Sunday, September 19, 2010

Inflation = Theft + Tyranny

We all have memories from our childhood. Whether they are sad, funny, quaint, or thrilling, they are mostly just personal stories about our lives. The memory I’m about to share, though, is a story that illustrates the most monumental theft in history. All for the price of a candy bar.

At that time of my story, soft drinks were sold in returnable 16 and 32 ounce glass bottles. The 16 ounce bottles could be returned for a nickel, and the 32 ounce bottles for a dime. My friends and I were always scouring open fields, alleyways, and trash cans for an empty bottle that could be redeemed. I’m sure every other kid in America did the same thing.

On the day of my story, I had three nickels in my pocket I’d earned from returning some bottles. I trotted down to the local mom-and-pop grocery near my house to buy three candy bars. I picked out my three bars, and took them to the counter. The clerk told me it was “30 cents.” I was dumbfounded. “What do you mean 30 cents – three times five is 15 cents.” “Sorry, the price went up to 10 cents each.” I was sick. There went my dream of three sweet candy bars. I had to settle for second best – one bar and a pack of candy cigarettes.

That was my first lesson about inflation. A hard lesson at the time, but one that I probably soon forgot in a flurry of other boyhood adventures. At that age I probably didn’t even know it was called inflation, and if I did, I probably would have told you it makes candy cost more money.

We’ve all been living with inflation all our lives. If you’re old enough, you may have lived through times of high inflation. Sometimes inflation gets so out of control that people have to spend their money as quickly as possible before it becomes worthless. You may have heard about examples of this, like Germany after World War I or Zimbabwe. It got so bad in Zimbabwe that they were printing money in trillions of dollars. What could you do with a trillion Zimbabwean dollars? Not much from what I hear – it was just a piece of paper with a lot of zeros on it.

I think I read somewhere that prices didn’t change much during the Middle Ages, and economic growth was glacial. You remember what a bad time that was, so maybe inflation is a good thing. Maybe inflation is like fertilizer, and it makes the economy grow.

Or maybe inflation is like gravity or the sun rising in the east – just a fact of life that must be accepted.

Or perhaps there is more to the story of inflation. Perhaps we just need to ask simple questions.

What is inflation, and why do we have inflation?

I’m sure that almost everyone has played Monopoly, or if not, at least you’re familiar with the game.

Now imagine the everyday game of Monopoly, the kind we play with children. There are multiple players, and everyone picks a little token to move around the board. Of course we have the Bank, and everyone starts with the same amount of money. With a little luck and some money management, you stand a chance of dominating the game and driving the other players into bankruptcy. After the game is over, we box everything up and have a piece of pie – just a fun evening with the family or some friends.

Now imagine a somewhat different game of Monopoly. It’s similar to the one you know. There are players – you and me. There are other players such as car companies, insurance companies, coffee shops, churches, auto clubs, farmers, labor unions, water districts, state governments, and the federal government. And, of course, we have the Bank.

In this modified version of Monopoly, though, the Bank, let’s call it the Federal Reserve Bank, has super powers. One of its super powers is that it can create new money at any time it wants and put it into the game. The Bank just pulls an unopened Monopoly box from the store shelf, pulls out as much money as it wants, and adds it into the game. Presto, more money.

Now if the Bank distributed this new money evenly to all the players at the same time, then the game would remain fair and equal. Let’s say the Bank doubled everyone’s money when it created new money. Instead of having $1000, you’d now have $2000, and all the other players would have twice as much, too. Relatively speaking, everyone would still have the same amount of money.

But the Bank in our special version of Monopoly doesn’t distribute this new money evenly and proportionately. It first gives the new money to one particular player – the federal government. The result is that that one player has an advantage over the other players – it suddenly has a bunch more money than they do. What does the player blessed with this extra money do with it? What would you do if you were suddenly given extra money? You’d buy stuff, right? Hotels, Boardwalk, a few railroads maybe.

(Before we continue playing our deadly game, there are three things you have to understand about the Federal Reserve Bank. First, it’s not a government agency, even though it sounds like one. It’s a banking cartel conceived by rich bankers and approved by the federal government in 1913. Second, I’m not kidding when I write that the Federal Reserve Bank creates money from nothing. And third, the federal government and the Federal Reserve Bank are partners in the biggest heist in history.)

What does the real federal government do with the extra money magically created by the Federal Reserve Bank?

It buys stuff just like the federal government in our fictitious version of Monopoly. Only in the case of the real federal government, it’s buying power and your freedom.

First it buys political loyalty, influence, and resources to keep its power. For example, it bails out large Wall Street banks that made risky, manipulative “investments” that went bad or companies and governments about to go bankrupt that have large union connections. The recipients of these bailouts help keep the government in power because they can make large campaign contributions and/or influence people to vote for certain political candidates.

The government also uses the advantage created by the Federal Reserve’s money from nothing to increase its power, decreasing your freedom in the process. It uses the extra money to create and fund all sorts of government programs. It doesn’t really matter what the programs do. Washington is more than happy to create anything that people ask for – Social Security, Food Stamps, Medicare, student loans, a strong military, farm subsidies, fair labor laws, education, homeland security, food safety inspectors, flood control, housing subsidies, a consumer protection agency – you name it, as long as it increases the federal government’s power.

