I obtained this report on inflation from Swiss America. This is an excellent report detailing our current inflation problems, and how the Obama Administration is using inflation redistribute wealth.
Enjoy:
THE USES OF INFLATION
Uses of inflation Monetary Policy and Governance in the 21st Century
A Swiss America White Paper--By Craig R. Smith
March 1, 2011
Copyright © 2011 by Swiss America Trading Corporation All Rights Reserved
Craig R. Smith is Chairman and Founder of Swiss America Trading Corporation and author of Crashing the Dollar: How to Survive a Global Currency Collapse
Lowell Ponte is a former think tank futurist, former Reader's Digest Magazine Roving Editor, and co-author of Crashing the Dollar: How to Survive a Global Currency Collapse
Portions of this Swiss America White Paper originally appeared in the book
Crashing the Dollar: How to Survive a Global Currency Collapse
Copyright © 2010 by Idea Factory Press.
All Rights Reserved.
Other portions originally appear in the book
The Inflation Deception By Craig R. Smith and Lowell Ponte
Copyright © 2011 by Swiss America Trading Corporation
All Rights Reserved
Swiss America Trading Corporation
15018 North Tatum Blvd, Phoenix, AZ 85032
800-289-2646 http://www.swissamerica.com
INTRODUCTION
by Craig R. Smith
Chairman, Swiss America Trading Corporation
High, or even hyper, inflation is rapidly approaching.
After almost 30 years of helping people hedge against financial risk, I can feel the tremors of this oncoming economic tidal wave rumbling beneath my feet. It is far bigger than I have ever felt.
The coming devastation will put America’s economy underwater and will destroy the U.S. Dollar as we have known it, as the world’s Reserve Currency.
For those who have not prepared, the economic devastation about to arrive will bring hardships that make the Great Depression look like a summer picnic.
Most of us have been deceived into thinking that high inflation is the inadvertent by-product of misguided or unlucky government policies.
As this White Paper will show you, inflation is the government policy. The approaching tidal wave has been deliberately set in motion. This investigation will show you how and why.................
This White Paper explains why inflation is much more than higher prices, and what steps you and your family can take to survive, thrive and even prosper during the hard economic times in America’s immediate future.
Fasten your seatbelt, dear reader. You are about to take an amazing journey through empowering information and horizon-expanding ideas. After reading this, you will never again see inflation or money the way you do now.
Craig
Craig R. Smith
"Germany will militarize herself out of existence,
England will expand herself out of existence, and
America will spend herself out of existence."
– Lenin
1917
Meet The Jones Family
Inflation frightens Ryan and Peggy Jones. Like most Americans, they sense that it is something more mysterious and ominous than just another way to say "higher prices."
As you are about to discover, their instinctive fear of inflation is justified. It comes from our survival instinct.
You might have the same fear, and with good reason. You probably see Ryan or Peggy each morning in your bathroom mirror.
To Ryan and Peggy, inflation is the name of a monster they have dreaded since the year they wed, 1980.
In that year President Jimmy Carter presided over a rate of inflation that soared above 18 percent and a prime interest rate that topped 21 percent.
Millions of homeowners, desperate to sell, saw the value of their biggest lifetime investment plummet, and the cost of everything else they needed, from food to gasoline, soar.
Millions more, like the Jones family (not their real name) were eager to buy their first home but – with interest rates at their highest level in American history – were unable to qualify for a mortgage.
Mr. Carter won office in 1976 by citing what he called his opponent's "Misery Index," the combined rates of inflation and unemployment.
By 1980 Carter had blamed the American people for his economic shortcomings in his so-called "Malaise" speech – while his own "Misery Index" of unemployment and inflation climbed to 21.98 percent.
President Carter's four years in the Oval Office produced the greatest act of theft in history. His nightmare inflation stole half the purchasing power from the life savings of every American.
Carter lost in 1980 to Republican Ronald Reagan, who with great discipline and political courage forced the inflation genie back into its sinister magic lamp and thereby laid the foundation for many years of prosperity.
However, the Carter legacy continues today, crippling the economic futures and dreams of millions of struggling homeowners, would-be home buyers and workers. Mr. Carter's housing policies – forcing banks to give billions of dollars in mortgages to high-risk borrowers – sowed the seeds of today's global economic problems and America's current financial crisis.
President Bill Clinton doubled down on Mr. Carter's redistributionist housing policies, forcing banks to fund more than a Trillion dollars of bad loans. My 2010 book Crashing the Dollar: How to Survive a Global Currency Collapse lays out the details of how this happened, and how it triggered the Great Recession. [1]
The Squeeze
Ryan and Peggy have worked hard for more than 30 years and now, like many typical American families, from two jobs they earn $1,000 a week. The Federal, state and local governments snatch a third of this in direct and hidden taxes, leaving them about $670 per week on which to live.
Each week, groceries cost $100 and gasoline another $30, so they have only $540 left to pay the utilities and mortgage. Squeezed dry, they have almost nothing left to save or invest for retirement or to spend for their children or grandchildren.
President Barack Obama's Administration tells them not to worry about inflation, which it officially declares to be close to zero.
In 2010 and 2011 the Obama Administration denied any Cost of Living Adjustment (COLA) to those who depend on Social Security, claiming that there is no increase in the cost of living. The government's official Consumer Price Index (CPI) shows inflation nearly dormant at around 1.1 percent per year.
Ryan's and Peggy's elderly parents are among the millions denied any Social Security increase, but every week prices get higher at the gas pump and the supermarket.
Nowadays Ryan and Peggy have only $35 left at the end of each week while, like a floodtide, prices around them keep rising. What will they do if an emergency hits, with the limits on their credit cards already maxed out?
Ryan and Peggy used to feel more optimistic. After all, they were earning a lot more dollars than their "Leave It To Beaver" fathers did while Mom stayed home with the kids.
The Carter Monster Returns
Today they see growing evidence that Jimmy Carter's inflation monster is quietly returning, and that it is again devouring their income, hopes and dreams. It also could soon devour the U.S. Dollar and America's economy.
What cost only $1 in 1971 now costs approximately $5.50, but how many of us have seen our incomes increase during the past four decades by 550 percent?
Ryan remembers 1973, just before the first Oil Embargo, when gasoline cost 27 cents a gallon and service station attendants were eager to wash your windshields, check your engine fluids and tire pressure, and give you a free set of elegant drinking glasses or other inducements to attract your business as a customer.
American cars were roomy and powerful back then, virtual ships of the land, and gasoline was so cheap that the Sunday drive and long-haul driving vacations were enjoyed by millions of us.
Ryan drove around America in spring 1973 in a 5-speed Toyota Corolla, wheeling from Southern California to Boston, Boston to Miami, and back from Miami to Southern California with lots of sightseeing along the way. The total cost of his new Toyota: $1,500. The cost of all the gas he burned on this trip while putting 10,000 miles on his Odometer: $140.
Today gasoline costs more than $3 per gallon, and Ryan and Peggy shudder to think what will happen to the price of keeping their jobs and of everything they buy that is shipped by truck if gasoline and diesel fuel jump to $4, $5 or $6 per gallon.
In inflation-adjusted dollars, Ryan and Peggy are earning almost exactly the same purchasing power they did 31 years ago on their wedding day – with both of them running hard in uncertain and stressful jobs just to stay in the same financial place.
What will happen when they retire and no longer receive meaningful raises in income to offset the dollar's shrinking purchasing power? How long will it be before the inflation monster devours them – and us?
Like most typical Americans, Ryan and Peggy feel but do not fully understand why they seem to be in a financial trap. They have been misled by the Inflation Deception, and, like you, their first step to escape from this trap is to read this White Paper.
The Obama "Misery Index"
If we combine the U.S. Bureau of Labor Statistics (BLS) December 2010 U6 measurement (roughly the way unemployment was measured during the Great Depression) of unemployed, underemployed and discouraged workers – 16.7 percent – with the estimate of real (not "official") inflation by highly-regarded Shadowstats.com economist John Williams – today at 8.5 percent annually – President Barack Obama's own current "Misery Index" is 25.2 percent.
If we use the more reliable Gallup Poll's January 2011 data equivalent of U6, combining part-time and unemployed workers – which is 18.9 percent – and combine this with John Williams' estimate of real annual inflation of 8.5 percent, Mr. Obama's "Misery Index" jumps to 27.4 percent [2]
These Misery Indexes range from 3.22 to 5.42 percentage points higher than what prompted American voters overwhelmingly to reject President Jimmy Carter for reelection in 1980.
"There is no means of avoiding the final collapse
of a boom brought about by credit expansion.
The alternative is only whether the crisis should come
sooner as a result of a voluntary abandonment
of further credit expansion, or later as a
final total catastrophe of the currency involved."
– Ludwig von Mises
Austrian Economist
Meet the Inflation Monster
Most of today's dictionaries, and even some economics textbooks, define inflation as a rise in the general level of prices of goods and services over a period of time.
This was not inflation's original meaning and not its proper definition today.
"For many years, the word inflation was not a statement about prices but a condition of paper money – a specific description of a monetary policy," writes Michael F. Bryan, Vice President and economist at the Federal Reserve Bank of Cleveland. [3]
"What was once a word that described a monetary cause now describes a price outcome," writes Bryan, and this confuses people as to cause and effect and to inflation's cause and origin.
