Have you ever wondered what exactly inflation is and why it raises prices? I wrote the following fictional story to illustrate what causes inflation in an easy to digest format…
Yes it’s long, but I consolidated a textbooks worth of information into a 15 minute read. If you read it to understand it, what you see around you in the reality of your world should make a lot more sense. I think it’s worth the time.
Lastly, please forward. Educate as many as possible even if it won’t make any difference. It’s better to know what is making your life so hard then to not know. Ignorance is only bliss until it bites you in the…
Let’s start with the definition, since what words mean is very important and meanings are often altered by those in power.
INFLATION: Definition: The real definition of inflation is when a Central Bank creates money. The act of creating money is inflation, by definition. We have inflation. That is a fact. Inevitably inflation causes rising consumer prices, which we also call, incorrectly, inflation. We mistakenly call it this because the causality is intertwined. A causes B, always. Prior to The Fed in 1913, there was no inflation. If a candy bar cost a nickel, it cost a nickel, or less, 50 years later.
The Coffee Shop
Let’s say you and me and one other guy named Bob walk into a coffee shop and our wives told us each to buy one small Mocha, one small Latte and one large regular Coffee. We each have $10. We don’t know each other at all. When we get to the coffee shop, the Barista hears our order and says, “Sorry guys, I only have one of each of those.” I turn to the Barista and I say, “No problem. I will give you $3 for each, so that’s $9.”
But you jump in and say, “Wait a second, that means you get all three, and I need at least one of these or my wife’s going to get upset.” So you turn to the Barista and say, “I’ll give you $3 each for the Mocha and Latte and $4 for the Coffee. That’s $10.”
Then Bob jumps in and says, “Whoa. Whoa. I need one of these too. Hey Barista, I will pay you $9 for the Mocha, it’s for my daughter and I really want her to get it, and that’s it.”
You and I turn to each other, and rather than beat his offer by spending our whole $10 on the Mocha, we let him pay $9 for the mocha and figure out what to do about the remaining Latte and Coffee. I offer the Barista $5 for the Latte and $5 for the Coffee. You jump in and offer $6 for the Latte. Since the Latte is for my wife, specifically, I beat your offer and offer $7. Since you don’t care either way whether you get the Coffee or the Latte you concede me the Latte for $7 and offer the Barista the menu price for the Coffee of $1.50. We all leave with the drink we really needed and paid what we thought was fair in order to buy what we needed away from the competition but none of us got everything we wanted.
This is free-market capitalism, where PRICE is the mechanism by which limited resources are most efficiently allocated to where they are most in demand.
Note: Government constantly interferes in this efficient allocation in every industry in America which creates horrific unintended consequences which Government then blames on “capitalism,” but you must understand that capitalism only works when there is no Government intervention. In the example above, the Government would choose to subsidize one of the buyers, impose heavy taxes on the purchase of Mocha’s, or regulate the Barista to only sell $1 Latte’s, all for reasons associated with “social benefits” or to cater to various lobbying interests that will help the politician get re-elected. Then when monopolies develop (from subsidies) businesses go bankrupt (punitive taxation) or when shortages occur (price fixing at $1), the Government will blame capitalism, or the evil “coffee” industry, not the Government’s own subsidies, taxes or regulations. To which of course it will then offer further subsidies, taxes or price fixing to correct the problem. Americans, grossly ignorant of even the most basic principles of economics (due to our Government education) and unwilling to self-educate gulp down whatever Government and the media tell them to believe was the problem and the cycle repeats ad infinitum (such as the past 100 years). We as a nation have not enjoyed the benefits of REAL capitalism for a little over 100 years but while we had real capitalism it built the most powerful and wealthiest nation on earth, from which we currently benefit from and are now destroying because we don’t know any better.
Now let’s revisit the story above as the three of us go back to the coffee shop the next day, with the same order, but with Ben Bernanke and Janet Yellen standing outside the coffee shop representing The Federal Reserve.
As we three walk into the coffee shop the following morning, Ben Bernanke sporting an ‘I HEART THE FED’ sweatshirt stops us for a moment and hands us each a $100 bill. Now when we enter the coffee shop, and the negotiations begin, we don’t just have $10, we have $110 in our wallets. So instead of bidding up the price of the Mocha to $9 to drive the two of us out of the market so Bob can get his Mocha, Bob “can afford” to drive it up to $109 (but only because of The Fed’s money that Ben gave him). He doesn’t care how high he has to go because he’s not limited anymore by just having $10 in his wallet. It follows of course that when we concede the Mocha to Bob for $109, we in turn negotiate the same way we did the day before, but now I am able to pay $107 for the Latte and you still pay $1.50 for the Coffee.
