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With the prices of agricultural products, industrial and precious metals, as well as energy at all time highs; we certainly live in inflationary times.  But what does the word inflation mean in economic terms, from whence does it come, and where does it lead?  Think you know?  Read on.

It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” – Henry Ford (1863 – 1947)


Let’s Define Our Terms

When we, here at The Falcons Lair, speak of economic literacy, the subject of inflation is perhaps the poster child that highlights what we are talking about.  Today the general public typically has no clue as to what true inflation is, what causes it, or why they should be worried about it.

A provocative statement perhaps?  Bear with me.

The mainstream media and politicians, along with their economists and modern economic text books and dictionary’s, with the general public in tow, typically define Inflation as:

“a general increase in prices and fall in the purchasing value of money”Oxford

I’m certainly not the first to point out the sleight of hand (or in this case sleight of definition) that has taken place with respect to the definition of inflation, but over time it seems it has been moved around on us.  If you take any beginning economics course or review an older basic economics text book or for that matter look up the word in an older dictionary, you will discover that someone has changed their mind about what they want the word inflation to mean.

A 1983 version of Webster’s Dictionary defines inflation as:

An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices…”

Follow the link below for a more thorough discussion of the change of definitions over time.

Inflation Data

So let’s sum up.  Since the beginning of modern economic study (i.e. during the 18th and 19th centuries) until let’s say the 1980’s, inflation was defined as an increase in the money supply, which in turn caused prices to rise and thus the dollar to fall in value.  The current definition and use has left out the cause (i.e. the increase in the money supply) and only focused on the effect (i.e. the rise in prices and the dollars loss in value).  Thus, the cause has been ignored and the effect has become the definition.

The Federal Reserve’s Contribution

Well how and why did this happen?  Let’s have a brief Q&A session:

·         How does the money supply get increased?  Answer: The Federal Reserve has a legal monopoly to create money and thereby increase the money supply.  This legal right was granted by Congress in the Federal Reserve Act of 1913.  The Federal Reserve can create money legally, while anyone else will go to jail for a long time.

·         How much have they increased the money supply? The short answer is,… a lot!  Here are the approximate amounts of money (in M3 terms) in existence during recent history as reported by the Federal Reserve:

o   1960 – $      315 Billion

o   1970 – $      677 Billion

o   1980 – $   1,996 Billion (or $   2.0 Trillion)

o   1990 – $   4,155 Billion (or $   4.2 Trillion)

o   2000 – $   7,118 Billion (or $   7.1 Trillion)

o   2006 – $ 10,299 Billion (or $ 10.3 Trillion)

o   Care to guess how this story is going to end?  You don’t have to.  See the next section entitled, “The Past as Prologue”. 

Footnote: In Feb 2006 The Federal Reserve stopped publishing the M3 money supply statistic because, according to them, it was no longer needed.  No matter, you can plainly see where this is headed.  If you are really interested, John Williams at http://www.shadowstats.com/ has continued to track M3 and has recently reported that it is growing at an annual rate of 18%.  The US economy is growing at 1%.  Lots of fresh new dollars but very few new goods and services to buy with them, Hmmm, what will this lead to?  It’s your turn to answer.

·     Is it possible that the reason for the subtle (or not so subtle) change in the definition of the word inflation is because increasing the money supply causes an increase in prices and the Federal Reserve is solely responsible for increasing the money supply?  Answer: Yes

·     Why would our political leadership, wall street, academia and the main stream media go along with this subversion of the definition without ever examining, in depth, the causes of rising prices?  Answer: Maybe because they all benefit from increases in the money supply.  The money that is created has to go somewhere.

 “Give me control of a nation’s money and I care not who makes it’s laws” –Mayer Amschel Bauer Rothschild (1743 – 1812)


The Past as Prologue

From the realm of “been there done that”, this is actually well traveled economic history.  Since the beginning of time governments and/or powerful interest groups have wanted to control the money supply for obvious beneficial reasons.  For one, it eliminates their need to rely on taxes or other sources to fund an agenda.  This in turn allows them to spend recklessly on budget deficits, pet projects, wars and corporate bail outs without constraint or accountability to the general public.

These actions are not without consequences however, and the pages of history are littered with the economic debris and social upheaval which results from rampant money creation.

Here are but a few examples as addressed in a fabulous book on the matter, “The Penniless Billionaires” by Max Shapiro:

  • Roman Empire (the end came about 476 AD) – Since they didn’t have paper money, the government accomplished the same ends by coin clipping.  That’s right, shaving a little bit of metal off the edges of coins, hoping the general public, and vendors in particular, didn’t notice.  There are a few more wrinkles to the story of course, but suffice it to say that the public did notice.  It is universally suggested that the Roman Empire simply slowly disintegrated until it finally ceased to exist for various reasons.  Funny, historians have an odd way of ignoring the most important aspect of any person or groups survival.  Hint: The economic model they operated under was deeply flawed and finally collapsed.

 

  • The French Assignat Era (1787 – 1799) – The French experiment with abandoning metallic money for the printed kind.  It ended in hyper-inflation, the starvation of the masses, the collapse of the country and the capitulation to Napoleon.  When it was over, the engraving machinery, plates, and paper used in printing the Assignats were smashed and burned in public.  For all his faults, Napoleon understood the nature of the problem and declared, “While I live, I will never resort to irredeemable paper”.  He kept his word, and Frances economy recovered.

 

  • The German Hyperinflation (1922-1923) – This was the era when wheel barrels full of money were required to buy every-day items.  Between January 1922 and November 1923 the wholesale price index went up by a factor of 7 billion, as extraordinary as it sounds.  They actually printed 500 Billion Mark Notes.  The German population was thrust into starvation and abject poverty.

In Closing

I think that intuitively people ultimately understand this phenomenon.  Although it can be obscured by certain dynamics, such as the definition swap described above, a generational lack of experience with inflation, or the failure of our political leadership and the main stream media to explore these important questions in depth.

A dramatic increase in the volume of anything is going to naturally decrease its value relative to other things.  This is no less true of an increase in the supply of the US dollar, or any other fiat currency for that matter.  However, the dramatic increase in the US money supply is particularly responsible for commodity price increases due to the fact that it enjoys a status as the world’s reserve currency (although perhaps not for much longer).  This means that most of the world’s commodities are priced in US Dollars and thus most countries must first purchase dollars before they can purchase the things they need.  The end result has been the printing of substantially more US Dollar than would have been necessary for US use only.

The ramifications of this explosion in the volume of US dollars and more recently derivatives goes far beyond a discussion of price increases alone.  These issues will be a fruitful source for future Falcon discussions.  In the meantime, people have begun to awaken to this long dormant monster called Inflation and it will be drawn more and more to center stage, as ones quality of life is dramatically impacted by the rising cost of living, stagnant wages, a lack of savings and credit, along with a contracting economy.

I leave you with the following comforting thought:

“The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless…” – Thomas Jefferson (1743 – 1826)

There are solutions but they require sober minded assessment in the cold light of reason, a return to economic sanity and a strong dose of common sense.

Stay tuned.

-THE FALCON

Have a response? Some thoughts? A question?  Leave a comment and let’s talk about it.

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