A six-year-old Federal Reserve Board was not confused in 1919 when its Bulletin said: "Inflation is the process of making addition to currencies not based on a commensurate increase in the production of goods."
"Inflation is always and everywhere a monetary phenomenon," said Nobel-laureate economist Milton Friedman, meaning that inflation comes from an undue increase in the supply of money, just as the classic definition of inflation says.
"As a condition of the money stock," writes Bryan, "an inflating currency has but one origin – the central bank – and one solution – a less expansive money growth rate."
Inflation occurs, in other words, when a government or its central bank – in America's case, the nominally private bank cartel called the Federal Reserve Board – authorizes the printing of more paper money than the value of newly-produced goods and services.
"Magic" Money
Like the fabled genie, the Fed can create paper money by fiat, an order, out of thin air. Conjuring and spending this "magic" money is what early economists meant by inflation, and it has serious consequences.
Paper money is, in a sense, just another commodity subject to a law that can no more be repealed than the Law of Gravity – the economic Law of Supply and Demand. If consumers are willing and able to pay two dollars for the same number of potatoes that a day earlier cost one dollar, then the price of potatoes will soon dramatically increase.
Since 2008 the U.S. Government and Federal Reserve Board have put several Trillion new dollars into the economy. This was purportedly done to prevent key companies and banks from collapsing or going bankrupt, and to fill the nearly-bottomless hole in consumer demand caused by plummeting home values, soaring unemployment, and economic and government policy uncertainties that made people too afraid to spend as they previously had done.
Fed Chair Ben Bernanke recently implemented a policy of flooding an additional $600 Billion, conjured out of thin air, into the economy by July 2011 in a policy he calls Quantitative Easing Two (QE2).
Will this increase marketplace prices? $600 Billion is more than double the entire quantity of actual physical paper dollars in all American wallets, piggy banks and mattresses in the United States. This is only a fraction of the electronic money in our economy that records transactions (and your bank account) as computer blips, but QE2 is adding a huge amount of money that will dilute the purchasing power of every other dollar in circulation.
QE2 will compound the huge dormant inflation caused by QE1, both with its tidal wave of money and via speculation done to hedge the market, as happens with commodity futures trading. In fact, Mr. Bernanke says that one of his aims is to stimulate the economy by deliberately generating roughly two percent inflation.
Inflation Intoxication
Among the first effects and symptoms of inflation is a brief illusion of prosperity, abundance and well-being that fools most of the people sometimes and some people all of the time. This effect of inflation is addictive and requires ever-increasing doses of stimulus money, and it always crashes when people lose faith in their paper money. [4]
This inflation deception happened in Germany's Weimar Republic after World War I, where vast quantities of paper money run off the printing presses first intoxicated, then addicted, and in its hyperinflationary crash devastated the society as people needed wheelbarrows full of money to buy a single loaf of bread.
Social values were destroyed in the upside-down Weimar world where hard work and thrift led to poverty, while irresponsible borrowing made wastrels wealthy as they paid off debts with devalued worthless currency. Weimar's hyperinflation thus paved the path to the depravity of Adolf Hitler.
In a healthy, productive society, each working person, on average, produces at least as much as he or she consumes. The money a person earns is an honest claim on goods and services in the marketplace.
The fundamental problem with inflation is that politicians concoct vast quantities of paper money in excess of what people are producing – usually so that unproductive people can be given a dishonest claim on available goods and services.
This effectively transfers much of the earnings of productive people into the pockets of the unproductive, while bidding up the price of goods and services for every consumer.
Stopping the Heartbeat
British economist John Maynard Keynes studied how various nations fared after World War I. He developed the idea that governments could prevent the up and down, boom and bust economic roller coaster ride of the business cycle if they borrowed to provide economic stimulus to their economies at the low point in such cycles. Such borrowing could be repaid by increasing taxation at the prosperous high points of such cycles.
The first problem with Lord Keynes' theory is that the business cycle is the heartbeat of a healthy economy. This cycle weeds out weak companies and entrepreneurs while making strong ones stronger. The business cycle is human nature's way of recycling workers and investment money to newer and better purposes.
By choking off the business cycle, Keynesian policies disrupt this process of economic recycling and renewal. This government interference in the economy then further degenerates as politicians redirect stimulus money, tax breaks, government contracts and other benefits to industries and specific companies they favor, often for arbitrary, ideological or corrupt self-serving reasons.
Such stimulus can become a permanent and regular feature of government policy and swiftly become "socialism through the back door" as marketplace winners and losers are picked not by consumers and investors but by politicians.
"We don't have a market economy now," says Thomas Hoenig, the President of the Federal Reserve Bank of Kansas City, Missouri. "I hate to use this term, but it's almost crony capitalism – who you know, how big your political donation is." [5]
When the business cycle heartbeat of the economy is suppressed, free market capitalism dies and is replaced by crony capitalism, giant companies such as General Electric so close to politicians and the government that they have effectively merged with and become extensions of government.
The stimulus policies of recent years merged with TARP, the spending of nearly a Trillion dollars to bail out companies "too big to fail."
Unnatural Markets
One of the ugliest, but least noticed, aspects of today's crony capitalism is that it encourages reckless high-risk investing by companies that know they will be rescued when their economic bets go bad.
Some liberals have rightly described this as high-stakes gambling in a rigged capitalist casino. When a risky investment wins, those marketplace winnings are pocketed by private companies and individuals. When such gamblers lose, however, they receive socialist government repayment for their losses in taxpayer money bailouts and other policies.
Sound investing is based on a balance of risk, reward and prudence. In recent years government bailouts and risk-spreading devices such as derivatives have largely erased risk. This turned Wall Street capitalism into a reckless high-stakes game where the unspoken motto was: heads I win, tails the taxpayers lose.
"By manipulating the supply of money and setting interest rates, the Fed has practiced backdoor economic planning," writes Rep. Ron Paul (R.-Texas) in his 2009 book End the Fed. [6]
"The Fed essentially keeps interest rates lower than they otherwise would be," Rep. Paul continued. "In a free market, low rates would indicate adequate savings and signal the businessperson that it's an opportune time to invest in capital projects."
"But the system the Fed operates discourages savings, and the credit created out of thin air serves as the signal for investors to spend, invest, and borrow excessively, compared to a system where interest rates are set by the market."
The Fed and government thus create malinvestment in the economy and produce economic distortions that cripple the free market's ability to invest rationally based on consumer wants and needs.
This produces many of the same problems as socialist centralized planning because, as Rep. Paul wrote, it is "backdoor economic planning" by government-empowered bureaucrats and Federal Reserve commissars.
The Speed of Unsound Money
Keynes taught that stimulus would work because money in an economy has at least two attributes – quantity and velocity, the speed at which it passes from hand to hand in transactions.
A wise government, neo-Keynesian theory still teaches, will provide money to the poor who, because they must spend it immediately to buy food and other necessities, will increase its velocity. This speed, Keynes believed, creates a "multiplier effect" in stimulating a slow economy. It also revives people's optimistic "animal spirits" essential to feeling the confidence to invest and spend. [7]
The economists in the Obama Administration are devout Keynesians who calculated that their stimulus spending would have a "multiplier effect" of 1.5 to 1.6 and produce rapid economic growth.
They were wrong. Massive government spending produced little growth and few jobs, not the millions of jobs they expected. We got a multiplier of less than 1.0 as recipients used government money to pay down existing debt, and governments used it to "save" jobs and pensions of public employees – using money taxed and inflated away from $60,000-per-year average private sector workers to safeguard government workers whose pay-plus-benefits average as much as $123,000 per year.
President Obama signed into law an $862 Billion stimulus package that he said would fix America's deteriorating infrastructure and provide "shovel-ready jobs." The money was spent, but only $4 Billion of the $862 Billion – less than half of one percent – was spent on infrastructure.
The Obama Administration sent $173 Billion to state and local governments, where most was squandered. Investor's Business Daily concluded that all this spending produced few jobs and generated little economic stimulus, calling it "a huge repudiation of the ideas behind Keynesianism." [8]
The lion's share of this stimulus money went to "transfer payments," taking the dollars you earned and saved from your pocket so they could go into the pockets of people more likely to vote for President Barack Obama and others in his Big Government political party.
In some ways Mr. Obama's stimulus produced negative growth, because government, by hook or by crook, must take money in taxes, available loans or monetary value away from other potential investors to be able to spend it. [9]
Keynesian True Believers
Keynes apparently was somewhat mistaken about stimulus and its multiplier effect, according to new research by economists Ethan Ilzetzki of the London School of Economics and Enrique G. Mendoza and Carlos A. Vegh of the University of Maryland. They studied how it worked in 44 different countries and found that the Keynesian fiscal multiplier can be effective in emerging countries with low debts, fixed exchange rates and closed economies. [10]
In advanced nations like the United States with high debt, floating exchange rates and open economies, Keynesian measures are often much less effective.
Lord Keynes came from an earlier era in which people were productive and saved – a time long before middle-class people lived on credit cards instead of earnings, and long before 71 percent of America's Gross Domestic Product (GDP) became consumer and government spending.