On the third day when we come in, Ben is there with his $100 for each of us, but when we walk inside we all see that the prices on the menu board in the coffee shop have changed. Where a Mocha used to be $4.50, now its $45. The Latte was $3.00 but now it’s $30.00 and the large Coffee is now $10.50. We ask the Barista what happened and he says, “With everyone showing up with more money to spend, I thought I would take advantage of that and just raise my prices.” So we grudgingly repeat the same bidding process as yesterday, but now we are only able to afford these drinks for as long as The Fed is standing outside providing the money and we all walk out with the same as the day before.
The coffee shop, enjoying this massive increase in prices reports significant gains in revenue on its income statement which the media reports to us as, “higher than expected earnings.” As a result, the price of its stock goes up from all this additional revenue, thus driving up the stock market. The Government points to the increase in the stock, and revenue, as a sign of a growing economy, but it’s not is it? It’s a house of cards based on inflation. A ponzi scheme. Which means at some point, abruptly, it ends…and that is going to be very, very bad.
On the fourth day when we come in, Ben is there and he stops all three of us. He says, “Boys, I understand that prices have gone up and you’re upset about it. As I keep saying on the news, inflation is a good thing for the economy. Don’t look at me like that, look at how great the Dow Jones is doing, just trust me! Here is $1,000 for each of you. Go inside and get your coffees.” So we three walk inside and start placing our orders. This time of course, we end up paying $1,009 for the Mocha, $1,007 for the Latte and $10.50 for the Coffee.
On the fifth day, the signs at the coffee shop have gone up yet again, with a zero being added to everything. Mocha’s are now $450, Latte’s are $300 and Coffee’s are $150. The shares go up, and the stock market follows the shares.
This is how The Federal Reserve creates inflation. The only difference is that The Fed gives the economy, not three guys walking into a coffee shop, billions of dollars every month and that money increases the total amount of money in the system, just like going from $10 to $100 to $1,000. By printing trillions of dollars into the system you end up with money that looks like this, real currency from Zimbabwe…
This $100 billion dollar note barely buys a loaf of bread.
You can read about their problem here.
Instead of the money supply expanding just inside the coffee shop system, it expands inside the planet system. As more money is pumped into the system, the prices of everything start to increase as there is more and more and more money available to the producers of everything we buy to purchase the raw materials they use to produce everything we consume. It happens slowly, with just a few percent increases in consumer prices each year, but over 5 or 10 years and you are paying twice as much for half of what you used to get. It’s the slow boil of your income, the siphoning of your paycheck through the hidden tax of inflation, it’s the pernicious evil of Governments…all while they smile on TV at you, kiss babies and make incredible promises they have no intention of, and no ability to keep – in exchange for your vote.
Inflation in the real world goes something like this…
Sneaky Ben & The Producers
Producers of food in Africa, America and Europe show up at THE MARKET to buy wheat to make bread, corn for canned corn and flour for pie crusts. They shake each others hands, talk about their kids and the weather and then get down to business. THE MARKET says it only has 10 tons of wheat today, 15 tons of corn and 12 tons of flour. Africa, America and Europe have each brought with them $100,000 to buy wheat, corn and flour with. Just like in the coffee shop, the three individuals negotiate prices with THE MARKET based on the real demand each has for the wheat, corn and flour which can change each day, of course. But for today, Africa already has some corn to get by on, but desperately needs flour whereas Europe definitely needs corn and some flour but can pass entirely on wheat, and so on. Eventually, each nation pays what is known as the ‘market clearing price’ that each can afford up to their $100,000 each. They all leave with something, none leave with everything. So far so good.
The next day, when Africa, America and Europe show up at THE MARKET to buy their wheat, corn and flour Ben Bernanke is standing there. He pulls America to the side away from the group and says, “Pssst. I know how you can get EVERYTHING you want from THE MARKET today.” America responds quizzically, “Howmagonnadothat?” Ben looks around, slowly reaches into his pocket, pulls out a loan document and says, “At just .5% interest, I will loan you up to $100,000, right this second. Just sign here.” America looks around, feels a little dirty, but pulls out a pen and signs the loan document. Bernanke opens up the back of his Hummer and fires up his printing press. As fire and heat belch out from the press and tortured souls can be heard screaming faintly from somewhere inside the Hummer, Ben quickly hands over the $100,000 in freshly minted bills and slams the door closed before anyone can hear. This time, when America enters into the negotiations in THE MARKET, he is able to outbid his competitors and take more flour, corn and wheat than they can afford to compete with, having only the same $100,000 in their pocket to his $200,000.
