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Inflation and the Purchasing Power of the Dollar

September 28, 2012

If you have been lending an ear to some of the right people like I have then you have probably be listening to Congressman Ron Paul and investor Peter Schiff and others talk about how quantitative easing is diluting the value of the dollar. While I agree with everything these men say I think we need to be careful not to delude ourselves into believing that going back to a gold standard will bring us into a state of utopia forever and ever. I am not saying I am against a gold backed currency, on the contrary, I support it all the way. What I am trying to say here is that we must never forget that Ludwig von Mises taught that the purchasing power of money never stays the same. The purchasing power of money is either inflating or deflating but never stays the same. I think what we need to ask ourselves here is what exactly do we want for our economy? Do we want more inflation or do we want to experience a deflation and how big of an inflation or deflation do we want to experience?

Let us also remember that Ludwig von Mises taught us that the concepts of inflation and deflation are not concepts coined by economists but rather by political pundits. Von Mises taught that inflation and deflation used to refer to the increase or decrease in the supply of money but in these modern times we use terms like quantitative easing to refer to an increase in money supply and inflation or deflation refers to the rise and fall in commodity prices and wage rates.

Aside from the shifts in meaning, inflation is also misdiagnosed among politicians and the unsuspecting public. So you have politicians promising to fight against what really is the symptoms of inflation as opposed to eliminating the root cause. This is a result of not comprehending the causal relation between the increase in the quantity of money on the one hand and the rise in prices in the other. So politicians and their central banking friends practically make things worse. We can go back in United States history to the Bank of North America or even further back to 1696 and the Bank of England, but lets take our financial time machine to the subsidies granted in the Second World War on the part of the government of the United States, Canada and Great Britain to farmers. This is where these governments provided a subsidy to the farmers producing at the highest cost. These subsidies were financed by what today we would call quantitative easing, namely, an additional increase in the supply of money. The result of this policy on the public and its purchasing power was inflation, that is, an increase in prices of goods and services.

I was having a conversation with a coworker about the price of gas at the pump and I found it rather curious that she was waiting for gas prices to drop back down to the what it was this past summer. I am amazed by anybody who believes that prices in gas or any goods or services here in the United States would do anything but rise. With QE Infinity prices will do nothing but rise as they always have since the creation of the Federal Reserve in 1913 but this time around the rise will accelerate so instead of waiting I recommend folks buy more of whatever it is they are planning to buy. If you erroneously believe that prices will drop at some point in the future, you are going to restrict your purchases and seemingly enlarge your cash holdings which unfortunately may not be worth much in the future if you understand that your savings will bleed 2.5% every year depending on whose inflation statistics you go by.

I do believe in saving and we should all save, unfortunately, with QE3 I anticipate the value of our savings will lose at least 2.5% every year. Thus I am buying more goods than I would have bought in the absence of my belief that we are heading towards inflation and the collapse of the dollar. I strongly believe we are on the eve of big cash-induced changes in purchasing power.

The Federal Reserve’s purchasing of $40m in mortgage backed securities every month until 2015 is being done as a way to keep housing prices from falling to their appropriate levels. So housing prices are going to continue to remain at their artifically high levels and unfortunately what will come next is a rise in prices in other goods and services.

There are still people in this country  who have not yet become aware of the fact that they are about to be confronted with a price crisis throughout various commodities and services although not all at the same time. Some people still believe that some day the prices will drop. I think this optimism no matter how misplaced could be used by the politicians in Washington to stop this inflationary madness of the Federal Reserve. Eventually the masses will wake up even if it ends up being a rude awakening to the extent that the people of Spain and Greece have recently experienced. Of course when this happens it will be too late, but there are a lot of late learners in the United States and I will admit to being one myself. I think QE Infinity is setting the stage for hyperinflation where people are going to become anxious to swap his dollars against “real” goods, no matter whether he needs them or not, no matter how much money he has to pay for them. But we are not there yet and I know we are not there yet because when I approach family members whom I love and other folks in my social circle about investing in gold and silver, they give me some excuse about not having the money right now. This is very unfortunate because I know they do have some amount of money to invest in some small quantity of gold and silver which is better than nothing and yet they have so much faith in that piece of paper that is losing confidence in the world. One day North Americans are going to be left holding the bag because they will be the only people in the world thinking that the dollars in their pockets are worth something. Most North Americans dont realize that confidence in the dollar is not just limited to within these United States, there has to be confidence in the world as well. The dollar has a future as scrap paper and its quite sad how most North Americans are totally oblivious to this very bleak future which is exactly why we are headed there.

I work with people who have to think twice about buying gold but will not think twice to spend three hundred dollars on a new cell phone they really didnt need. These same people say they dont have time to study history because they just finished school and are tired of reading. Well, I am not asking people to read their history for leisurely enjoyment or even a degree, the latter being a fate more important than death it seems. For those who feel that certain death is more important than a degree, read about the history of the Bank of North America, The First Bank of the United States, the Second Bank of the United States. Read what happened in North America in 1781 with the Contintental currency, with the French mandats territoriaux in 1796, and with the German Mark in 1923. But dont stop there, read about what recently happened in Argentina in 2001 and you can read what has recently occured in Spain and Greece. Those who dont read their history are doomed to suffer the consequences. These consequences range from not having anything to eat for several days, having no access to your bank account and finally having a medium of exchange turn into a worthless piece of scrap paper that you can do nothing except wipe yourself with it when you are done using the can. Inflationary policies do not work, they never have historically, they will not work here in the United States today.


From → Economics

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