This new analysis of today's spendthrift era of living on credit makes it clear that Mr. Obama's stimulus policies have wasted far more than a Trillion dollars on a wrong-headed left-liberal Keynesian dogma. Obama and Fed Chair Bernanke via QE2 are right now in the process of wasting another $600 Billion in an attempt to stimulate the U.S. economy.
Let's be clear. Today's Neo-Keynesians will never be persuaded by the evidence that they are wrong. For them Keynesianism is a religion that promises them the keys to a heavenly utopia in which government, run by a chosen elite of superior people like themselves, will control all aspects of human society, including the economy.
As True Believer religious zealots possessed by their own "animal spirits," the Keynesians' response to all contrary evidence is that "we didn't spend enough on stimulus." If only government would tax away everything from the rich and spend another $100 Trillion on stimulus to redistribute that wealth, they say, a glorious new age will dawn.
Atlas Is Shrugging
Even if Keynes' theory were correct, such stimulus is the wrong medicine for what currently ails the American economy. His stimulus is supposed to create liquidity to lubricate a dry economy, but today's economy is not dry – it's frozen.
Corporations and banks are reportedly holding back at least $3 Trillion on their books, reluctant to hire or invest because of uncertainties about President Obama's tax, regulatory and other policies that will affect their future costs of doing business.
In addition to such uncertainty, some corporate leaders may be living out the fantasy set forth by philosopher Ayn Rand in her novel Atlas Shrugged – a strike by society's "productive" people, a work stoppage to protest ever-higher taxes and oppressive mandates that force them to pull the wagon millions of others feel entitled to ride in for free.
We may be seeing Atlas shrugging right now in today's slowdown by investors and employers against an Obama Administration that is openly hostile towards business and capitalism.
When this $3 Trillion regains velocity in the economy, and when hundreds of billions of stimulus money now hoarded by recipient entities is again being spent, the economy will be awash in money. Explosive inflation will likely then send prices soaring, perhaps leading to Weimar-like hyperinflation in which prices double every month, thereby turning the United States into Weimerica.
By following a QE2 policy deliberately intended to spark inflation, Mr. Bernanke and the Federal Reserve are literally playing with fire in a room full of frozen gasoline.
Housing's Potemkin Village
QE2 may have caused the stock market to inflate its values, perhaps by using Fed money secretly channeled through its 18 insider lending institutions [11].
Housing – which has been the biggest form of savings by middle-class Americans and the biggest source of their spending of borrowed money prior to the Great Recession that began in 2008 – continues to lose value and drag down the economy. Improvements in the housing market, which affects roughly one-third of American jobs, have usually led the way out of past recessions.
Fully 27 percent of borrowers as of early February 2011 were "underwater" on their mortgages, owing more than the market and appraisal value of their homes. In the Fourth Quarter of 2010 average home prices plunged another 5.9 percent. [12]
Meanwhile, 11 percent of the nation's homes stand empty, and the "shadow inventory" of unsold homes is apparently between 6 and 7 million, many of which have yet to be put on the market lest oversupply drag prices down even further and faster.
The fact that the housing market continues to lose value suggests that today's "recovery" is either anemic or part of a Potemkin Village, a fake structure of the kind originally built to fool Russian Czarina Catherine the Great.
Today's Potemkin Village masquerades as a solid economic recovery, fabricated through media reports and low-volume stock exchange activity as an illusion to fool consumers into spending again.
The Unemployment Deception
Unemployment remains stuck at or near double-digit levels. In early February, 2011, Mr. Obama's Executive Branch reported January growth of only 36,000 jobs, but declared at the same time that unemployment had dropped from 9.6 to 9.0 percent of the workforce. It based this seeming contradiction on evidence that nearly two million people in January gave up, ceased looking for jobs, and thereby were no longer counted as unemployed.
By this reasoning, wrote financial columnist John Crudele of the New York Post, "the jobless rate will end up zero when everybody who is unemployed throws in the towel and simply stops sending out resumes or looking in the help-wanted ads." [13-16]
Like many other government economic numbers, the Bureau of Labor Statistics (BLS) employment information is a mix of hard data and out-of-thin-air guesses and assumptions that is not necessarily reliable.
The yardsticks chosen to measure unemployment sometimes change in ways that could appear political.
In January's report, for example, if BLS had used the same assumption about job losses that it used a year earlier, writes Crudele, its "headline number could have been negative instead of showing the paltry 36,000 job growth." [13]
The U.S. Commerce Department reported that sales were up in December 2010, data that many in the media reported as evidence that consumer activity was increasing and the economy was growing.
But a deeper look, writes Crudele, reveals that this rise came not from happy consumers "but instead from rising prices on things like energy. That isn't growth; it is inflation. And inflation is bad." [14]
"Despite all the inflation that you and I see in the real world," writes Crudele, "the Commerce Dept. barely noticed that prices were rising in its GDP (Gross Domestic product) calculations.... The December estimates put into the GDP are about as solid as a Jello mold." [14]
This lack of growth begets a lack of jobs. Today our economy has at least 7.2 million fewer jobs than before the Great Recession. Many of these jobs are never coming back. They have moved overseas, vanished in the disappearance of unsuccessful businesses, or been eliminated by companies that learned how to produce more with fewer workers.
President Obama has been active in pursuing his vision of job growth. He has been hiring approximately 10,000 new Federal Government employees per month. Such Federal civil servants in 2009 earned on average $123,049 per year in wages and benefits, more than double the $61,051 annual wages plus benefits of private sector employees. [17]
Had Mr. Obama chosen instead to provide comparable tax incentives for private employment, he could have helped twice as many people get jobs.
These new government workers, of course, will be paid with money taxed away from private workers. Obamacare all by itself directs the eventual hiring of an additional 16,000 Internal Revenue Service agents to enforce this one law, 81 of whom will enforce Obamacare's 10% tax on tanning salons. Many of those new IRS agents will doubtless increase the government's rate of auditing businesses to collect the ever-greater taxes a growing government requires.
Incidentally, 16,000 is roughly the number of people in an ancient Roman Legion, a military force used to subdue and collect taxes in conquered provinces of the Roman Empire.
Governmental Cannibalism
Unemployment, the decline in housing, and slow economic activity have combined to reduce the tax revenues of states, counties and cities – which, unlike the Federal Government, cannot simply print whatever amount of money they desire.
In recent years states such as California have engaged in governmental cannibalism as counties have seized city property tax revenues, and the state government has seized county revenues. California, whose legislature has been run by liberal redistribute-the-wealth Democrats for many decades, is now at least $25 Billion in debt, despite its use of every bookkeeping trick in the books to remain solvent.
Nationwide, the fat paychecks and pensions politicians promised to government employees and their unions during more prosperous times have left state, county and city governments a bitter legacy of at least $2.5 Trillion in unpayable debt. Federal bailouts in 2009 and 2010 largely went to keep these government retainers from losing pay and benefits, or from being fired like their lower-paid private sector counterparts in downsizing and failing companies.
In 2011, with the dawn of a Republican-majority House of Representatives, the likelihood that such Federal bailouts will continue has largely vanished.
This seems likely for at least two reasons. Republicans generally find it distasteful to make one person or state pay for the irresponsibility of another person or state. States that have been profligate – and especially those run into the ground by liberal Democrats elected with union help – should bear the price of their vote-buying, spendthrift behavior.
Republicans also tend to believe in states' rights, local sovereignty and the Constitution's separation of powers. These would be lost if states and localities became mere dependencies, bowing and scraping for the money to survive from the Federal Government in Washington, D.C. It would turn individual states and localities into welfare recipient governments, or into beneficiaries of partisan or ideological preference in a new national scheme of wealth redistribution.
The elephant in the room today that few are willing to face is whether economic collapse in America will begin at the top with the Federal Government monetizing its debt and sending prices into the stratosphere, or at the bottom with a spate of city, county and state bankruptcies in an attempt to re-write public employee union contracts.
In 2010 in Greece, this latter scenario led to public strikes, lethal violence, and a breakdown of social and civil order that further damaged the climate for investment. The resulting uncertainty made bonds and loans more expensive, pushed up the cost of living, and depressed the prospects for future economic growth.
Hiding Obama’s "Anti-Stimulus"
Government's gimmickry with data and statistics suggests that no piece of good economic news from the government can be trusted. All such data now appears to be massaged and manipulated to serve Mr. Obama's 2012 re-election campaign already underway.
By contrast with Obama Administration numbers, the Gallup polling organization does its own tracking of unemployment and in early February reported that unemployment had increased to 9.8 percent. [18]
The cost and uncertainty caused by Obama Administration policies and its open hostility to capitalism and business have produced poor results.
By adding $4 Trillion to our nation's debts and deficit – the largest infusion of stimulus money in human history – Obama boasts that he has driven economic growth to somewhere between one and three percent.
At best, this "growth" is being devoured by concealed inflation running three times higher than our growth.
Mr. Obama's government-expanding expenditures and legislative agenda could be called an "anti-stimulus" because they frightened business people away from investing and hiring.
