Inflation Is Great If You’re Already Rich

Written by Doug French

he 4.2 percent Consumer Price Index (CPI) bounce for April sent a chill through some traders and financial commentators who had expected a tamer number like a 3.6 or 3.9 percent from last year’s covid price level air pocket. 

The MarketWatch headline screamed, “U.S. Inflation Soars in April to Thirteen-Year High, CPI Shows, and Reveals Fresh Stress on the Economy.” Barron’s was slightly more relaxed: “Surging Inflation Is Hammering the Stock Market. Why It Isn’t Time to Panic Just Yet.” Then there was Nobel laureate Paul Krugman, who tweeted, “So, the inflation report wasn’t a nothingburger, but it was sort of a White Castle slider—not a very big deal.”

Before the 4.2 percent print, John Authers posted a piece on Bloomberg, “Markets Give Powell a Break. It May Be Transitory.” “It” being CPI. “Transitory” being a term Powell uses often, a.k.a., “don’t worry, be happy, this too will pass.” 

With all of this teeth gnashing over CPI and money supply, Nobelist Krugman offered up what he calls “Krugman Wonks Out: Return of the Monetary Cockroaches,” where he says, “[C]ockroach ideas, false beliefs that sometimes go away for a while but always come back.” The false belief according to him is that increases in the supply of money lead to inflation, meaning price inflation.

We must remember what Ludwig von Mises wrote, “What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. This semantic innovation is by no means harmless.”

So while Chairman Powell claims to be adhering to the Fed’s mandate of stable prices, stable prices in a world with the division of labor and technology running step for step like Affirmed and Alydar in the 1978 Belmont Stakes, prices should be falling, making everyone, especially those at the bottom of the economic food chain better off.

Tragically, Powell sees it another way. Reuters reported the Fed chair as saying that “low inflation hurts American businesses and households and constrains the Fed’s ability to offset economic shocks with easy monetary policy.” Nothing could be further from the truth.

Professor Jörg Guido Hülsmann wrote in Deflation and Liberty,

In a word: the dangers of deflation are chimerical, but its charms are very real. There is absolutely no reason to be concerned about the economic effects of deflation—unless one equates the welfare of the nation with the welfare of its false elites. There are by contrast many reasons to be concerned about both the economic and political consequences of the only alternative to deflation, namely, re-inflation—which is of course nothing but inflation pure and simple.

Given the retirement of the Contra Krugman team of Tom Woods and Bob Murphy, I’m left to point out that what Krugman can’t see must not be. Where’s the hyperinflation, you zombies and monetary cockroaches? He said we cried wolf ten years ago and are doing it again.

Now, he fingers the crypto crowd for the money-printing panic. He claims to be patient, but those who seek escape from the government’s currency and are arguing “[f]iat money is doomed because the Fed won’t stop running the printing press” are wrong, he says, because “nothing like that has happened in the U.S.”

But it has happened and is happening. Murray Rothbard explained, “[A]n increase in the money supply can only dilute the effectiveness of each existing money unit, and therefore must be “inflationary” in the sense of raising prices beyond what they would have been otherwise.”

“What they would have been otherwise” being the key. Were the Weimar Republic or recently Zimbabwe or today’s Venezuela sophisticated economies ripe with technology and the division of labor, creating efficiencies and pushing down prices? No. Those governments printed money, and their people had nowhere to escape the falling currency but by buying up consumer goods, creating shortages, clearing shelves, and forcing up prices until their entire economies fell apart.

Everyone has seen pictures of empty shelves in Venezuela. Meantime, the one-year return on the Caracas stock exchange is 1,804.92 percent according to Bloomberg.

Venezuela’s well-to-do survive and possibly thrive, while the poor starve. And, for Nobel laureates and Fed chairmen that’s just fine.

The US has inflation. It benefits the rich, at the expense of the poor.

“Inflation is the true opium of the people and it is administered to them by anticapitalist governments and parties,” wrote Mises.

What Krugman can’t see is that people are escaping the Fed’s money creation by buying stocks, bonds, real estate, crypto, NFTs, and who knows what all. While it might not be hyper, yet, the Fed is providing an overdose of what Mises called true opium.

Let’s Level the Playing Field between the Dollar and Competing Currencies

Written by Michael Milano

To be a reliable and useful medium of exchange, money must be durable, portable, divisible, and recognizable, but also scarce. The privileged power of the state to manipulate the scarcity of money has had disastrous consequences for national currency systems throughout history. While money, like everything else, is subject to the subjective valuations of consumers—as noted by Mises—money’s exchange value is “the most important kind of value, because it governs the social and not merely the individual aspect of economic life.” Legal tender laws and other regulations imposed on currencies cause value discrepancies to arise.

Indeed, when states intervene to impose “official value” on money, true market preferences can be partly observed in the workings of Gresham’s law. Gresham’s law is conventionally described as “bad” money drives out “good” money, but a more accurate definition per Rothbard is that “money overvalued artificially by government will drive out of circulation artificially undervalued money.” Imagine a specie-based economy that issues a coin containing one ounce of gold. Facing mounting debts, the government substitutes copper for a more valuable metal in the minting process while maintaining the coin’s denominational value. According to Gresham’s law, once citizens recognize the inconsistencies in the precious metal content, they’ll opt to spend their artificially “overvalued” newer coins while hoarding their artificially “undervalued” older coins.

