Inflation as a Wealth Distribution Scheme….

[Tim Liston]

So a few evenings ago I had one eye on the Olympics and the other on some blogs I read, and I came across an article entitled “Inflation: It’s a Wealth Distribution Scheme.” All I could think was RIGHT! I didn’t even have to read the article, and I didn’t. I think it was a Mises Institute article, if you care.

When something unnecessary and quite possibly damaging is allowed to continue, it’s usually because powerful interests want it to continue, whether it makes any sense or not. And because it’s not on the radar of everyday people. Think health insurance, the reigning king of all rackets.

Inflation is also like that. Inflation is thoroughly institutionalized as economically necessary; in fact it’s one of the “dual mandates” of the Federal Reserve. The Fed even tries to “target” the inflation rate at 2%. (Because for some reason 2% inflation is better than 1% or 3%. I’m not sure they can tell you why. I know I can’t.)

So let’s think very simplistically about inflation. When most of us think of inflation, we think of higher prices for the day-to-day stuff we buy: food, shelter, transportation, health care, education, entertainment, etc. All increasing in price at some smallish but inevitable rate every year. Some years more, some years less.

But inflation really a monetary phenomenon. Absent outside supply/demand factors, prices would not rise if the amount of “money” (and credit) available to buy stuff increased no faster than the rate of growth of the economy. But that’s where the aforementioned Fed comes in. They control the money (and credit) supply, so they also control inflation. And like I said, they TRY to create inflation as a policy matter. They could make inflation go away tomorrow if they wanted.

Inflation as a monetary phenomenon causes prices to rise. And inflation is absolutely UNnecessary. What’s so great about rising prices? You and I surely don’t benefit from it, especially these days, when wages are hard-pressed to keep up with prices. The fact is, there was a period of about 100 years when there was NO inflation. None. 0% for generations. Prices couldn’t rise because legal tender (“cash”) was made of gold and other scarce metals whose supply increased only very slowly. And credit was scarce. That period began to end about 100 years ago, with the 1913 creation of the Federal Reserve. (Which is no coincidence.) Inflation finally skyrocketed when Nixon completely and finally unlinked gold and silver from our currency, though that process had been well-underway previously with fiat money creation and Bretton Woods. Inflation is still skyrocketing, but the phony BLS numbers don’t accurately reflect it.

So why is inflation so thoroughly institutionalized within our economy, when it is unnecessary and probably harmful to most? Why is it just taken for granted as something we inevitably expect? Because there is one constituency that benefits GREATLY from inflation. The everyday stuff we buy (the aforementioned food, shelter, etc.) are not the only items that rise in price when inflation is purposely engineered into our economy. Other things rise in price too, including (drum roll please)….

Investment assets: stocks, real estate, commodities and the like. Even bonds. And that’s how inflation becomes an easy, stealth way to transfer great sums of wealth, trillions of dollars, from everyday folks who work for it to those who are already very wealthy.

I don’t have the stats in front of me but we all know that the wealthiest 5% (plus or minus) own about 90% (plus or minus) of all investment assets here in the U.S. and elsewhere. Those same 5% (and especially the 1% within it) pretty much control policy in this country. But the thing is, they don’t require any more food or clothing than anyone else. Heck, Warren Buffet famously lives in an ordinary little ranch home in Omaha. What does it matter to Warren B. or George S. or Jeff B. or even “little” (haha) Donald T. if they have to pay 2% more for food, so long as their multi-billion dollar investment portfolios gain $100's of millions a year for no particular reason? 2% or more, year after year?

It doesn’t. And yes, some everyday people (like me) own investment assets in their 401k plans, or own paid-off homes. So we get to play too, at least a little bit. But the wealth that’s been “created” (extracted, really) over the last 2-3 decades, it’s well documented that it’s accrued almost exclusively to the already very wealthy. And inflation has been the primary means by which such wealth has been distributed.

(Ever notice that stock prices are not a component of our CPI calculations? There’s no reason that stocks should be excluded from the CPI, if investing for the future is at least as important as making cell phone calls and watching cable television. Inflated stock prices are just as harmful to millennials as ZIRP (0% rates) is to boomers so I guess at least we’re equally screwed….)

The sooner we come to realize that inflation is hugely pernicious, and not at all benign, the sooner everyday people will derive at least some benefit from new wealth. Of course, inflation is not the only such wealth transfer mechanism, but the more I think about it, the more I come to believe and understand the HUGE role inflation plays in wealth distribution. Remember, inflation is NOT rising prices. Rising prices are the symptom. Inflation is a monetary phenomenon. It’s the purposeful creation of excess “money” (credit, really). Most recently, especially over the last 2-3 years, new credit (with the attendant 0% interest rate) has been used in large part to fund stock buybacks, and drive stock prices up even more. I read recently that last year, more money was spent on stock buybacks than those companies even earned from operation. That should make your head explode! It means that no earnings whatsoever were invested in future growth, in the aggregate. 0% money (credit) just going straight into the pockets of the already-rich without the nuisance of a repayment obligation….

I leave you with this. The reason the Fed gives for promoting inflation is “because deflation would be a disaster for our economy.” WHAT? And you see that over and over especially in mainstream publications. The fact is, less money (credit) would cause prices, ESPECIALLY INVESTMENT ASSET PRICES, to drop substantially. The “economy” would not imperiled by the “threat” of deflation. Uber-wealthy people would be. Everyday people would see prices for everyday things stabilize and even drop. Maybe farmers could buy farmland again, not just investors....

[ryan costa]

"money" is basically a fiat currency. Since the beginning of the industrial revolution, gold standards were largely just pretend. They work briefly when people pretend they are real.
In America, money was very necessary to settle the continent and build and engage in all manner of commerce and industry. Banks popped up everywhere and issued their own currencies, and large land owners basically did the same. people demanded a centralized bank and better regulated currency.

The gold standard is largely a holdover from feudal times. it is great if a few people score a lot of gold or silver, but the same can be said of cocaine or uranium or fancier decorative rocks.

The stock market might be considered a higher-tier of fiat currency.

While much real estate is vastly inflated, most of it is on the coasts. that is why the 15 dollar minimum wage is popular.

The post-industrial economy pushes real estate inflation to pretend that the post-industrial economy makes any sense. Although there is an enormous surplus of housing and commercial real estate in this country, it is easy to drive demand by slumming up much of it as quickly as possible.
http://www.cbsnews.com/news/u-s-retaile ... s-problem/

The good news is we have a lower population density than Europe, and still have a greater abundance of natural resources regardless. So that's okay.