“Inflation”
occurs when the creation of currency outruns the creation of real wealth it can
bid for… It isn’t caused by price increases; rather, it causes price increases.
Inflation
is not caused by the butcher, the baker, or the auto maker, although they
usually get blamed. On the contrary, by producing real wealth, they fight the
effects of inflation. Inflation is the work of government alone, since
government alone controls the creation of currency.
In a
true free-market society, the only way a person or organization can
legitimately obtain wealth is through production. “Making money” is no
different from “creating wealth,” and money is nothing but a certificate of
production. In our world, however, the government can create currency at
trivial cost, and spend it at full value in the marketplace. If taxation is the
expropriation of wealth by force, then inflation is its expropriation by fraud.
To
inflate, a government needs complete control of a country’s legal money. This
has the widest possible implications, since money is much more than just a
medium of exchange. Money is the means by which all other material goods are
valued. It represents, in an objective way, the hours of one’s life spent in
acquiring it. And if enough money allows one to live life as one wishes, it
represents freedom as well. It represents all the good things one hopes to
have, do, and provide for others. Money is life concentrated.
As the
state becomes more powerful and is expected to provide more resources to
selected groups, its demand for funds escalates. Government naturally prefers
to avoid imposing more taxes as people become less able (or willing) to pay
them. It runs greater budget deficits, choosing to borrow what it needs. As the
market becomes less able (or willing) to lend it money, it turns to inflation,
selling ever greater amounts of its debt to its central bank, which pays for
the debt by printing more money.
As the
supply of currency rises, it loses value relative to other things, and prices
rise. The process is vastly more destructive than taxation, which merely
dissipates wealth. Inflation undermines and destroys the basis for valuing all
goods relative to others and the basis for allocating resources intelligently.
It creates the business cycle and causes the resulting misallocations and
distortions in the economy.
We know
the old saw “The rich get richer, and the poor get poorer.” No one ever said
life had to be fair, but usually there is no a priori reason
why the rich must get richer. In a free-market society the sayings
“Shirtsleeves to shirtsleeves in three generations” and “A fool and his money
are soon parted” might be better descriptions of reality. We do not live in a
free-market society, however.
The
rich and the poor do have a tendency to draw apart as a society becomes more
bureaucratic, but not because of any cosmic law. It’s a consequence of any
highly politicized system. Government, to paraphrase Willie Sutton, is where
the money is. The bigger government becomes, the more effort the rich, and
those who want to get that way, will put into making the government do things
their way.
Only
the rich can afford the legal counsel it takes to weave and dodge through the
laws that restrict the masses. The rich can afford the accountants to chart a
path through loopholes in the tax laws. The rich have the credit to borrow and
thereby profit from inflation. The rich can pay to influence how the government
distorts the economy, so that the distortions are profitable to them.
The
point is not that rich people are bad guys (the political hacks who cater to
them are a different question). It is just that in a heavily regulated, highly
taxed, and inflationary society, there’s a strong tendency for the rich to get
richer at the expense of the poor, who are hurt by the same actions of the
government.
Always,
and without exception, the most socialistic, or centrally planned, economies
have the most unequal distribution of wealth. In those societies the
unprincipled become rich, and the rich stay that way, through political power.
In free societies, the rich can get richer only by providing goods and services
others want at a price they can afford.
As
inflation gets worse, there will be a growing public outcry for government to
do something, anything, about it.
People
will join political action committees, lobbying groups, and political parties
in hopes of gaining leverage to impose their will on the country at large,
ostensibly for its own good.
Possible
government “solutions” will include wage and price controls, credit controls,
restrictions on changing jobs, controls on withdrawing money from bank
accounts, import and export restrictions, restrictions on the use of cash to
prevent tax evasion, nationalization, even martial law—almost anything is
possible. None of these “solutions” addresses the root cause—state intervention
in the economy. Each will just make things worse rather than better.
What these
solutions all share is their political nature; in order to work they require
that some people be forced to obey the orders of others.
Whether
you or I or a taxi driver on the street thinks a particular solution is good or
not is irrelevant. All of the problems that are just beginning to crash down
around society’s head (e.g., a bankrupt Social Security system, federally
protected banks that are bankrupt, a monetary system gone haywire) used to be
solutions, and they must have seemed “good” at the time, otherwise they’d never
have been adopted.
The
real problem is not what is done but rather how it is done: that is, through
the political process or through the free market. The difference is that
between coercion and voluntarism. It’s also the difference between getting
excited, frustrated, and beating your head against a wall and taking positive
action to improve your own standard of living, to live life the way you like
it, and, by your own example, to influence society in the direction that you’d
like to see it take—but without asking the government to hold a gun to anyone’s
head.
Political
action can change things. Russians in the ’20s, Germans in the ’30s, Chinese in
the ’40s, Cubans in the ’50s, Congolese in the ’60s, South Vietnamese and
Cambodians in the ’70s, then Rhodesians, Bosnians, Rwandans, and Venezuelans
today are among those who certainly discovered it can. It’s just that the
changes usually aren’t very constructive.
That’s
the nature of government; it doesn’t create wealth, it only allocates what
others have created. More typically, it either dissipates wealth or
misallocates it, because it acts in ways that are politically productive (i.e.,
that gratify and enhance the power of politicians) rather than economically
productive (i.e., that allow individuals to satisfy their desires in the ways
they prefer).
It’s
irresponsible to base your own life on what hundreds of millions of other
people and their rulers may or may not do. The essence of being a free person
is to be causative over your own actions and destiny, not to be the effect of
others. You can’t control what others will do, but you can control yourself.
If
you’re counting on other people, or political solutions of some type, most
likely it will make you unwary and complacent, secure in the hope that “they”
know what they’re doing and you needn’t get yourself all flustered with worries
about the collapse of the economy.
Editor’s
Note: Really, there’s no need to get worried or flustered. But
you do need to act… now. We think there’s a strong chance widespread economic
collapse is just around the corner. That’s why we’ve put together a timely
special report, our Guide to Surviving and Thriving During an Economic
Collapse. Click here to download your free
PDF copy now.