Whereas “overvalued” money was created in the past by physical debasement, “overvalued” money today is the result of reckless monetary and fiscal policy. Over the course of the pandemic, the money supply, M2 according to the Federal Reserve, increased 29.7 percent, from $15.405 trillion in February 2020 to $19.979 trillion in March 2021. Since the advent of the Federal Reserve, the purchasing power of the dollar has dropped by over 96 percent (i.e., $1 today is the equivalent of $26.14 in 1913). Unbridled quantitative easing has further amplified inflation worries and global doubts about the stability of the dollar.

Legal tender laws in the United States require the public to accept payment for debts and taxes at the dollar denomination shown on the bill. This form of coercive price control has established the dollar as the economy’s unit of account. Similarly, burdensome tax regulations bolster the “overvalued” dollar by constructing barriers of use for its rivals.

The Case of Cryptocurrency

We can see the effects of these regulations at work today in how cryptocurrency is used.

According to the IRS, bitcoin and other cryptocurrencies are considered property for taxation purposes. Thus, the act of buying goods and services with BTC is identified as a realization event that requires the purchaser to declare any gains recognized from their BTC cost basis. Disregarding scalability concerns, onerous requirements that force users to track gains and losses for all transactions ultimately prevents BTC from serving as an effective medium of exchange.

On the other hand, if there is real market demand for various cryptos, government regulations designed to discourage the use of anything other than the “official” money will cause the demanded “unofficial” monies to become “undervalued” currency.

Thus, in accordance with Gresham’s law, the in-demand cryptos would be hoarded, rather than circulated at large. In the bitcoin community, for example, this mentality is personified by the Hodl meme encouraging bitcoin users to simply hold, rather than spend, bitcoin. A feedback loop has been generated where greater levels of fiat inflation have led to wealth flooding into BTC, further strengthening the perception that BTC is a reliable store of value. This mentality has been embraced of late by numerous corporations, who have transferred portions of their cash reserves into BTC (e.g., Tesla, MicroStrategy, Square, and MassMutual).

Thanks to so many government restrictions on the use of potential monies that aren’t the dollar, we can only guess as to what the relationship between dollars and bitcoin would be in a functioning marketplace. To find out, it would be best to level the playing field by eliminating legal tender laws and onerous taxation requirements. This would allow individuals to actively assess true differences in purchasing power.

This is unlikely, however, because elected officials depend so much on inflating the supply of dollars for political gain. Whether Democrat or Republican, politicians within our current system overwhelmingly perpetuate the welfare-warfare state—and this would be much more difficult with market-based money not subject to easy inflation by central banks.

Perversely incentivized, these politicians promote expansionary monetary policies that benefit special interest groups while pandering to their electoral base. As noted by Hayek, “[W]ith the exception only of the 200-year period of the gold standard, practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people.” Depriving the state of this exclusive power would force accountability first and foremost. If the threat of violence and imprisonment were stripped away, the public could freely evaluate the quality of different currencies and act accordingly.

Who Bought the $4.5 Trillion Added in One Year to the Incredibly Spiking US National Debt, Now at $27.9 Trillion?

Someone had to buy every dollar of this monstrous debt. Here’s Who. The Fed isn’t the only one. But China continues to unwind its holdings.

by Wolf Richter of Wolf Street

So we’ll piece together who bought those trillions of dollars in Treasury Securities that have whooshed by over the past 12 months.

Tuesday afternoon, the Treasury Department released the Treasury International Capital data through  December 31 which shows the foreign holders of the US debt. From the Fed’s balance sheet, we can see what the Fed bought. From the Federal Reserve Board of Governors bank balance-sheet data, we can see what the banks bought. And from the Treasury Department’s data on Treasury securities, we can see what US government entities bought.

Share of foreign holders falls to 25% for first time since 2007:

In the fourth quarter, foreign central banks, foreign government entities, and foreign private-sector entities such as companies, banks, bond funds, and individuals, reduced their holdings by $35 billion from the third quarter, to $7.04 trillion. This was still up from a year ago by $192 billion (blue line, right scale in the chart below). But their share of the Incredibly Spiking US National Debt fell to 25.4%, the lowest since 2007 (red line, right scale):

Japan (blue line), the largest foreign creditor of the US, reduced its holdings in Q4 by $20 billion, to $1.26 trillion. But compared to a year earlier, its holdings were still up by $102 billion.

China (red line) continued on trend, gradually reducing its holdings. In Q4, its holdings ticked down just a tad, and over the 12-month period fell by $8 billion, to $1.06 trillion:

Japan’s and China’s relative importance in the Incredibly Spiking US National Debt continues to decline, with their combined total ($2.32 trillion) now down to a share of 8.4%, the lowest in years:

Read the rest here….