On Inflation.

When Ron Paul speaks about the American government inflating the currency...






... he is right on the money, pun intended.

The expression I would use to describe what is happening today, "Debasement," has very old historical roots. English Monarchs, for example, were very skilled at the craft.

In the ancient world, gold and silver coinage was debased by increasing the percentage of non-precious metals, thereby conserving the gold and silver and boosting the production of additional coin.

In our modern world, the dollar is debased by increasing the volume of dollars by pressing a few buttons, thereby diluting the purchasing power of each dollar in circulation.

With this in mind, I would like to share with you this exceptional article entitled Inflation Index Manipulation : Theft by Statistics by Daniel R. Amerman. I believe this piece really helps to illustrate exactly WHY inflation is so very harmful to people like you and me.

Overview

If the United States government was an individual or corporation, and we looked at the obligations it has entered into for the decades ahead – it would be bankrupt. However, the federal government is not an individual or corporation, and has powers that make these bankruptcy analogies quite dangerous for investors who take them to heart. Thinking the United States may go bankrupt means focusing on a danger that isn’t real, while missing the dangers that are real – which are the methods the government can use to avoid bankruptcy, and the devastating impact of those methods upon retirees, salaried workers and many investment strategies.

The government’s effective immunity from bankruptcy can be found in two separate but related governmental powers: 1) the government controls the money supply, meaning it controls the degree of inflation (in broad terms); and 2) the government also controls the official inflation indexes. Many people are aware that there will likely be a major squeeze coming up that means future beneficiaries will receive much less than current beneficiaries in purchasing power terms. The contribution of this article is to flesh out how the specifics can work, and demonstrate how through steady and somewhat hidden pressure, the value of promises can be gradually stripped away even as a generation of retirees is impoverished. We will use a fairly simple example based on two widely known current inflation figures, to illustrate how through the manipulation of both inflation and inflation indexes, the government can simultaneously repay existing government obligations at 15 cents on the dollar, while repaying inflation-protected promises (in full) at a mere 27 cents on the dollar...

... When we look at what has happened to the prices for food, energy, housing prices and medical insurance over the last several years, there are many Americans who are having trouble believing the government story of an official 2%-3% per year. Therefore, for exploration and illustration purposes, we will use a nice, round 10% assumption as the true rate of inflation. John Williams of ShadowStats.com has made a case for this figure being the true rate of inflation, when inflation is calculated using the same methodologies that were used by the government in the 70s and 80s.

A belief that the government does or would systematically deceive its citizens to serve political interests is incidental to this article. It is up to the reader to decide whether we talking about what is happening now – or what could be happening in the future. The numbers work the same way whether the inflation and index-manipulation is openly admitted, fraudulently hidden, obfuscated behind layers of statistical complexity and technical jargon – or some combination thereof...

No....... our government would never lie to us!

Or would they?

Continuing:

"... A sovereign nation dealing with excessive promises denominated in it’s own currency does not face an impossible problem, and the solution is not even a mystery – “print the money” as needed, which slashes the value of the currency, and the magnitude of the problem is slashed along with it (along with the value of the life savings of the nation’s citizens, unfortunately, but such is the true nature of currency).

This government power to pay promises through inflation is illustrated in the “Ending Real Value of a Dollar” (column 3). As would be expected with a 10% rate of inflation, the value of a dollar plunges. It is only worth 75 cents after three years, 50 cents within 7 years, and is down to only 15 cents by the end of 20 years. This destruction of the value of the dollar is an entirely legal means of reneging on the government’s debts, and effectively allows it to walk away from ever paying for past deficit spending, both domestically and internationally. Those massive trade deficits which were covered by other nations buying US Treasury bonds will never likely be repaid, in other words..."

Now you know what this means: foreigners will be much less likely to invest in our dollar and our bonds if they suspect that America is inflating on purpose, causing our economic collapse.

Or, even worse, foreigners might wise up and BUY our assets at fire sale prices. They could easily become the masters of our nation, by hook or by crook. While our military might is unchallenged at present... we would still be vulnerable to (and in some cases, desperate for,) takeovers by foreign investors, sovereign wealth funds, and the like.

When Thomas Jefferson said:

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks...will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered..."

This is exactly what he meant.

Not only are people losing their homes in record numbers, the American people might end up selling themselves into indebted slavery due to our haphazard monetary policy.

Now then, getting back to the article, take a look at this:

How Many People Can You Fool & For How Long?

Can you really fool all the people with a combination of inflation and inflation index manipulation? Some might say “No way! People are way too smart for that, and the professors and media would quickly expose the fraud.” Interesting thing though… 40 years ago, one working adult earned enough to support a middle class household of five or six, including a stay-at-home spouse and three or four kids. Today, normal seems to be defined more like 2 working adults for every middle class household with 1-2 children. True, the houses are bigger, the color TVs are bigger, there are two cars, they are better cars, people eat out more and travel more, etc, etc. But, as we’ve gone from one worker to support 5-6 people, to one worker to support 1.5 to 2 people… did you ever wonder how accurate that indexing has been in practice?

It isn’t reported as such, but arguably the inflation index is one of the most important political statistics. It determines everything from the economic growth that is reported, to the benefits that are paid out, to budget deficits and surpluses, and whether taxes need to be raised. Indeed, the difference between prosperity and recession – as reported in the papers – can be no more than 2-3% in the inflation index, as economic growth is net of inflation indexes. Such complex calculations as well, not understood by either reporters or the public, performed in obscurity – but watched with keen attention by the political appointees, who know exactly what it will take to win the next election.

There is not even a need for a “conspiracy”, or a group of politicians meeting in secret and deciding to defraud the public. Human nature, time and overwhelming incentives are enough to gradually make real what we have illustrated in this article. Political appointees know how to reward those government employees who can find a way to rationalize dropping the rate of growth of the index by 0.2% here, and 0.02% there. If as an employee you want to get promoted – that is what you do. Which creates an environment of decades of incentives leading to decades of incremental changes, steadily moving the standard as the changes add up. Human nature being what it is, what do you think happens? Has already happened? Will happen when the political motivations reach all new levels?

Ladies and gentlemen, please read this article in full, as the effects of inflation and debasement of the money supply must be understood. As the author suggests, we will see more attempts to debase the currency, not less, as America's financial problems come to a head, something that I think will occur in the next three years, unless of course, Ron Paul is elected as President.

When you are done there, please take a look here for recommended reading that will hopefully enable you to understand the historical and political events that have lead to our present malaise, and can hopefully help you survive and thrive financially during these difficult times.

Kumogakure.