The housing, employment, economic growth and inflation data coming from the Obama Administration may or may not be politicized. It is certainly unreliable. Genuine data might show what an astonishing failure the current Administration is.
Because of this failure, we could be on the verge of inflation or hyperinflation that will bring hardships and horrors even worse than the nightmare of the Jimmy Carter years.
"There does not exist an engine
so corruptive of the government
and so demoralizing of the nation
as a public debt.
It will bring on us more ruin at home
than all the enemies from abroad...."
– Thomas Jefferson
Letter to Nathaniel Macon, 1821
INFLATION AS IDEOLOGY
Inflation can be extremely dangerous, so why do politicians and central bankers print reckless amounts of paper money, knowing the catastrophe this can cause?
The answer is that inflation is many things in addition to devaluation of the currency. Inflation can be a tool, an ideology, a form of taxation that secretly extracts the earnings not only of Americans but also of unsuspecting people in other countries, a means of wealth redistribution, a mode of social engineering, a device to weaken some and strengthen others both within a nation and in the global community of nations, and a way to seize and exercise power.
As my colleague Lowell Ponte explains in Table One of this White Paper, inflation has literally become a new kind of governance that imposes its own sinister rules and alternative values, values quite different from those of America's Founders.
Mr. Bernanke has long believed that by "inflation targeting," an approach that has spread to dozens of countries since New Zealand began practicing it in 1990, it is reliably possible to limit inflation to only two or three percent in our economy. [19]
Central bankers in recent years have boasted of the success of inflation targeting, but this, too, is part of the Inflation Deception. As the Euro community and other currencies have all tried to lower their value – thereby making their exports cheaper and more successful abroad – the major currencies have increasingly moved in lock-step.
When the Fed cheapens the U.S. Dollar, it prompts trade competitors to likewise inflate their own currencies to avoid giving the dollar an advantage.
This drives inflation in many places.
Currency Wars
The result of these "currency wars" has been a race to the bottom. However, as all currencies tend to lose value in tandem, they stay in roughly the same value relationship to one another. It's like several people who jump from a bridge together, staying side by side as they plummet towards a crash.
The major currencies therefore exhibit little inflation relative to each other.
When compared to commodities such as foodstuffs or gold, however, all these paper currencies have been rapidly losing value. Later this White Paper will show how fast paper fiat dollars are falling in value relative to real things, commodities.
When a reporter says that gold has surged above $1,400 per ounce, the news you should hear is that the U.S. Dollar has fallen so far that it now takes 1,400 dollars to buy one ounce of gold. When the Fed was created in 1913, an ounce of gold cost only around $20.
The dollar back then was, of course, on the gold standard. While this anchor lasted, the U.S. Dollar was one of the world's most reliable stores of value. Inflation averaged one-quarter percent per year, so a dollar saved retained almost all of its purchasing power for decades.
Inflation's Winners and Losers
Inflation creates winners as well as losers, and those who advocate inflationary policy do so because they think of themselves as on the side of the winners.
Inflation favors debtors at the expense of creditors. It makes a nation's paper money worth less, which causes exports to be cheaper and more successful abroad while raising the price of imported goods that compete with domestic products. Cheaper money attracts foreign tourists while making it more expensive for a nation's own citizens to travel abroad. [20] And America, being the world's largest debtor, has the most of all to gain from inflation.
Inflation, as it did in Weimar, favors speculators over those who work hard, and the young at the expense of the elderly, the risk-averse, savers and those on fixed incomes whose life savings, pensions or Social Security checks may be rendered worthless by rapidly rising prices.
The 90 percent of Americans who play by the rules, work hard, live prudently and responsibly, try to be self-reliant, reject theft and covetousness as the Bible's Ten Commandments say to do, and follow culturally conservative values are the ones most hurt and punished by high inflation.
Law's Paper Schemes
People for thousands of years have tried by hook or crook to steal value for themselves by manipulating money. Ancient rulers would clip crude early metal coins and keep the removed gold or silver.
Other ancient kings would melt coins of gold or silver, then cast new ones that were a mix of these precious metals with cheaper ones. This practice gave the rulers more coins, which they would try to pass off as equal in value to the coins they melted. Think of such rulers as the first Federal Reserve chairmen.
Merchants who understood this adulteration of the money demanded more coins in exchange for their goods. Think of this as the first inflation.
One of the first major modern advocates of manipulable monopoly paper money as a medium of exchange was John Law, born in 1671 into a family of Scottish bankers and metalworkers. In 1705 Law published Money and Trade Consider'd with a Proposal for Supplying the Nation with Money.
The thrifty Scots rejected Law's plans for a national bank, but he persuaded King Louis XV to appoint him Controller General of Finances of France.
France was bankrupt from foreign wars and running out of gold and silver coin.
Law claimed that he could pay off the King's huge national debt with profits from a government-monopoly bank for national finance and a state company for commerce. The King's council rejected this idea, but the eccentric Law found other ways to replace gold with paper credit.
Law converted much of France's national debt to paper shares of ventures such as "The Mississippi Bubble" investment scheme, created by consolidating French trading companies in and around Louisiana into a monopoly. Speculation wildly inflated the values of these shares, followed by a crash in value that devastated aristocratic and middle-class investors and further damaged the French treasury.
Vilified in his own time, John Law is now widely seen by Keynesians as a pioneer who devised key ideas of modern Big Government economics.
Were he alive today, Law would probably be invited to join President Obama's Council of Economic Advisers, or to chair the Federal Reserve Board to implement Mr. Obama's easy-money inflationary policies.
The catastrophe of Law's governmental inflationary paper wealth schemes may be the reason his French contemporary Voltaire wrote: "Paper money eventually returns to its intrinsic value – Zero."
Inflationism
An economic and political ideology called "inflationism" promotes deliberate inflationary government policies (which it calls "expansionism") to increase the supply of money. It was widely held and advocated as good for society less than a century ago.
"The popularity of inflationism is in great part due to deep-rooted hatred of creditors," wrote famed Austrian economist Ludwig von Mises in Human Action. "Inflation is considered just because it favors debtors at the expense of creditors." [21]
America's Civil War spawned its own early inflationists. To fund the war, the North issued $450 Million "Greenbacks," paper fiat money not backed by gold or silver. After the war President Andrew Johnson authorized the Treasury to pay gold for Greenbacks. This was a boon to creditors, but a burden to those who hoped to repay their debts with cheap Greenbacks.
A movement arose, mostly among Western Democrat farmers, that advocated "inflating the Greenback" to ease their debt and thereby redistribute more wealth from East to West. [22]
In 1874 President Ulysses Grant vetoed the "Inflation Bill" that would have issued another $14 Million in Greenbacks, four years after a U.S. Supreme Court ruling declared such paper money to be constitutional.
Inflationism, Capitalism and Revolution
Some "naïve inflationists" do not understand that inflation diminishes the purchasing power of money, wrote Mises in The Theory of Money and Credit, while other inflationists see its problems yet believe inflation can serve higher values, including in time of war the survival of the state. [23]
Inflation can also be an ideological weapon to overthrow nations and economic systems, at least according to liberal economist John Maynard Keynes in his 1919 book The Economic Consequences of the Peace.
"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency," wrote Keynes. "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens...."
"As the inflation proceeds and the real value of the currency fluctuates wildly from month to month," Keynes continued, "all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery."
"Lenin was certainly right," Keynes concluded. "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
"Paper is poverty.... It is only
the ghost of money,
and not money itself."
– Thomas Jefferson
Letter to Edward Carrington, 1788
INFLATION AS TAXATION
"The power of taxation by currency depreciation is one which has been inherent in the state since [ancient] Rome discovered it," wrote John Maynard Keynes in 1923. [23]
"The creation of legal tender has been and is a Government's ultimate reserve," Keynes continued, "and no State or Government is likely to decree its own bankruptcy or its own downfall so long as this instrument still lies at hand unused."
"The U.S. is bankrupt," wrote Boston University Professor of Economics Laurence J. Kotlikoff in August 2010.
The International Monetary Fund (IMF) announced that America is effectively bankrupt in a July 2010 Selected Issues Paper. Governments, of course, do not go bankrupt so long as they have citizens they can tax into individual bankruptcy. Inflation offers a way of "taxation" that governments can use to siphon off the earnings of those who think they pay no taxes, or who are secret tax evaders unknown to government agents.
"The U.S. fiscal gap associated with today's [U.S.] federal fiscal policy," wrote the IMF, "is huge for plausible discount rates" and "closing the fiscal gap requires a permanent fiscal adjustment equal to about 14 percent of U.S. GDP." [25]
"This fiscal gap," wrote Kotlikoff, "is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years."
Total government revenue today is approximately 14.9 percent of GDP.
The Unsustainable Gap
"So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal, income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act." [Emphasis added]
This fiscal gap, writes Kotlikoff, "is the government's credit-card bill and each year's 14 percent of GDP is the interest on that bill. If it doesn't pay this year's interest, it will be added to the balance.... Our country is broke and can no longer afford no-pain, all-gain 'solutions'."
