Laissez Faire Links: Government Shutdown, Delaying the Obamacare Mandate, the Morality of Abortion, and Myths Against Capitalism

What would a proper government shutdown look like?  Why will President Obama need to delay his mandate provision?  Can a woman be charged with homicide for aborting her baby?  Did capitalism cause the 2008 financial crisis?

  • Ari Armstrong over at The Objective Standard talks about a government shutdown that would be welcomed.  His brief piece Toward a Shutdown to Celebrate makes the point that most government functions are superfluous, and there are many.  Beneath the umbrella of laissez-faire capitalism, the proper function of government is strictly limited to protector of individual rights.  He states, “In order to protect rights, the government needs to run an effective military, police force, court system, and the aspects of government necessary to support them. Those, and nothing else, are the essential functions of government.”
  • Forbes contributor Scott Gottlieb discusses problems the new government healthcare exchanges are having out of the gate.  Why President Obama Will Have To Delay His Health Insurance Mandate makes the case that technical problems with the virtual exchange rollout will necessitate a delay in the requirement for those uninsured to purchase coverage.  His prognosis is not optimistic: “The Administration started building these systems late, and rushed them online, without perfecting these networks. Working them out now, in real time, is going to take months, and maybe a year.”  With that large of a delay, the Obama Administration will have to backpedal on its threat to penalize the uninsured.
  • Just a little more from our friends at The Objective Standard tells us about a possible Colorado ballot measure that would effectively criminalize any and all abortions, even in cases of rape and incest.  The measure would go further though.  In addition to calling for “homicide prosecutions for killing the unborn,” the “Brady Amendment” violates a women’s moral right to choose how she lives and what is best for her and her body.
  • Did Capitalism Cause the Financial Crisis?  This is a short, but invaluable video regarding the common myth that capitalism failed, resulting in the 2008 financial meltdown. Yaron Brook, Director of the Ayn Rand Institute, states that this is erroneous because a true system of laissez-faire capitalism did not exist prior to 2008.  What did exist was a degree of government intervention that distorted the market, leading to bubbles in asset prices that never would have existed under natural market forces.  It is no coincidence that the three most highly regulated industries – housing, banking, and mortgages – were those that failed.  Pay particular attention to his comments on the Federal Reserve system.  For more information, see my discussions of the Federal Reserve.


GAO Audit of Federal Reserve Reveals Over $16 Trillion in Bailout Loans

The Government Accountability Office (GAO) conducted its first comprehensive audit of the Federal Reserve, revealing some startling facts concerning the lending practices of America’s central bank.  Here are just a few highlightsas pointed out by Vermont Senator Bernie Sanders.

  • Provision of over $16 trillion in financial assistance in the form of bailouts to domestic and foreign banks and businesses
  • Inability or refusal to adequately deal with and mitigate conflicts of interest:

“For example, the CEO of JP Morgan Chase served on the New York Fed‘s board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed. Moreover, JP Morgan Chase served as one of the clearing banks for the Fed’s emergency lending programs.”

  • Outsourcing of loan operations to private, third-party vendors who were themselves recipients of special low-interest-rate loans:

“The Fed outsourced virtually all of the operations of their emergency lending programs to private contractors like JP Morgan Chase, Morgan Stanley, and Wells Fargo. The same firms also received trillions of dollars in Fed loans at near-zero interest rates. Altogether some two-thirds of the contracts that the Fed awarded to manage its emergency lending programs were no-bid contracts. Morgan Stanley was given the largest no-bid contract worth $108.4 million to help manage the Fed bailout of AIG.”

To read the full report, click here.  Also, a more comprehensive report is due in October of this year.

Economic Cannibalism: A Lesson from the Soviets

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Simon Black’s June 14th article entitled “What are the Social Implications of Economic Collapse?” makes a clear-cut diagnosis of America’s imminent fall from its economic pedestal.  The point of no return is passed according to Black.  Foreign buyers of Treasury securities are undoubtedly nervous over the credibility of U.S. debt, and as we lose their business the only option for Washington is to turn up the printing press at the Federal Reserve.  Deficit spending has evolved into an all-out race to the bottom of the dollar.  The diagnosis is in.  Massive inflation and an attempt to continue government austerity via higher taxation will erode much of America’s purchasing power along with her savings.  The final result will be what Black and many others have termed economic cannibalism.  On this, Black makes a poignant reference that bears the full light of Ayn Rand’s vision as laid out in Atlas Shrugged.