The next day, Africa and Europe figure out what happened. This time, THEY approach Ben Bernanke who they see standing next to his Hummer counting his interest income profits of .5% from America and whistling evilly to himself. They ask Ben for the same deal that he gave to America, to which Ben happily complies. Now when Europe, Africa and America walk into THE MARKET, America is SHOCKED at how much higher Europe and Africa can bid up the offering prices for corn, wheat and flour. All three again leave with something, none leave with everything, but the price of everything they left with is much, much higher than it would have been if Ben had not printed so much money for them from the back of his Hummer.
Day after day after day, Africa and Europe and America go back to THE MARKET to secure commodities and resources for their respective nations consumption and get ever increasing amounts of money from the back of Ben’s Hummer. And every day, they take on more and more debt that they must pay interest and eventually principle on, but the interest rate is so low, they can’t help but borrow the money because it’s almost free to borrow it. Almost.
Those higher costs move through the production process, passed on from the raw material supplier of the corn, the wheat and the flour to the canned corn, bread and pie crust manufacturers, to the shelves on the grocery store for you and me. In many cases, to hide the inflation, the manufacturers will put less corn, fewer slices of bread or thinner pie crusts into the cans and bags and boxes, but charge the same price as before. Over time however, as each day passes, and Ben keeps printing out of the back of his Hummer for Africa, Europe and America…the manufacturers can’t keep a lid on the prices always rising and rising and rising, and eventually the consumer has to shell out more money for less product.
As we pay more in price for the same or less product or service, that additional higher revenue for the company shows up as “higher earnings” which raise the stock market because the higher earnings are mistaken for increased sales volume or expansion, which would be signs of healthy organic growth due to a strong and expanding economy. In our world however, these higher earnings are due entirely to inflation, not growth, and are a sign of a dying economy, but that doesnt stop Obama, or the Government, or The Fed, or the media, from lying and saying its from economic growth.
This inflation impacts the entire commodities market; oil, gas, corn, steel, aluminum, rice, copper, natural gas, propane, coffee, cotton, etc… Everything that every American buys is made of one or more commodity raw materials that are openly bought and sold on the GLOBAL MARKET where thousands of competing companies and nations bid as high as they can for the limited resources available for that day – and they all have Ben’s cell phone on speed dial (which is to say, a central bank willing to give them a low interest loan). It is a slow, insidious but inevitable process.
Ben and Governments
What Ben does for the world commodities market through cheap loans, he also does for Governments. When Congress or the President need more money, they turn on the HUMMER bat signal from the roof of the White House and as soon as Ben (now Yellen) sees it, he quickly drives over to the Treasury Department, takes U.S. Treasury Notes (bond debt) and prints up billions from the back of his Hummer for the politicians. They spend that money on guns, bombs, free cell phones, social security, green energy, Vet healthcare, bridges to nowhere, Star Trek spoof videos, etc… As that money filters out into the economy it steals a little bit of value from every dollar already out in the economy by creating this inflation, just like the value Ben stole in the coffee shop, making it take more and more dollars to buy the same thing. That is why inflation is called the hidden tax. Politicians know that nothing ends a political career like raising taxes on people. Inflation is a way for politicians to “tax” the people by printing up money to give to groups of people that will vote for them and keep them in office as long as those people will keep receiving that printed money
Meanwhile, Ben stares at the endless piles of U.S. Treasury Bonds he received in exchange for the cash he gave the Politicians that he has accumulated in a room the length and width of a football field dedicated to storing them. He looks at all the I.O.U’s the Government has issued to him, and he wonders how many generations, how many hundreds of millions of yet unborn children will have to work their entire lives to pay back this debt. Then he smiles at himself and is so happy that when The Fed was created in 1913, they had the foresight to create the income tax at the same time, in the same law, because they knew back then that when all this debt is stacked to the ceiling, there would have to be a law in place to force every generation to pay it all back. After pondering that fact for a moment, Ben sits back and quietly counts the money that Africa, Europe and America are paying him at 0.5% interest every month. Both the world and their Governments have signed a deal with the devil.
And it’s a deal that Ben is happy to countersign.
What is the end result?
There are a few options that I explain below in the bullets, but this is what I see for at least the near future and perhaps beyond…
Where inflation is last to show up, if it shows up at all, is in paychecks. While the prices of everything rise around you, your paycheck does not. This creates a net loss every year in your purchasing power, and your standard of living therefore drops a little bit each year as you are forced to scale back on the quantity or quality of the services and products that you previously enjoyed. While companies are giving 1% and 2% cost of living adjustments based on the false Government reported inflation rate, the real rate of inflation is closer to 9% which means every American is taking an 8% to 9% pay cut every year.