The non-partisan Congressional Budget Office (CBO) issued a report on July 27, 2010, titled "Federal Debt and the Risk of a Fiscal Crisis." The report's most likely fiscal scenario predicts that America's national debt was almost certain to rise above 62 percent of Gross Domestic Product expected by the end of 2010 and would certainly reach that level by 2020.
In February 2011 the Washington Times reported that President Obama's proposed budget would cause "the biggest one-year jump in debt in history...nearly $2 Trillion," increasing Federal debt to 102.6 percent of GDP by September 30, 2011. [26]
In their 2009 book This Time It's Different: Eight Centuries of Financial Folly, University of Maryland Economics Professor Carmen M. Reinhart and Harvard University Professor Kenneth S. Rogoff warn that debt reaching 90 percent of a nation's GDP is usually the point of no return for countries; those whose debt grows this large almost always see their currencies and economies crash and burn rather than regain health. [27]
CBO projects that if today's levels of government spending continue, the U.S. national debt will be close to 110 percent of GDP in 2025 and to 180 percent of GDP in 2035.
Such spending above and beyond national income, warned CBO, is simply "unsupportable....unsustainable."
And in January 2011 CBO projected that 2011's deficit will be an unexpectedly-high $1.48 Trillion, followed in 2012 by an additional shortfall of another $1 Trillion, with the possibility that our bar tab could add $1 Trillion or more each year for the next 10 years. [28]
Debtor Superpower
Add to this another complication: approximately 41 percent of what the U.S. Congress has spent in recent years is borrowed money.
Our largest creditor is China, which buys roughly 21 percent of our foreign debt. And like other lenders, China is logically concerned that the United States appears unwilling either to double the tax burden on our citizens or to cut our government spending in half.
If our politicians dared do either of these things, Mu-Barack Obama might soon follow Egyptian President Hosni Mubarak into exile.
It is far easier for politicians to keep borrowing on the credit cards – to "take the cash and let the credit go," as Persian poet Omar Khayyam wrote – until lenders such as China take the credit cards away.
China should require the United States to cut up its other credit cards, its borrowing from other nations. This would collapse America's economy or force the government to do rapidly what it today is doing a bit more slowly: printing all the money it needs.
The day China cuts off our credit, our last resort, short of declaring bankruptcy, will be as John Maynard Keynes implied. Our politicians, including the politically-appointed head of the Federal Reserve, will switch on the printing presses and manufacture as much "legal tender" paper money as needed to "monetize the debt," to pay off our debt with nearly worthless pieces of debased currency.
Other countries, including Weimar Germany, destroyed their currency and economy by such acts.
The Secret Tax
The United States has done a slow-motion version of using inflation as a de facto tax for a long time.
In 1945 Beardsley Ruml, the Chairman of the Federal Reserve Bank of New York, reportedly delivered a remarkable speech before the American Bar Association in which he declared: "The necessity for a government to tax in order to maintain both its independence and its solvency is...not true for a national government." [29]
"Two changes of the greatest consequence have occurred in the last twenty-five years which have substantially altered the position of the national state with respect to the financing of its current requirements," said Ruml.
"The first of these changes is the gaining of vast new experience in the management of central banks," he said.
"The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold."
FDR's prohibition of gold ownership by Americans meant that U.S. citizens could no longer seek a safe haven here against inflation by converting their paper dollars into gold bullion.
Ruml's speech, published in the January 1946 issue of the quarterly journal American Affairs, offered a surprising new vision of what taxes "are really for."
The primary purpose of Federal taxation listed by Ruml is "As an instrument of fiscal policy to help stabilize the purchasing power of the dollar."
The implication of Ruml's speech is that government can fund itself merely by printing as much money as needed. The new money produced out of thin air acquires its value, in effect, by devaluing the old dollars that productive people have earned and saved.
To prevent a blaze of high inflation or hyperinflation from burning up the entire value of every dollar in circulation, new and old, taxes will be used to selectively take back money from targeted individuals, groups and industries.
Tax policy, writes Ruml, will "express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes....[and] in penalizing various industries and economic groups...[and] to isolate and assess directly the costs of certain national benefits, such as highways and social security."
Inflation also carries the double whammy of boosting other taxes linked to prices. A 10 percent tax on a $5 product nets the government 50 cents. After inflation doubles that product's price to $10, however, this same tax snares $1 for the government's coffers.
Thus inflation becomes a tax, a way to fund the government, while other modes of taxation can be targeted to prevent excessive inflation by picking the pockets of individuals and groups too small to threaten the ruling political elite with their votes.
Dependence Replaces Independence
The central government can further punish or reward individuals and groups by how it shields them from the effects of inflation. If at the next election the ruling party needs the votes of senior citizens or specific minority groups, it can offer them special protection in the form of Cost Of Living Adjustments or special payments to offset what inflation would otherwise drain from their government welfare or Social Security payments.
Such COLAs can be altered at any time, as President Obama has done by withdrawing them from Social Security recipients. Mr. Obama in fact made token payments to Social Security beneficiaries that he said were to help offset their loss of COLAs. Odds are that Social Security COLAs will be restored in 2012, when he is up for re-election.
Inflation measures such as the Consumer Price Index (CPI) have become a source of controversy because of what prices they choose to measure, and because they have been "adjusted" in ways that alter their findings. One index ignores food and energy costs, while another gives weighted importance to housing costs.
Deception by the Numbers
"[I]f we still calculated inflation the way we did when Jimmy Carter was president, the official inflation figures would look about as bad as they did when...Jimmy Carter was president," wrote Wall Street Journal financial columnist Brett Arends on January 26, 2011. [30]
"You Can't Trust the Inflation Numbers," Arends' column reported, based on data and analysis by economist John Williams at ShadowStats.com and other sources. [31]
Arends points to three major problems with the government's inflation statistics.
One is that the government has changed how it does its inflation analysis.
"Each change in methodology has come with plausible-sounding justifications," writes Arends. "But, as if by magic, each change has had the effect of flattering the numbers. Funny, that."
"According to Mr. Williams' calculations," writes Arends, "if we counted inflation under the old system the official rate wouldn't be 1.5%. It would be closer to 10%."
Government now assumes that if steak prices go up, you will switch to cheaper hamburger. "Presto – no inflation!" writes Arends.
If price stays the same for, say, an Apple laptop computer, these same government inflation analysts calculate using "a piece of chicanery called 'hedonics....that the real price has actually fallen," writes Arends, because today's computers are better than a year ago so buyers get "more" for their money. In fact, the price has not fallen, he notes, so this inflation calculation is misleading.
"The second reason to treat the official inflation figures with some mistrust is that they look backward....not [at] what's about to happen," writes Arends.
This, he notes, means that government is ignoring the cost of raw materials.
"Around the world prices are skyrocketing, from copper to cocoa. The United Nations Food Price Index has just hit a new record high. Oil's back near $90 a barrel. Wheat prices have nearly doubled since last summer," he writes, and nations have begun hoarding foodstuffs, making world supplies even tighter.
"Sooner or later this is going to show up in your supermarket, or at the mall, in higher prices," writes Arends. "How is this not inflation?" Yet the official backward-looking analysis continues to say that consumers face no inflation.
Arends' third reason to mistrust government inflation statistics is "economics." The government is printing vast quantities of paper dollars, far in excess of our nation's productivity. As said before, the Law of Supply and Demand can no more be repealed by the Fed and our politicians than can the Law of Gravity.
"[I]f you drastically increase the number of dollars without a commensurate increase in the number of goods and services, each dollar must, by definition, be worth less," Arends writes. "That's another way of describing inflation."
Arends could have gone even further. A fourth reason for skepticism is changes in how government does "weighting" of various inflation factors. [32]
China's government, for example, gives much more weight in its inflation calculations than our government now does to price increases for food and drink – and China has in recent weeks raised its central bank lending rate three times to fight what it sees as dangerous inflation.
"So long as the Chinese tie themselves to the U.S. Dollar, they are importing our inflation," writes Arends. "[O]ne wonders how this can be called benign."
Taxing the World
By using government's own manipulated inflation indexes, politicians and bureaucrats can avoid paying out hundreds of billions – even, over years, trillions – of dollars in Cost of Living Adjustments to senior citizens, welfare recipients and others. Such manipulation is a kind of theft by fraud.
When the Obama Administration announced that Social Security recipients would receive no increase for two years, skeptics reasonably noted that CPI cannot reliably predict what inflation will be a year from now. Has Uncle Sam become Uncle Sham when measuring inflation? [33]
Meanwhile, the inflation tax is in many ways a dream for bureaucrats. It is dirt cheap to collect and requires no audits or enforcement agents. It simply sucks the lifeblood value out of everyone's dollars like an invisible vampire. And it derives vast revenue for the government even from those with off-the-books income and other tax evaders who remain undetected by the government.
Whoever uses the government's paper fiat money is taxed by its deliberate inflation.
This includes citizens and central banks of other countries who mistakenly trusted the dollar as a reliable store of value.
Inflation has become the U.S. Government's way of taxing the world, not just its own citizens. No wonder inflation has been called America's largest and most profitable export. [34]
The Wheel of Inflation
Vladimir Lenin, founder of the Communist Soviet Union, said that the way to destroy the capitalist bourgeoisie was to "grind them down between the wheels of taxation and inflation."