What does the Federal Reserve Bank get out of this joint venture with the federal government?

Nothing directly. The Federal Reserve is just a tool, a front man, for making sure that the rich stay rich and get richer.

The Federal Reserve helps the rich do this with another of its super powers – fractional banking. People deposit money into a bank. Since the bank knows that not everyone is going to withdraw all the money at the same time, it only keeps a fraction of the money in the bank and loans out the rest with interest. The money that is loaned out is then deposited into other banks, and those banks keep a fraction and loan out the rest with interest. This process can be repeated many times. Each time it is, the supply of money increases, and the new money is lent out with interest. When the money is lent out, the rich skim some off the top – interest on money that was created from nothing. This process explains why the Federal Reserve has made current interest rates so low. It wants people to borrow more money, so the money creation and lending process, and the associated thievery, will start up again. If you steal $10,000 from the bank at gunpoint, you go to prison for 10 years, but if you steal $5 from 14 million customers of the bank, they make you a partner.

The rich get richer in other ways, too. After the federal government and its rich and influential cohorts squeeze the advantage out of the extra money created by the Federal Reserve, the money finds its way into the rest of the economy. Money has to go somewhere, and when there’s too much money around it can create a market bubble, say a stock market or tech stock IPO or housing price bubble. Bubbles are useful to clever and well informed people because they provide an opportunity to siphon large sums of money from the market into their private accounts.

Who gets hurt by inflation?

Poor people get hurt the most, of course, because they are the last ones to get the extra money. One of the biggest lies in Washington, and there are many, is that our Representatives and Senators are working to make life “fair” for poor people. They’ve modified the tax code so that half of the people who file tax returns don’t “pay” any federal taxes, and they’ve created a myriad of welfare and subsidy programs to “help” poor people. Washington claims its redistributing money from the mean, selfish, and nasty rich people, but nothing is further from the truth. It’s all just a sham to placate people and hide the biggest secret tax in history.

The federal government and its cronies don’t really exempt poor people from “paying” taxes, and they don’t care how much money is appropriated for welfare programs because the Federal Reserve Bank can just print up more money at any time. With a wave of the Federal Reserve’s magic wand, the government and the rich keep their advantage, and all the hapless people who thought the government was helping them are still poor and just as dependent on the government as they ever were because their money is worth less and less every day.

If the thievery was only against poor people, that would be bad enough. With each passing day, though, the government’s grasp is expanding. Look at the government’s spending as a percentage of the country’s spending over time. Each year it grows, and each year more and more of us are employed by the federal government or by a state or local government program that is funded by the federal government. Or we become caught in the insidious web of federal entitlements, contracts, subsidies, tax rebates, and incentives. If the trend continues, the day will arrive when everything comes from or through the federal government.

Maybe this is a good thing. Maybe all our wants and our needs are best managed centrally. Maybe if we bring the best minds to Washington, they can work together to solve all the complex problems that confront modern America and provide for our security and happiness.

Before you consider the merits of this approach, though, you have to consider two things. First, this requires the concentration of vast power in the hands of a small number of people. Such an environment is ripe for corruption. Which is easier to corrupt – one federal government or 50 state governments? Second, there are countless factors that have to be considered, coordinated, and reconciled to make this work. Therefore, all of the people that we entrust with this power have to be virtuous and brilliant.

If you believe Washington is filled with virtuous and brilliant people who only have your best interest at heart, then don’t do anything. The pattern is for the government to keep getting bigger and providing more benefits and more programs.

Once the federal government has bought everything, though, including your freedom, what will it do then? Will it ever give them back? Why should rich and powerful people give up their riches and power?

There’s an old saying about “not biting the hand that feeds you.” If we allow Washington to take over everything, we put ourselves in a vulnerable position. How will you take care of your family if questioning the government might mean losing your government job, your government contract, your government benefit check, or your government health care? Do you trust the people in Washington? Do you think they care about you?

If you don’t trust the folks in Washington, or doubt their ability to manage the lives of 300 million people, then you need to wake up and do something about it.

How are they able to get away with this?

The federal government and the rich can get away with this because Washington is filled with politicians. Most politicians are unprincipled cowards that will step on their own mothers if it will get them elected. They will do whatever is necessary to conceal what is really going on between the federal government and the Federal Reserve Bank. This means slinging every slur and hyping every scandal they can find to pit the people against each other and keep us distracted. Both the Republicans and the Democrats are guilty of this. All the while the really big money, and your freedom, is going out the back door.

Now it wouldn’t take much to spot the unfairness if the Bank created new money during a kitchen-table Monopoly game and distributed it to only one player. A child could see in about four seconds that something is up – something unfair, something rigged – and would demand that it stop immediately or quit playing the game. It’s harder to see it in the real world, but that is exactly what’s going on. The federal government and its unscrupulous, and immoral, friends have given themselves a huge advantage over every other player in the game of life, liberty, and the pursuit of happiness. They won’t stop until you demand that it stop or the whole system comes crashing down like it did in Germany and Zimbabwe. They’ve gotten very good at it, and it’s easy for them. It’s so easy, it’s like taking candy from the mouth of a child.

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