The Politicians however benefit immediately from inflation by using that printed money to buy whatever they want for their voters. The Bankers and the Wall Street financial cartels benefit from that money immediately by using it to invest before its value is eroded by the inflation it will create (since they get the money first, then it trickles out into the economy). In many cases, the cheap money (or the gains from its investment) are used to buy hard assets (buildings, other companies, land, gold, silver, etc.) which do not depreciate in value. For example, China, which holds billions of US dollars that it earns from interest we pay them on the loans they’ve given us is buying up real estate and companies and gold from all over the U.S. and the world because they know the dollar is self-destructing so they want to convert those dollars into hard assets as fast as possible. The bankers here in the U.S. do the same thing with Fed money.
Eventually taxes will have to rise to deal with all of the debt that has been issued as well, so the middle class will pay more as consumers from inflation, and will have less to pay more with due to higher taxes. This is how a middle class is dispatched. Those who can will try to fight their way up to the wealthier classes, and the rest will be ground down into the lower classes. In the end, the wealthier classes will consist almost entirely of those who work for the Government, directly or indirectly, as a private company contractor or supplier or entity largely dependent on Government subsidies, loans or other aid and the elite political aristocracy class. This will take one to two more generations.
The lower classes will be tremendous blocks of Americans living check to check, heavily dependent on Government assistance for their healthcare, retirement, job lapses, education and job placement. No matter how poor the services provided to them by the Government will be, they will be too poor and unstable to ever pose an organized challenge to the wealthier classes and will over a generation or two settle down into a subservient lower-working class granted a subsistence living but no real chance for advancement except in cases of nepotism granted to them from the wealthier classes. If their guns are removed from the calculation, they will have an even remoter chance of being able to organize and resist. Dissent will be easily identified and dealt with due to the saturation of the surveillance state and the treatment of American “domestic terrorists” from the NDAA which strips them of their constitutional protections.
In a generation or two, the entire purpose of our lives will be to just “get by” and keeping our heads down while surrendering a significant portion of our productive capacity to the Government for whatever redistributive use it deems worthy. The political process will be reduced to choosing among the pre-chosen elite much as it already is today, but with just enough choice that with no more than a crumb of cognitive dissonance we can convince ourselves that we are making a real choice for our future. That will be the future of America.
Why is Ben able to offer low interest rate loans?
In a nutshell, free-market capitalism, which we have not had in over 100 years, relies on THE MARKET deciding what the interest rate should be. When there is too much money in the market, interest rates rise naturally. In the case of the COFFEE SHOP, I might not buy that Mocha if I can put that money in the bank and earn 10% interest on it instead. A higher interest rate makes saving money more attractive than spending it. That puts a lid on how high inflation can go. When there is too little money in THE MARKET, interest rates fall to make spending money into THE MARKET more attractive than saving it. If I can only earn 1% on my savings, I am more likely to spend that money in the COFFEE SHOP instead. This natural fluctuation of interest rates created the United States, the most powerful nation on earth with the highest standard of living for its citizens. That is gone.
Since we created The Fed in 1913, in combination with the elimination of the gold standard by former President Nixon, and in collaboration with all of the other central banks of the world like The Fed, an anti-capitalist system of interest rate control has been setup where a small group of individuals, the global bankers like JP Morgan, Citibank and other international banks can work together to force the interest rate to be where they want it to be (low) to achieve all of the financial and political goals that the bankers and politicians desire, at your expense. This system has led to the dot.com boom and bust, the housing boom and bust and the current bond market/stock market/student loan bubble and eventual bust but all have been a billion dollar windfall for the banker, Wall Street financiers, and politician architects. By putting their boot on the neck of interest rates, and not allowing it to rise and soak up all this money flooding out into the economy, The Fed and the Bankers are able to maintain a perpetual state of global inflation and wealth creation for themselves and the politicians.
We will never be free of this new system that destroys our currency, our standard of living, our independence from Government control and coercion, our soaring debt, our enslavement of future generations to indentured debt servitude, and our global hegemony until this entire system is destroyed and capitalism is returned to power.
There are only three outcomes from this system:
- The People gain an understanding of the true nature of their enemy (unlikely – because it requires effort and a certain degree of intellect) and actively change it from within through; a) the political process, b) violence when they are met with Government resistance.
- The system implodes on itself with the collapse of the dollar where the Government is either; a) redesigned for freedom with a return to the founding principles of the Constitution or, b) has sufficiently dumbed down the population to make a complete power grab and nationalize the entire economy to “save it” with the public’s ignorant blessing.
- The Government manages to avert a systemic collapse subjecting the entire country to sub-human mediocrity as I explained above under, “What is the end result?” It is a world without a middle class based on fairness, equality, consensus and mediocrity where everyone is reduced to the lowest common denominator. Or, in the opinion of those who would choose not to be slaves, Hell on Earth.
Categories: Economy, Government Failures, Government Tyranny, Inflation
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