Has deliberate inflation thus become a weapon of class warfare for President Obama and his political comrades?
This deliberate grinding by inflation is precisely what liberal presidents have done since Republican Richard Nixon in 1971 broke the U.S. Dollar's last anchor tying its value to gold.
In 1933 an earlier left-liberal Democrat, President Franklin Delano Roosevelt, made it illegal for Americans to own gold bullion and confiscated it. The Executive Orders outlawing and confiscating gold remained in effect until January 1975.
FDR also destroyed by law something that was commonplace in major contracts when the American Dollar was backed by gold – a gold clause, which provided that if politicians destroyed the dollar, the person owed money could demand payment instead in a fixed amount of gold. Such things impaired the ability of government to rob people by manipulating the value of their currency.
FDR did not outlaw all gold. Those who used gold in certain professions, such as dentistry, were allowed to possess it. Numismatic gold coins were exempt from confiscation under FDR's Executive Orders, and those who owned them profited handsomely when gold's value jumped by approximately 60 percent immediately after gold bullion was confiscated.
FDR seized gold bullion using government's eminent domain power to acquire it at its old fixed price, thereby transferring to government the huge profit of gold's new, much higher market price.
The Tax from Jekyll Island
The aim of left-liberals and so-called Progressives, with the 1913 establishment of the Federal Reserve Board and the income tax and continuing today, apparently has been to create disintegrating paper money....money with built-in obsolescence....all the better to tax you with.
Economic historian G. Edward Griffin explains this provocative idea in his history of the Federal Reserve Board The Creature from Jekyll Island:
"Inflation has now been institutionalized at a fairly constant 5% per year. This has been determined to be the optimum level for generating the most revenue without causing public alarm. A 5% devaluation applies, not only to the money earned this year, but to all that is left over from previous years. At the end of the first year, a dollar is worth 95 cents. At the end of the second year, the 95 cents is reduced again by 5%, leaving its worth at 90 cents, and so on. By the time a person has worked 20 years, the government will have confiscated 64% of every dollar he saved over those years. By the time he has worked 45 years, the hidden tax will be 90%. The government will take virtually everything a person saves over a lifetime." [35]
According to the government's official CPI index, inflation in December 2010 and January 2011 was running at 0.4 percent per month, which could average out to 4.8 percent per year, more than double Fed Chair Bernanke's 2 percent target but close to Griffin's 5 percent average, above. [36]
One way to escape this inflationary slavery is by studying and sharing this White Paper and using what it and the book Crashing the Dollar: How to Survive a Global Currency Collapse teach about freeing yourself from the government's paper fiat money.
Our Nixonian no-longer-anchored-to-gold paper dollar is losing value every decade to inflation, and this is happening not by accident but by design.
Government tax and regulatory policies are snatching away our earnings, in part by making almost everything we buy more expensive in dollars.
Because of this, the American working class has scarcely increased its real purchasing power, its inflation-adjusted income in dollars, over almost 40 years.
And this grand paper dollar con game uses other tools as well.
The "Tax the Rich" Trap
Liberals and progressives prey on human envy and covetousness. "Let's tax the rich who have more than you do," they have said for a century.
Are you "rich?" Most Americans think of themselves as middle class, but more than half of us now pay the "progressive" income tax that was supposed to hit only the rich.
This tax was originally proposed by Karl Marx and Friedrich Engels in 1848 in The Communist Manifesto as a way "to wrest, by degrees, all capital from the bourgeoisie," from business people and other capitalists. [37]
After many decades of letting inflation push people into higher and higher tax brackets, the income tax was supposedly "indexed" for inflation. However, we have already seen how deceptive inflation indexes can be, and how quickly greedy politicians eager for more revenue can manipulate the rules to squeeze money out of us.
Again and again people have been conned into accepting taxes that were supposed to apply only to the wealthy. When the income tax was enacted in 1913, the "rich" included those making only $25,000 per year. How many realized that inflation would soon put a majority of us into this "rich" category subject to income taxation?
This same inflation deception that tricked people into accepting the so-called "progressive" income tax would later seduce Americans into swallowing the Alternative Minimum Tax (AMT) to catch "those rich people who avoid paying taxes." Thanks to inflation, a majority of Americans could soon be required to pay AMT.
This and a thousand other penalties and surcharges have been sold as targeting "only the rich." And thus today the successful Middle-Class American, whose dollar income (but not purchasing power) has risen mostly because of inflation, now pays a confiscatory tax rate that was originally supposed to rob only the rich.
Large parts of President Obama's new laws include tax and fee increases that are NOT indexed for inflation. Does anyone really believe this is accidental?
The coming hyperinflation will soon define almost all of us as "rich," just as the AMT has for millions of middle-class Americans, even though you will have less purchasing power than you did three decades ago.
Being fraudulently redefined as "rich" will subject you to an array of government money grabs.
Waking Up to Inflation
What has really happened? An old joke makes it clear. A man falls asleep and, like fabled Rip Van Winkle, reawakens 20 years later. He promptly calls his broker to ask about his IBM stock.
"I have good news," his broker says. "Your $100,000 in IBM stock is now worth One Million Dollars."
The man starts to cheer, but is cut short by the pay telephone operator saying: "That will be $30,000 for the next three minutes, please."
The value of the U.S. Dollar is not what it used to be, but many government tax policies deliberately designed to use inflation as a way to tax ordinary income earners as if they were "rich" have not changed.
The capital gains tax, for example, is not indexed for inflation and will take a huge bite out of Rip Van Winkle's "gain" when he sells his almost-worthless IBM stock.
"There are two ways to
conquer and enslave a nation.
One is by the sword,
the other is by debt."
– John Adams
INFLATION AS POWER
Inflation makes a nation's currency and economy weaker, and it also makes that nation's individual citizens weaker.
Honest money serves two functions: as a medium of exchange, and as a store of value. Inflation destroys a currency's ability to be a reliable store of value.
Having no intrinsic value of its own, a fiat paper currency such as the U.S. Dollar can be made worthless merely by government printing 120 trillion paper dollar bills.
Insecurity Deposits
When a nation's money is always losing value through inflation, as the U.S. Dollar is, a constant psychological pressure exists to spend instead of save. In this way inflation acts like a Keynesian prod to stimulate spending.
In individuals, this psychological pressure of constantly-rising prices can prompt more spending on marginal and frivolous purchases.
In businesses this pressure, like that caused by income tax deductibility, encourages spending on marginally-useful supplies and equipment the price of which will increase. This, Keynes could have argued, is good for the overall economy – but such spending could also be malinvestment that is not the best or wisest use of an enterprise's limited capital.
Inflation means that no citizen who holds his or her life savings in the form of paper dollars can ever be secure – can never rest easy with confidence that he or she has earned and saved "enough" money to meet all basic needs in old age.
In a fiat currency society, therefore, citizens are more inclined to look to government as a source of security and for favors such as COLAs.
The essence of the welfare state is that "they break your legs, then offer you crutches." High taxes and government-caused inflation leave millions unable to earn or save enough to be self-reliant. This forces many into a dependence on government that would have been unnecessary had they been allowed to keep and save what they earned.
This same pattern plays out in many other ways – e.g., government makes it illegal for you to own a firearm or defend yourself, then offers to protect you in exchange for a sizable piece of your freedom.
Inflatocracy
Veteran think tank futurist Lowell Ponte in Table One lays out his theory that inflation has moved from an economic policy and ideology to a mode of governance that he calls "Inflatocracy," which he sees emerging in the United States.
Inflatocracy, as he defines it, is political rule by and for the elite that controls inflation and its political constituency groups that benefit from inflation.
Like other styles of government, Inflatocracy reshapes the values of the people it needs to retain and expand its power. It uses inflation to encourage their loyalty, support and votes.
This new mode of governance, Ponte suggests, has turned us into an "Inflation Nation" largely ruled by the unelected Federal Reserve.
"I doubt...the autonomy of the Federal Reserve," wrote Carnegie Mellon University political economist Allan Meltzer in 2009. "[U]nder Mr. Bernanke, the Fed has sacrificed its independence and become the monetary arm of the Treasury," complete with bailouts and the bankrolling of government projects. [38]
The Fed purportedly began with a simple purpose – to keep the U.S. Dollar stable. Under President Carter the Fed was given a second, often contradictory mandate: to steer the economy towards full employment.
Current Fed Chairman Ben Bernanke appears to have taken on a third role – defender and booster of equities and the stock market. Nothing in its enabling legislation gives the Fed this job, but Mr. Bernanke has grabbed it.
Along the way today's Fed has driven interest rates close to zero. This might be good for borrowers if economic and legal uncertainties had made banks more willing to lend.
Alas, rock-bottom interest rates also determine what banks pay to savers, who today have little incentive to have a bank account that pays one-tenth the real, concealed rate of inflation.
Helicopter Ben
We are being turned into a Euro-Socialist welfare state with double-digit unemployment as our normal state of affairs.
Those who share President Obama's ideology have long argued that the United States should become more like democratic-socialist Western Europe.
Ironically, this is happening at the same time that some of the biggest Euro-Socialist nations – Germany, France and Great Britain – have chosen to fight today's economic difficulties with austerity measures and by shrinking the size of their governments. They are becoming more capitalistic.