In the best traditions of Atlas Shrugged, the government will continue its persecution of the productive class– professionals, investors, entrepreneurs, and skilled workers. Existing taxes will rise, new taxes will be created, trade barriers will be enacted, and a maze of cost prohibitive regulations will be passed.

In the private sector, the results will be stifled incentive, which translate into a serious lack of innovation and growth.  The public however will see still worse effects:

When inflation eats away at a family’s already meager standard of living, when austerity eliminates the benefits to which recipients have grown accustomed, when default vanquishes a retiree’s savings, when high taxes make workers feel like they’re just government serfs– this is when the real turmoil will begin.

Why do we continue down a path to ruin when it is so clearly lit by the beacon of bankruptcy?  One may be so bold as to draw a useful comparison between the fiscal inadequacies of the U.S. over the past two decades with that of the Soviets.  In 1982, President Reagan in a June 8th address to the English House of Commons, said with a wagging finger, “the Soviet system pours its best resources into the making of instruments of destruction.  The constant shrinkage of economic growth combined with the growth of military production is putting a heavy strain on the Soviet people.  What we see here is a political structure that no longer corresponds to its economic base, a society where productive forces are hampered by political ones” (my emphasis).  One may argue then, that the U.S. system of government no longer “corresponds” to the economic realities that dictate pragmatic policy.  Our political structure instead ignores  the logical implications of its policies in favor of safeguarding political interests, thus rendering such policies and the political structure itself highly illogical and contrary to our best interests.

So as we continue to look to government for solutions, perhaps we should ask ourselves if government is itself the source of the problem.  America has gone through many changes in its lifetime, but never has the social and ideological fabric been altered so drastically as since the Great Depression and the beginning of the American welfare state.  Since then, deficit spending (printing money in the name of economic recovery and future stability), government austerity, and continually growing defense spending has left America desperately insolvent, while declining investments in education and a shrinking middle class has left many clinging to the bosom of government like newborn pups.  This is not democracy.  This is not liberty.  It is the natural evolution of the welfare state.

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The Truth Concerning Quantitative Easing, Inflation, and the Federal Reserve

What in the World is Quantitative Easing?

The Federal Reserve’s second round of quantitative easing (QE) begun last November is scheduled to end this month and inject another $600 billion into the economy.  According to Bernanke and most high-profile economists, the effect of QE is stimulus, stimulus, stimulus. But what exactly is QE?  It is no surprise that Federal Reserve policy is cloaked in technical jargon, and this is just one more example. To clear things up a bit, QE is simply an economic euphemism for printing money. Think of the economy as a watch. While the gears are all the different markets, policies, and institutions (monetary and fiscal policies, interest groups, political parties, etc.) that make up an economy, money is simply the oil (no pun intended) that keeps the gears from binding.  The Federal Reserve System – against the better judgment of economists and elected officials of the early twentieth century – has become the watchmaker.

Recall the primary issue of 2008 was a liquidity crisis, which was essentially the unwillingness of banks to lend.  The result was a complete international market seizure, whereby cash was no longer circulating to keep the gears lubricated.  Once cash-flow stopped, the watchmaker knew he had only one option to save face.  He claims now, as he did in 2008, that injecting money into the economy will jump-start lending, reduce excess industrial capacity, and lead to more hiring and an eventual return to the natural rate of unemployment (4-5%).  Keynesian economics, particularly deficit financing, is the name of game here.  Keynes saw the inherent benefit of deficit spending as a tool of monetary theory, and consequently, was largely responsible for gaining the necessary acceptance for inflationary monetary policy as such.

