Tuesday, October 30, 2007


Quoth the Mogambo:
What Mr. Rosenblum [the executive vice president and director of research at the Federal Reserve Bank of Dallas] actually admitted was, as un-freaking-believable as it sounds, that "The FOMC seeks to foster an economic environment characterized by low and steady inflation"!

This, of course, brings up the quote of the famous economist John Maynard Keynes, who correctly said, "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. 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."

Officially inflation is about 2%, but this is due to hedonistically adjusting the measurements and conveniently leaving out things like energy (oil hit $90 a barrel) food (7%+ inflation) and housing.
I mischievously ask, "What would happen if the Fed didn't create more money and credit?"

[Peter Schiff] easily replies, "If the money supply were held constant, increases in some prices would be offset by decreases in others. The result would be no overall inflation."

No inflation! To make sure that nobody misses this important point, I grab the microphone right out of his hand and I scream, "No inflation in prices! No inflation in prices! It's a paradise! No inflation!"

Mr. Schiff, taken aback by my sudden outburst, gingerly takes the microphone back and says that, "In fact, without government created expansions of the money supply, the natural tendency of prices would be to decline as technology allowed for more efficient production of goods and services."
A valid question might be just what is the rate at which prices fall in a non-inflationary economy. The answer is approx. 2.5% per year. This does not affect every industry but it is a historic number. This is due to increases in efficiency such as shifting to an assembly line, or advances in techniques or machinery to do a specific job. It could also be due to economies of scale in that smaller operations are consolidated, as with power plants.

Imagine if you will that you made $500 a week and that you make that for the rest of your life. If there was no inflation that weekly earning would have a purchasing power of $820 after just 20 years. This would mean an increased standard of living with NO change in what you are doing.

Conversely let's look at what is currently happening. Since inflation is closer to 10% and the official 2% we will look at both numbers with the same scenario as before. 2% inflation over 20 years leaves you with the purchasing power of just $334. 10% inflation leaves you with a paltry $61. Or to look at it another way, to maintain the same standard of living as you have today you would have to increase your earnings to $743 or $3,364 respectively. This is what the Fed's "low and steady inflation" will do and IS doing to you.