With the Government’s increasing appetite for deficit spending comes the need to debase the currency at ever increasing rates. The interventionist economic policies by the Federal Reserve further inflates the currency. While the media complex reports how the various bailouts cost much less in terms of dollar numbers or that the tax payer made a profit on some of the bailout programs, one has to keep in mind that this was only made possible through the various market interventionist policies that cost trillions of newly created dollars as we reported in our article “Treasury Has (Manipulated) Paper Gains On Toxic Assets“. The interventionist policies of Quantitative Easing, purchasing of toxic debt, manipulation of interest rates to below true market rates, guarantees of non-sense loans, etc. come at the cost of inflation. Adjusted for inflation, the bailouts cost significantly more but the Government and Federal Reserve conveniently ignore that fact as projecting a positive spin prepares the population to accept future bailouts and yet more Government intervention.
The public education system has done a great job of leading the people to wrongfully believe that we should accept price inflation as normal economic behavior. We are indoctrinated with the mindset of accepting a yearly abritrary inflation number of around 3% and the entities in charge have done an exceptional job of tweaking the CPI forumula to ensure that the official inflation number remains within its accepted range.
An episode of the cartoon DuckTales teaches more about real inflation than many MBA programs.
Inflation is described by the Austrian School of Economics as the creation of new money. The resulting price increase of goods, whether instant or delayed, is a direct consequence of the increase in the supply of money as more currency is chasing an equal amount of goods. In ancient times prior to the introduction of paper money Governments would inflate their currencies to finance wars by reducing the size and weight of their metal coins. The practice of devaluing the coin currency through the use of cheaper metals was and still is popular. The US mint for instance discontinued using silver in its general circulation coins in the 1960s as the Government’s deficit policy resulted in a devaluation of the currency below the value of the actual metal. The “cheap” coins of lesser denomination also became cheaper in the process as the face value of the coin no longer represented the underlying metal value of the coin. The US Penny for example was made of 100% copper until the mid 1800s. The use of more abundant and cheaper metals for the coinage of the penny was introduced in direct response to inflation. Prior to the introduction of the Federal Reserve System the Penny was made of bronze which consists of 95% copper and 5% tin and zinc. As the USD lost value through inflationary policy the penny lost value and today a penny cosists of 97.5% zinc and only a tiny amount of copper.
The United States is certainly not the only country as virtually most Nations have an appetite for deficit spending and consequently seek to devalue their currency to “afford” such irresponsible fiscal behavior. Brazil for instance experienced several introductions of new currencies over the past decades. In 1986 they replaced their Cruzairo with the Cruzado, in 1989 the Cruzado was replaced with the Cruzado Novo, in 1990 Brazil’s currency was once again called Cruzeiro, then replaced by the Cruzeiro Real which since 1994 became the Real. Each currency introduction came at a hyper-inflationary exchange rate and the people lost much of their paper wealth in the process.
Zimbabwe has been in the news on many occasions as their Zimbabwean dollar hyperinflated at record rates. When the Zimbabwean Dollar replaced the Rhodisian Dollar at par value it was valued above one USD. The purchasing power of the Zimbabwean Dollar quickly eroded as the country created more. Unlike the US Dollar there is no international demand for the Zimbabwean Dollar and with that the inflationary practices quickly resulted in price increases.
The fundamental creation of more currency is no different in Zimbabwe than it is here in the US. Both Nations increase their money supply. The major reason why the US hasn’t experienced massive price increases can be attributed to the status of the USD as that of the World’s Reserve Currency. With that the USD is in demand and the Federal Reserve’s purchasing of dollars at Treasury Auctions further stabalizes its depreciation for the short term. The inevitable can be delayed through systematic policy enforcement but to think that the United States would be immune to hyperinflation and a new currency is ignorant of history as many Empires have collapsed due to monetary reasons. The Roman Empire collapsed as did the Great Yuan Dynasty in China as a consequence of the debasing of their currency to fund budget deficits. The Weimar Republic also hyperinflated its currency after the first World War resulting in a collapse of its currency and it eventually cost 4.2 Trillion Reichsmark for 1 USD.
When the Government through the Federal Reserve increases the supply of money it’s done under the pretense of good economic policy. An individual that does the same, counterfeits the currency and then stimulates the economy while enriching himself, is rightfully put in jail. The Government and Federal Reserve ignores the knowledge of those who question the inflationary policies and warn about their dire consequences. The Germans not only learned from the consequences of inflation but attempted to use inflation as a weapon during World War II. The Nazis through “Operation Bernhard” planned to destabalize the British Economy by counterfeiting the Pound. Flooding the British Economy with additional currency would have resulted in hyperinflation and a collapse of business activity. Destabalization of the US Economy through counterfeited inflation was also planned. It’s time that U.S Government officials learn about the consequences of inflation, realize that the United States is not indefinitely exempt from inflationary price actions, and start living within its means.