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Matthew Stevenson: The magic of soaring inflation
November 11, 2012
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I  buy none of the post-election, prime-time hokum that what decided the presidential race was the Latino vote, women’s issues, the next Supreme Court justices, the view from the fiscal cliff or how drones are winning the War on Terror. This presidential election was, as always, a contest between gold standardists and inflationists.

The victors were the forces of cheap money. William Jennings Bryan would be proud — as would bimetalists and Weimar Republicans.

Inflation won because it is the panacea for all that ails the body politic: a short-term cure-all that promises economic growth, the possibility of paying off runaway national and international debts, new-found prosperity for the middle classes and liquidity for the impoverished, who otherwise would be voting in the streets with rocks and burning tires.

Think of it as doping for those wanting to win political races.

Cheap money defers many liabilities. Real wages for industrials workers have declined since the 1970s. True unemployment — including those too discouraged to look further and others working part-time for unlivable wages — is closer to 22 per cent than the official figure of 7.9 per cent. The national debt, $16.3 trillion, exceeds the gross national product. With unfunded entitlement programmes, such as Medicare and Social Security, the government is eventually on the hook for an additional $46 trillion, which it would rather not pay with pieces of eight.

The hard-money men have not been able to win many elections since the 19th century, arguing as they do for reductions in the monetary supply; an asset-backed currency (preferably with gold) and policies that lead to deflation. These are a boon to lending institutions that want to get repaid with readily convertible cash, not watered stock.

The magic of inflation, before it turns everything to dust, is that it papers over a number of intractable financial problems. The United States is now able to run monumental trade and budget deficits, fight multiple foreign wars, vote tax cuts, extend unfunded pension and healthcare benefits to citizens over age 65 and spend money with Medici-like munificence on myriad federal programmes by printing money or borrowing in national and international capital markets.

Were the dollar unacceptable as a reserve currency in investor portfolios here and abroad, these financial sleights of hand would have ended long ago. Imagine the consequences if the Chinese demanded gold, diamonds or barrels of oil as collateral for their US dollar bond investments. Already, the dollar is badly depreciated against many currencies, including the Swiss franc and the euro.

The reason lenders to the American dream don’t demand hard assets in exchange for their full faith and credit is that most marketplace debt, as well as the circulating currency, comes with the guarantee of the US federal government — perhaps why a pyramid is printed on the back of a dollar bill.

Think about it: Bank deposits, mortgages, the balance sheets of large banks and hedge funds, Social Security, Medicare, defence spending and General Motors all fall under the rubric of being “too big to fail.” They have the implicit endorsement of the federal government, which pays its obligations with inflated money — as opposed to doubloons carried around in a sack.

Why, then, does the economic data never show inflation as a problem, one that might have become a discussion point in the election? Since 2000, the consumer price index has shown inflation hovering between a manageable 2 per cent and 4 per cent per year.

The reason the inflation statistics alarm few is because it is far easier to manipulate economic data than it is to control runaway inflation, which ought to be synonymous with four-year college tuition at $200,000, one-bedroom apartments in New York City priced at $1 million, gasoline at $3.46 a gallon and carts of groceries that routinely cost at least $250. Nonetheless, the September consumer price index showed inflation at a modest 2 per cent per year.


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