Money/credit expansion (inflation) is insidious and like an addictive drug. The first effects appear to be pleasant – a seeming increase, if not boom, in business; lower interest rates; more available credit and a decline in unemployment – BUT, unless the monetary stimulus is continued, and probably at increasingly higher doses, the temporary high disappears. Below is a sampling of what eventually happens when central bankers try to ‘help’ the economy by creating money out of nothing. Words: 799
So says ”Monty Pelerin” (a pseudonym derived from The Monty Pelerin Society) in edited excerpts from his original article* as posted at www.economicnoise.com.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Pelerin goes on to say, in part:
Steve Saville (www.speculative-investor.com) provides more detail on the effects of easing monetary policy in his timeless article** The Insidious Effects of Monetary Inflation which is provided below.
|Most people with a basic grounding in economics know that increasing the supply of money leads to a fall in the purchasing power of money. However, this is as far as most people’s understanding goes and explains why monetary inflation is generally not unpopular unless the cost of living happens to be rising rapidly. Monetary inflation would be far more unpopular if its other effects were widely understood.We list, herewith, some of these other effects.
1. A greater wealth gap between rich and poor. For example, monetary inflation is probably a large part of the reason that the percentage of US national income captured by the richest 1% of Americans has risen from 9% to 25% since 1980. Inflation works this way because asset prices usually respond more quickly than the price of labour to increases in the money supply, and because the richer you are the better-positioned you will generally be to protect yourself from, or profit from, rising prices.
2. Large multi-year swings in the economy (a boom/bust cycle), with the net result over the entire cycle being sub-par economic progress due to the wealth that ends up being consumed during the boom phase.
3. Reduced competitiveness of industry within economies with relatively high inflation rates, due to the combination of rising material costs and distorted price signals.The distortion of price signals caused by the monetary inflation is very important because these signals tell the market what/how-much to produce and what to invest in, meaning that there will be a lot of misdirected investment and inefficient use of resources if the signals are misleading.In relation to this point it is appropriate to contrast the performances over the past decade of the manufacturing sector’s of Germany and the US. Germany is far from being a bastion of economic freedom (its economy is hampered by a heavy regulatory burden) and German labour costs are high, and yet Germany’s manufacturing sector has handily outperformed its US counterpart over the past decade. The only advantage that Germany appears to have had is the absence of an inflation-fueled boom – but what an advantage it turned out to be!
4. Higher unemployment (an eventual knock-on effect of the misdirection of investment mentioned above).
5. A decline in real wages over the course of the inflation-generated boom/bust cycle. Even during the boom phase of the cycle, wages will usually be near the end of the line when it comes to responding to the additional money. During the bust phase, the higher unemployment rate (the excess supply of labour) will exacerbate the tendency of wages to be slower to rise than most other prices in response to inflation.
Note that while a lower average real wage will partially offset the decline in industrial competitiveness resulting from distorted price signals, it won’t result in a net competitive advantage. It should be intuitively obvious that an economy could never achieve a net competitive advantage from what amounts to counterfeiting on a grand scale.
6. More speculating and less saving. The greater the monetary inflation, the less sense it will make to save in the traditional way and the more sense it will make to speculate. This is problematic for two main reasons. First, saving is the foundation of long-term economic progress. Second, most people aren’t adept at financial speculation.
7. Weaker balance sheets, because during the initial stages of monetary inflation – the stages that occur before the cost of living and interest rates begin to surge – people will usually be rewarded for using debt-based leverage.
8. Financial crises. Rampant mal-investment, speculation and debt accumulation are the ingredients of a financial crisis such as the one that occurred during 2007-2009.
The above is a sampling of what eventually happens when central bankers try to ‘help’ the economy by creating money out of nothing.
People get confused about the nature of mass inflation, hyperinflation, and what causes both. [Let me clarify the nature and causes of each.] Words: 930
Whether our current economic crisis will end with massive inflation or in a deflationary spiral (ultimately, either one results in a Depression) is more than an academic one. It is the single most important variable for near and intermediate term investing success. It is also important in regard to taking actions which can prepare and protect you and your family. [Here is my assessment of what the future outcome will likely be and why.] Words: 1441
Daniel Thornton, an economist at the Federal Reserve Bank of St. Louis, argues that the Fed’s policy of providing liquidity has “enormous potential to increase the money supply,” resulting in what The Wall Street Journal’s Real Time Economics blog calls “an inflation inferno.” [Personally,] I think it’s too soon to make significant changes to a portfolio based on inflation fears. Here’s why. Words: 550
The developed economies of the world have opened the money spigots…[and this] massive money and credit creation is sitting in the banking system like dry tinder just waiting for a spark to set it ablaze. How quickly it happens is anyone’s guess, but once it does we are likely to be enveloped in a worldwide inflation unlike anything before ever witnessed. [Let me explain further.] Words: 625
Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660
Economists are telling central banks to accelerate monetary growth even faster…to avoid a bank balance sheet implosion with all the deflationary consequences that implies. [As such,] the prospects for 2012, and thereafter, are for Total Money Supply to continue its hyperbolic trend – and when such a trend becomes established it becomes almost impossible to stop because the whole debt-based economy and the banking system would collapse. [Let me explain further.] Words: 550
There is a difference between inflation and hyperinflation…and there is no gradual path from one to the other. To wind up with true hyperinflation, some very bad things have to happen. The government has to completely lose control… the populace has to completely lose faith in the system… or both at the same time. [Are we there yet? Let’s take a look.] Words: 1188