President Obama, by contrast, has taken the opposite path – heavy borrowing, astronomically-increased debt, and paper-money printing to create Keynesian stimulus. His old belief that the United States should become more like France has suddenly fallen silent, now that France is moving to the right.
Fed Chair Bernanke – sometimes called "Helicopter Ben" because in 2002 he said that it could be effective economic stimulus to throw money out of a helicopter – nowadays is expressing genuine worry.
A February 9, 2011, CNBC story quoting the Fed Chairman was headlined "Bernanke to Congress: We're much Closer to Total Destruction Than You Think." [39]
"By definition, the unsustainable trajectories of deficits and debt that the CBO outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit," Bernanke told a congressional committee.
"One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point," Bernanke continued. "The question is whether these adjustments will take place through a careful and deliberative process...or whether the needed fiscal adjustments will come as a rapid and painful response to a looming or actual fiscal crisis."
Now you can understand why the cover of my latest book, Crashing the Dollar: How to Survive a Global Currency Collapse, features President Obama piloting a giant paper dollar airplane...and why Fed Chair Bernanke is shown as his praying co-pilot. To see this cover, go to http://www.crashingthedollar.com.
See Table One for examples of how the emerging Inflatocracy promotes values that are the opposite of what America's Founders believed in.
OPTING OUT OF INFLATOCRACY
The Bible's Book of Matthew tells of an attempt by opponents to "entangle [Jesus] in his talk" by asking whether it was legal to give tribute to Caesar.
If Jesus approved paying such tribute, he would violate Jewish law and lose the support of many devout fellow Jews. If he told listeners not to pay the tribute, he could be arrested for violating the law of the Roman Empire.
"Shew me the tribute money," said Jesus, who then asked his interrogators: "Whose is this image and superscription?" on the coin. They replied: "Caesar's."
"Render therefore unto Caesar the things which are Caesar's," said Jesus, "and unto God the things that are God's." [40]
Those who hold their savings denominated in the paper fiat money of the Inflatocracy – U.S. Dollars – are holding promissory notes from an entity that according to the International Monetary Fund is already effectively bankrupt. Its debts are in excess of $120 Trillion in unfunded liabilities, an amount so large that a 100 percent tax on the income of all U.S. citizens would be insufficient to pay it off.
The politicized Federal Reserve Board is already monetizing this debt with devalued paper currency as rapidly as it dares without causing a flight out of U.S. Dollars. The Fed needs to avoid driving people into other currencies, tangible commodities that politicians cannot print, or what since Biblical times has been accepted universally as intrinsically valuable money that needs no government endorsement: silver and gold.
Gold versus The Welfare State
A silver bullet is widely believed to have the power to kill a werewolf, if such a creature exists.
Gold is the bullet that, without doubt, can kill the very real monster of inflation, which is almost entirely a creature of government paper fiat currency.
This is why economist Alan Greenspan, later to chair the Federal Reserve Board, wrote in 1966 about why so many "welfare-state advocates" have "An almost hysterical antagonism toward the gold standard," which anchors a currency to gold convertibility and thereby handcuffs politicians eager to run the Mint's printing presses.
Welfare-statists, Greenspan wrote, realize that "the gold standard is incompatible with chronic deficit-spending (the hallmark of the welfare state).... [T]he welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes."
"In the absence of the gold standard," wrote Greenspan, "there is no way to protect savings from confiscation through inflation. There is no safe store of value.... The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves."
"Deficit spending is simply a scheme for the 'hidden' confiscation of wealth," Greenspan continued. "Gold stands in the way of the insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." [41]
If inflation worries you, as it does Ryan and Peggy, isn't it time to diversify a portion of your paper dollar savings into something secure that politically-created inflation cannot devalue and politicians cannot run off a printing press?
The politicians are unlikely to restore a government gold standard. Their power, after all, comes from the Inflatocracy, a political system based on the deceptive printing of paper fiat money and the dependency it creates.
Now you understand why welfarists from FDR to Fed banker Beardsley Ruml saw the end of the gold standard as key to expanding the government and welfare state.
"Gold and economic freedom are inseparable," wrote Greenspan. "[T]he gold standard is an instrument of laissez-faire and...each implies and requires the other."
And the reverse side of this coin is equally true: a gold standard makes a welfare state and the denial of economic freedom almost impossible. No Inflatocracy can exist where honest money prevents inflation and restricts the printing of more paper fiat currency.
Creating Your Own Gold Standard
If everyone decided to convert his and her paper money bank deposits into metal with intrinsic value and stopped accepting government paper money, wrote Greenspan, then "government-created bank credit would be worthless as a claim on goods." Government fiat money, in other words, could no longer buy anything.
The highway to the socialist welfare state is a carpet of government paper fiat money. The path back to the practical and moral values of America's Founders requires us to restore the precious metal they constitutionally specified as real money. This is the philosophical difference between a society built on paper promises and a society built on a solid foundation of integrity and gold.
The good news is that Americans can choose to create their own gold standard, their own store of value that inflation and politicians cannot steal. Gold can be your and your family's own Declaration of Independence from the Inflatocracy, its invisible taxes and its welfare state.
Render unto the Inflationistas their paper inflat-a-money, and render unto yourself and your family a solid financial foundation of real money such as gold that is inflation-proof and whose value cannot be destroyed by the Inflation Deception.
THE INFLATION DECEPTION
Much of the media is also caught in the web of contradictory disinformation spread by governments, political partisans, ideologues and pundits.
Thus, for example, the cable business network CNBC in January 2011 published stories with the following mutually-contradictory headlines:
"Rising Commodity Prices Won't Cause Inflation"
"Making Money on Food & Energy Inflation: Pros"
"Ways to Profit From Rising Food Prices"
"Why Rising Food Prices Could Hurt Stocks"
and
"Are We Seeing a Whiff of Inflation?"
(apparently for those who see with their noses)
CNBC published these in a month when riots over soaring food prices toppled a government in Tunisia, triggering uprisings in Egypt and other Middle Eastern nations and threatening chaos, more government overthrows, a potential new regional war involving Israel and oil producers, and a surge of worldwide oil prices. In early February, 2011, Brent oil (North Sea crude) blipped to $119 per barrel, and West Texas Intermediate Oil bounced over the $100 per barrel barrier.
If the falling dominos of crisis cause oil prices to soar, so will gasoline prices and the diesel fuel that transports everything else you buy. Such price inflation is cumulative and will rapidly grow like compound interest, with one price rise triggering the next, and with anticipatory prices pushed upward by great inflationary expectations.
We are living only one bad news headline away from a worldwide economic and currency collapse.
Yet CNBC says: "Rising Commodity Prices Won't Cause Inflation."
Contrary to CNBC, will commodity prices cause inflation? Here's what is in the price pipeline headed for your wallet:
According to price tracking data by the International Monetary Fund, from July 2010 until January 31, 2011, here is what happened to worldwide commodity prices. To see what this increase would be over a whole year, double each of these huge price increases:
The Commodity Food Price Index overall, up 22.92 percent.
Fertilizers needed to grow future food, up as much as 50.34 percent.
Wheat, up 56.77 percent.
Soybeans, up 30.4 percent.
Corn (maize), up 53.14 percent.
Barley, up 21.26 percent.
Rice, up 14.04 percent.
Sugar, up 75.69 percent.
Beef, up 17.7 percent.
Fish, up 11.78 percent.
Coconut oil, up 66.34 percent.
Cotton, up 99.93 percent.
Coal, up 19.81 percent.
The index of industrial commodity inputs, up 20.66 percent.
Rubber, up 44.96 percent.
The index of metals prices, up 19.12 percent.
Copper, up 35.59 percent.
Silver, up 63.73 percent.
Yet the Obama Administration is blocking any increase in Cost of Living Adjustments for Social Security.
As previously noted, currencies are not inflating much relative to each other because in today's international "currency wars" all are falling together in unison, by design, by deliberate inflation money-printing. Each nation, as well as the Euro community, keeps printing more and more of its own paper easy money to create the "cheapest" currency.
But relative to commodities – real things, not paper fiat money – the above data is an early sign of the inflation tidal wave of soaring prices headed our way.
Have you taken steps to protect your family against a collapse of global currencies, including the U.S. Dollar? To learn how you can hedge your portfolio against the very real risk of high inflation, call Swiss America at:
1-800-289-2646.
"There is no means of avoiding the final collapse
of a boom brought about by credit expansion.
The alternative is only whether the crisis should come
sooner as a result of a voluntary abandonment
of further credit expansion, or later as a
final total catastrophe of the currency involved."
– Ludwig von Mises
Austrian Economist
Sources
[1] Craig R. Smith and Lowell Ponte, Crashing the Dollar: How to Survive a Global Currency Collapse. Phoenix: Idea Factory Press, 2010. For its two chapters on the housing crisis as trigger for the Great Recession, see pages 39-70. This book is available from Swiss America Trading Corporation.
[2] "Gallup Finds U.S. Unemployment Up Slightly in January to 9.8%," Gallup.com, February 3, 2011.
