Academy of Ideas - How Inflation Enriches Politicians and the 1%
Central banks have spent decades flooding the global economy with newly created money. Rapid expansion of the money supply is economically destructive; it impoverishes the poor and middle class, exacerbates wealth inequality, permits a dangerous growth in state power, and sets an economy up for a crash. The real reason those in government favor the policy of a monetary inflation is because it is an effective means to transfer wealth from the citizens to the state.
“Monetary inflation breeds not only poverty and chaos, but also government tyranny. Few policies are more calculated to destroy the existing basis of a free society than the debauching of its currency. And few tools, if any, are more important to the champion of freedom than a sound monetary system.”
Hans F. Sennholz, Inflation, or Gold Standard
Money is a medium of exchange; money is not wealth. Real wealth consists of the goods and services produced in an economy which can be put to use to better our lives. A central bank can double the supply of money overnight, but this action would not make an economy wealthier.
While an increase in the supply of money by a central bank is not wealth generating, it is wealth redistributing. When money is created it does not enter the economy in a uniform manner. Rather newly created money enters the economy through specific channels in the form of loans, bailouts, or asset purchases by the central bank.
“It should never be forgotten that inflation always represents an unearned gain to whoever is in a position to introduce the newly created money into the economic system through his spending – and a corresponding loss to the individuals who make up the rest of the economic system.”
George Reisman, Capitalism
“Monetary inflation confers no general social benefit; instead, it redistributes the wealth in favor of the first – and at the expense of the laggards to the race. And inflation is a race – to see who can get the new money earliest. The latecomers – the ones stuck with the loss – are often called the fixed income groups.”
Murray Rothbard, What has Government Done to Our Money?
Low interest rates entice people to borrow newly created money through the banking system and who are the people most capable of borrowing this cheap credit? Those in the upper class as they possess more of the assets needed to act as collateral on loans. With access to this cheap credit the rich can spend it to purchase real estate, equities, fine art, vintage cars, precious metals, or other forms of wealth. The elevated demand for these assets pushes up prices and this increases the net worth of everyone exposed to these asset classes, which again, is primarily those in the upper class.
The low interest rates that drive this policy act as false signals enticing individuals to overconsume and businesses to overexpand to a degree not warranted by the long-term fundamentals of the economy. But when interest rates rise, and the easy money stops flowing through the arteries of the economy, a crash ensues. The low to high waves are similar to Malthusianism, where a crash has the effect of forcing the population to “correct” back to a lower, more easily sustainable level. The crash clears all the economic deadwood, or malinvestment, out of the system and transfers capital away from inefficient uses and away from unsustainable entrepreneurial endeavours.
”…the depression phase is actually the recovery phase. Most people would be happy to keep the boom period, where the inflationary gains are visible and the losses hidden and obscure…The stages that people complain about are the crisis and depression. But the latter periods, it should be clear, do not cause the trouble. The trouble occurs during the boom, when malinvestments and distortions take place; the crisis-depression phase is the curative period… ”
Murray Rothbard, Man Economy and State
Central banks have been flooding the economic system with easy money for decades. This has been a boon for the growth of the state, it has enriched the upper class, and it has created bubbles in the price of assets such as equities and real estate. But in the process, it has impoverished the middle class and the poor, and we are now facing the menace of an accelerated rise in consumer prices, but sticky wages (as described in Nominal rigidity). Central banks are trying to tame this increase in price levels by raising interest rates and tightening credit conditions. But with so much debt in our system, at an individual, corporate, and governmental level, a rise in interest rates threatens to collapse the house of cards upon which so much of the economy is built. Removing the drug of easy money, in other words, is setting us up for a crash. Will central banks keep fighting the rise in consumer prices with higher interest rates and allow a curative crash to unfold? Or will they follow the pattern of the past several decades and at the first sign of a serious collapse in equity or real estate prices, cut interest rates once again?