Thinking Different about Inflation and Debt

This article is in response to the Think Different Challenge, posed by Peter from the excellent personal development website I Will Change Your Life .com. As part of the challenge, participants are challenged to write a post on their blog about changing thinking about something from negative to positive. Since most of my posts are already tagged “Thinking Different” this challenge is well fit for this blog. What I did for this challenge was play devil’s advocate with my negative stance on The Federal Reserve, Debt, and Inflation:

Where does money come from? And where does it go?
A number of years ago I got interested in studying how the U.S. economy really works and the role government plays in it. What I found out was quite disturbing. Henry Ford summed it up well when he said, “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

Taxes
There were a few major things I picked up from my economic studies. First off, I found that in the United States, the federal government literally steals the people’s money through income taxes and inflation. Income tax is something that is not allowed in the U.S. Constitution because it is a direct tax. And the so called 16th amendment that is said to have changed that fact, technically gives no new taxation power. That is why Congressman Ron Paul keeps a sign on his desk that says, “Don’t Steal, The Government Hates Competition.” Just about all the stuff people care about and expect from government is handled by local and state taxes, not federal tax. Federal tax is empire tax and the trough of the biggest corruption and waste (corporatism). The main purpose of federal tax is servicing government debt and buying votes from an ill informed populace with government goodies, programs, and actions that allow the government to make more debt.

Inflation
Along with the income tax, there came the equally unconstitutional Federal Reserve System (both established in 1913). The Federal Reserve is not federal but in fact private. It is the private Central Bank that controls the United States money supply. In it, money is made from government debt. And its policy since its implementation has basically been inflate, inflate, inflate, by constantly increasing the money supply through more and more government debt—especially since 1970 when the dollar lost all backing by gold. For those who don’t quite know what inflation is, simply put, it is an increase in the supply of money (credit/debt); more money chasing the same amount of stuff equals higher prices. Since money in the Federal Reserve system is made from government debt—and that debt is charged interest—the system requires constant injections of debt money and constant growth and taxation in order to survive; it quickly becomes a runaway train. The official government numbers on inflation are highly rigged by using things like hedonic adjustments to underestimate the real inflation picture.

The Problem
So, what we have here is a system for stealing and redistributing people’s money, and a system reliant on exponential perpetual debt (government and private debt) and perpetual growth, which is inherently unsustainable. Not many people know this stuff though because it is shrouded in complexity and secrecy; it isn’t the kind of thing that can be explained in a little blog post like this; it is something a person has to take the initiative to really study. Politicians don’t even understand it.

Watch when FED Chairman Ben Bernanke goes in front of congress and listen to the kinds of questions asked by the people who are supposed to be in charge of operating the United States. And also listen to the nebulous answers given by Bernanke to those irrelevant questions. What you’ll see is lack of knowledge by the politicians and secrecy by the FED

Unfortunately, all you have to do is look at the current value of the U.S. dollar and soaring hard asset prices to see that the system is really starting to crack. And since most currency supplies around the world can be inflated just like the dollar, most central banks around the world will deflate their currencies along with the dollar. So, this isn’t just a U.S. problem.

Thinking Different
So, anyway, the natural reaction to finding all this stuff out and actually understanding its implications is to feel screwed over and thus mad. However, a person can focus on the potentially positive aspects of this inflationary system and make some peace.

1. Hard Assets: If you have knowledge of the system, you can capitalize off it. And it just so happens that just about all the money I’ve made in my young life so far has come from exploiting recent inflationary pressures by trading commodity futures. However, I’ve been shying away from commodity futures lately, due to widespread high prices and excessive volatility. But the simplest way to beat inflation is to be out of cash and into hard assets, or at least in some assets like stocks.
2. Debt: Inflation is advantageous to people with debt and disadvantageous to people with savings. As money depreciates in value, past debts become easier to pay off. After all, you used to be able to buy a decent house many years ago for the price of a good flat panel TV today. Inflation is disadvantageous to people with savings, because if you have savings, it needs to grow faster than the rate of inflation or its purchasing power is eroded. And so, people who save are forced to put their money to work, which often means putting it at risk–and to add insult to injury they are taxed on any gains they make trying to beat inflation. If individual people could lend out their savings like banks do, using fractional reserve banking, then savings would be great. But when individuals do what banks are allowed to do, it is called fraud. People who can borrow money cheap are the ones most equipped to win in this system. It doesn’t help poorer people who can’t borrow money at low interest rates.
3. No Widespread Deflation: When an economy gets too carried away with excessive supplies of money and irrational exuberance, the medicine is recession (deflation). However, even though recession purges the system of excesses, most people, especially politicians, don’t like to take economic medicine. Consequently, we tend to inflate instead of deflate when signs say the system needs cleansed. We couldn’t do that when currency was tied tightly to gold, but since it hasn’t been tied tightly to gold for a very long time now, we beat deflation by inflating. So, even when we do have recessions, no one really ever knows because inflationary pressure (increased credit) comes in and mutes it. The closest thing we ever have to recession anymore is isolated bubble bursts. When an economy goes many decades without really taking any deflationary medicine, it is like a volcano building up evermore pressure. Eventually, the pressure becomes so great that attempts to stop it lead to run-away inflation (hyper-inflation). It is a story repeated throughout history. If you happen to live and die in an inflationary era, you get to reap the benefits without ever taking medicine. However, a younger generation inevitably gets stuck with the neglected medicine, leading to the downfall of the established order.
4. Innovation: The excessive exuberance facilitated by excessive supplies of money can facilitate undue innovation. This is basically what happened in the internet tech bubble of the late 90’s. Although the consequent tech wreck was rough, the bubble helped get the internet and telecommunications world well established.

So, obviously there are benefits to this economic system, even if they are sorter term benefits and even if most people are clandestinely manipulated by the system. With knowledge, you can use the system instead of letting it use you. Consequently, you can make peace with it and build immunity to its vulnerabilities. If this stuff is new to you and you want to find out more, watch this in-depth documentary: The Money Masters

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