URL: http://www.gallup.com/poll/145922/gallup-finds-unemployment-slightly-january.aspx
[3] Michael F. Bryan, "On the Origin and Evolution of the Word Inflation," Monograph. Cleveland, Ohio: Federal Reserve Bank of Cleveland, October 15, 1997.
URL: http://www.clevelandfed.org/research/commentary/1997/1015.pdf
[4] Craig R. Smith and Lowell Ponte, Crashing the Dollar: How to Survive a Global Currency Collapse. Phoenix: Idea Factory Press, 2010. Pages 157-158.
[5] David von Drehle, "The Man Who Said No to Easy Money," Time Magazine, February 14, 2011.
[6] Ron Paul, End the Fed. New York: Grand Central Publishing, 2009. Page 181.
[7] George A. Akerlof and Robert J. Schiller, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton, NJ: Princeton University Press, 2009.
[8] "The Economic Stimulus That Wasn't" (Editorial), Investor's Business Daily, January 25, 2011.
URL: http://www.investors.com/NewsAndAnalysis/Article/560910/201101251850/The-Economic-Stimulus-That-Wasnt.aspx
[9] Robert J. Barro, "Government Spending Is No Free Lunch," Wall Street Journal, January 22, 2009.
URL: http://online.wsj.com/article/SB123258618204604599.html
[10] Ethan Ilzetzki and others, "How Big (Small?) are Fiscal Multipliers?" NBER (National Bureau of Economic Research) Working Paper No. 16479 (October 2010).
URL: http://www.nber.org/papers/w16479.pdf
For a slightly earlier version of this paper available on the Internet, go to:
URL: http://econweb.umd.edu/~vegh/papers/multipliers.pdf
See also David Brooks, "The Two Cultures," The New York Times, November 15, 2010.
URL: http://www.nytimes.com/2010/11/16/opinion/16brooks.html?_r=1&ref=davidbrooks
[11] Craig R. Smith and Lowell Ponte, Crashing the Dollar: How to Survive a Global Currency Collapse. Phoenix: Idea Factory Press, 2010. Pages 80-81.
[12] Diana Olick, "Negative Home Equity Surges, Weighing on Housing Recovery," CNBC.com, February 9, 2011.
URL: http://www.cnbc.com/id/41483676/print/1/displaymode/1098/
[13] John Crudele, "Tricks But No Miracles in Recent Jobs Report," New York Post, February 8, 2011.
URL: http://www.nypost.com/p/news/business/tricks_but_no_miracles_in_recent_5BVccbpjgGSJR4cvIzr54N
[14] ___________, "Another View on Why There is No Robust Job Growth," New York Post, February 10, 2011.
URL: http://www.nypost.com/p/news/business/another_view_on_why_there_is_no_4hr26jGyaVVNP8zVsCA23L
[15] ___________, "The Super Bowl of Jobs Reports is Out Tomorrow," New York Post, February 3, 2011.
URL: http://www.nypost.com/p/news/business/the_super_bowl_of_jobs_reports_is_dBjG6UtUNOplnuUjZs24VL
[16] John Crudele, "On Jobs, President Clueless Really Doesn't Get It," New York Post, January 11, 2011.
URL: http://www.nypost.com/p/news/business/on_jobs_president_clueless_really_oOMcwNZUAvvDnxSj7ughgL
[17] Dennis Cauchon, "Federal Workers Earning Double Their Private Counterparts," USA Today, August 13, 2010.
URL: http://www.usatoday.com/money/economy/income/2010-08-10-1Afedpay10_ST_N.htm?csp=hf
Apparently unable to dispute the total compensation disparity Cauchon found between Federal and private sector employees in Department of Commerce Bureau of Economic Analysis (BEA) data, liberal media voices have argued that the average Federal employee is a better, "higher-skilled" person who deserves to be paid even more than twice as much as the average private sector worker.
See, for example, E.S.S., "Fox Continues to Push False Federal vs. Private Pay Comparison," Media Matters for America, December 1, 2010.
URL: http://mediamatters.org/iphone/research/201012010020
[18] "Gallup Finds U.S. Unemployment Up Slightly in January to 9.8%," Gallup.com, February 3, 2011.
URL: http://www.gallup.com/poll/145922/gallup-finds-unemployment-slightly-january.aspx
[19] Ben S. Bernanke and others, Inflation Targeting: Lessons from the International Experience. Princeton, NJ: Princeton University Press, 1999. For a contrarian view, see Columbia University economist and Nobel Laureate Joseph E. Stiglitz, "The Failure of Inflation Targeting," Project Syndicate, May 6, 2008.
URL:http://www.project-syndicate.org/commentary/stiglitz99/English
[20] Ludwig von Mises, Human Action: A Treatise on Economics, Third Revised Edition. Chicago: Contemporary Books, 1966. Pages 789-790.
[21] Ibid., pages 466-471.
[22] Michael F. Bryan, "On the Origin and Evolution of the Word Inflation," Monograph. Cleveland, Ohio: Federal Reserve Bank of Cleveland, October 15, 1997.
URL: http://www.clevelandfed.org/research/commentary/1997/1015.pdf
[23] Ludwig von Mises, The Theory of Money and Credit, New Edition. Irvington-on-Hudson, NY: Foundation for Economic Education, 1971. Pages 219-231.
[24] John Maynard Keynes, Essays in Persuasion. New York: W.W. Norton, 1963. Pages 86-87.
[25] Craig R. Smith and Lowell Ponte, Crashing the Dollar: How to Survive a Global Currency Collapse. Phoenix: Idea Factory Press, 2010. Pages 76-77.
[26] Stephen Dinan, "Debt Now Equals Total U.S. Economy," Washington Times, February 14, 2011.
URL: http://www.washingtontimes.com/news/2011/feb/14/debt-now-equals-total-us-economy/
[27] Craig R. Smith and Lowell Ponte, Crashing the Dollar: How to Survive a Global Currency Collapse. Phoenix: Idea Factory Press, 2010. Page 77-78.
[28] Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021. Washington, D.C.: U.S. Government Printing Office, January 2011.
URL: http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf
[29] Beardsley Ruml, "Taxes for Revenue Are Obsolete," American Affairs, Vol. VIII No. 1 (January 1946). Pages 35-39.
URL: http://www.constitution.org/tax/us-ic/cmt/ruml_obsolete.pdf
[30] Brett Arends, "Why You Can't Trust the Inflation Numbers," Wall Street Journal, January 26, 2011.
URL: http://online.wsj.com/article/SB10001424052748704013604576104351050317610.html
[31] John Williams, "Hyperinflation Special Report (Update 2010)" [Monograph], shadowstats.com, December 2, 2009.
URL: http://www.shadowstats.com/article/hyperinflation-2010
Pdf version: http://www.shadowstats.com/article/hyperinflation-2010.pdf
The Shadow Government Statistics website offers this independent economist's analysis and alternative charting of the inflation rate, unemployment, the money supply, Gross Domestic Product and more.
URL: http://www.shadowstats.com/
[32] Daniel Indiviglio, "Should the Government Reform How It Measures Inflation?" The Atlantic Magazine. January 26, 2011.
URL: http://www.theatlantic.com/business/archive/2011/01/should-the-government-reform-how-it-measures-inflation/70292/
[33] "Top Investor: 'U.S. Government's Inflation Data Is a Sham'" and "What Is the Real Inflation Rate?" Whistleblower Magazine, January 2011; see also the CPI vs. Shadow Government Statistics graph showing a divergence in data after the Clinton Administration changed CPI methodology and sampling, Whistleblower Magazine, January 2011, page 5.
[34] Ronald McKinnon, "The Latest American Export: Inflation," Wall Street Journal, January 18, 2011.
URL: http://online.wsj.com/article/SB10001424052748704405704576064252782421930.html
[35] G. Edward Griffin, The Creature from Jekyll Island: A Second Look at the Federal Reserve, Third Edition. Westlake Village, California: American Media, 1998. Pages 550-553.
[36] "Economic News Release: Consumer Price Index Summary," Washington, D.C.: U.S. Bureau of Labor Statistics, February 17, 2011.
URL: http://www.bls.gov/news.release/cpi.nr0.htm
[37] Karl Marx and Friedrich Engels, The Communist Manifesto. London: Penguin Classics, 1985. Page 104.
[38] Allan H. Meltzer, "Inflation Nation," The New York Times, May 4, 2009.
URL: http://www.nytimes.com/2009/05/04/opinion/04meltzer.html
[39] John Carney, "Bernanke to Congress: We're Much Closer to Total Destruction Than You Think," cnbc.com, February 9, 2011.
URL: http://www.cnbc.com/id/41491193/Bernanke_to_Congress_We_re_Much_Closer_to_Total_Destruction_Than_You_Think
[40] Book of Matthew 22:15-21, The Holy Bible (King James Version).
URL: http://www.biblegateway.com/passage/?search=Matthew+22%3A15-21&version=KJV
[41] Ayn Rand, Capitalism: The Unknown Ideal. New York: Signet Books, 1967. Greenspan's essay appears on pages 96-101. An online text of Greenspan's essay "Gold and Economic Freedom" can be found at:
URL: http://www.constitution.org/mon/greenspan_gold.htm