Wednesday, September 14, 2011

Inflation Targeting gone Amok

I read the following quote from a facebook post from a friend who majored in Economics:


A slightly higher inflation target promotes the incentive to spend money, rather than hold onto it.


There is absolutely no doubt that the above statement is true.  I have two questions in response to the above statement:


1. What is inflation?


Inflation is the expansion of the supply of money AND credit marked to market.  Basically its the entire supply of currency available to transact in the economy.  Inflation is NOT the rise in prices.  Rising prices are a symptom of inflation.  In a capitalistic economy prices tend to actually fall over time which would increase the purchasing power of currency.  Unfortunately we do not have a capitalistic economy.  We have a banker run economy.


2. What causes inflation?


Bankers cause inflation by monetizing unsecured "assets".  Treasury debt is unsecured.  Underwater residential mortgage backed securities are partially unsecured.  SBA loans guaranteed by the Treasury are unsecured.   The Federal Reserve is the greatest monetizer of debt since it is accountable to no one and can only be shut down by the US Congress, which ceded its Constitutional authority to regulate the value of its currency.  Typically if a bank lends unsecured and the loan defaults, the bank will lose a lot of money.  Therefore it will only make unsecured loans to customers with a minuscule probability of default.


Housing prices, commodities, and oil rose dramatically in price during the 2003-2008 boom as a result of unsecured lending, mostly in housing.  Price spirals were caused by monetary inflation which were then backed by fraudulent lending to those who could not afford to pay debt service.  These price signals suggested that people who had houses could cash out "equity" in their houses to fund further consumption, increasing the supply of credit.


In 2008, the margin call came.  The frauds were realized and prices began spiraling down because CREDIT was not available and the unsecured credit evaporated.  The reason banks began failing is because they had lent too much without collateral.  That is they may have lent money with collateral, however the presumed value of the collateral in reality was reliant upon a fraud perpetrated by the Federal Reserve in order to signal people to spend money they didn't really have.


Monetary inflation is in effect an invisible tax that depreciates the value of your earned money.  Monetary inflation is determined by an organization owned by private banks.  Price inflation is a result of monetary inflation.


My next question is this: WHO should control the supply of money?  


I'll start with who should not.  Bankers and Academics should not control the supply of money.  They've had their turn and failed miserably.  See Historical CPI Since 1800 and focus on what happened to price inflation after the Federal Reserve was started in 1913.  Governments also are typically poor managers of the supply of money since they tend to want to emit bills of credit to pay for political projects and wars.  


This leaves the market to define what money is.  Gold and silver have typically been the form of money chosen by the market.  Although many other commodities or products could be used as money.  Credit can be issued under gold and silver and in the Historical CPI since 1800 chart under the gold standard, the level of price inflation was effectively zero over time.


E-CON-onmists had no effect on the supply of money.  As a result prices were stable, older people didn't lose value on their savings, and banks didn't blow up quite like they did in the Great Depression, Savings & Loan crises, and the recent credit crisis.  They still blew up, but there was no risk backstop by the government and a central reserve bank.  JP Morgan was basically the reserve bank in the late 1800s.  When interbank lending dried up, JP Morgan would either lend or take over banks at incredible rates of return.

Inflation targeting is blatantly unlawful under the Federal Reserve Act which mandates stable prices.  It is also immoral since it is a theft of purchasing power with policies set by banker's acting in their best interests.  The problem this country is in is due to too much credit.  Inflating the supply of credit only exacerbates the problem of less demand because more currency is spent covering debt service rather than for productive purposes.  The simple solution to this mess we're in is to end central planning of the economy by bankers and return to a market based currency.

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