are so quick to complain. I fear we will have some very real issues to complain about in the coming years ahead!

    Reply

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