Monty Pelerin (pen-name) translates this idea well to highlight what inflation means for the average worker and consumer.  “In his General Theory, Keynes advocated solving unemployment problems by “fooling” workers with higher nominal wages.  He assumed workers were too obtuse to differentiate between nominal and real wages.”  Keynes also recognized inflation for what it truly was.  That is, he was well aware that “The best way to destroy the capitalist system is to debauch the currency.  By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”  This is the hidden tax we call inflation, and its primary avenue of realization is the Federal Reserve system.  By using fiat money instead of pegging the dollar to a tangible commodity such as gold or silver, central banking is able to manipulate the value of our monetary unit, thereby controlling the future of its purchasing power.  The implication of this for us all is staggering.  QE, then, is just an additional mechanism the Federal Reserve and U.S. Treasury is currently employing to devalue our currency and diminish the purchasing power of our paycheck.

But there is, of course, a political agenda hidden beneath the surface of Keynesian theory.  The ability to directly control the money supply places the reigns of everyday life in the hand of our bureaucrats.  Statism is the name of the game here.  As Pelerin states, Keynesian economics (deficit financing)  “is not economics, but political manipulation of an economy. Politicians love it because its underlying thesis is that the economy, left alone, would stagnate at some level below full employment. This false claim is the basis for Statist government enabling government to grow bigger, take more from its citizens and involve itself into all aspects of peoples’ lives.”  I believe reference back to Alexander Hamilton, our nation’s first Treasury Secretary under President Washington, will make a sufficient point.  When debating with Jefferson the matter of a national (central) bank to consolidate the debt of the thirteen colonies, his position was strongly in favor, for to take on such a magnitude of debt would bring with it the power of a strong centralized government.

A Bit of History

A bit of history is needed in order to understand how exactly Keynesian economics was able to grab hold of the brighter minds of America.  Proponents of Keynesian doctrine often cite the Great Depression and the booming years afterward as proof that, indeed, Keynesian monetary theory is sound and advantageous to America.  However, despite the conventional wisdom – written largely by unconventional individuals with equally unconventional agendas – some credit U.S. entrance into WWII as the primary impetus of America’s return to economic growth.  This may seem trivial, but is quite important because our high schools, community colleges, and universities are teaching our children a watered-down version of American history.  This is just another example.  In fact, well-renowned historian Howard Zinn says,

“[T]he war economy created millions of new jobs at higher wages.  The New Deal had succeeded only in reducing unemployment from 13 million to 9 million.  It was the war that put almost everyone to work,  and the war did something else: patriotism, the push for unity of all classes against enemies overseas, made it harder to mobilize anger against the corporations….The war not only put the United States in a position to dominate much of the world; it created conditions for effective control at home.  The unemployment, the economic distress, and consequent turmoil that had marked the thirties, only partly relieved by the New Deal measures, had been pacified, overcome by the greater turmoil of the war.”

A People’s History of the United States, pp. 402, 425

Therefore,  as WWII created a tremendous expansion in wartime production, it spurred enough demand to absorb increases in the money supply that are today associated with monetarism.  In short, demand created by the newly evolving military-industrial complex furnished the necessary goods and services to keep prices and inflation steady. After WWII passed, Washington created an atmosphere of fear among the public – very much similar to today’s war on terrorism – and a general consensus for a “permanent war economy” throughout Congress that allowed the Cold War to continue to fill this role.  This is known officially as the “warfare state.”  It seems, then, Washington has turned its fear mongering toward the war on terrorism to justify its increased military spending.

A Snapshot of the Federal Reserve System

In order to understand this, let us first examine a bit of Federal Reserve history.  Much of this is summation from G. Edward Griffin’s The Creature from Jekyll Island: A Second Look at the Federal Reserve.  Contrary to conventional wisdom of our central banking system – that it uses interest rates to control the money supply in an effort to keep prices and growth stable, namely to avoid economic crises – Griffin’s view holds the Federal Reserve itself responsible for economic crises and the massive depreciation of the dollar we have seen over the past century.  But how does an institution achieve such destructive agendas?  It helps, Griffin says, that the Federal Reserve is cloaked in ambiguity.  It is neither a private nor a public bank.  Although claiming to be politically independent, it is neither a political unit of our government nor a private bank as we typically think of the idea. Rather, the Federal Reserve System is a cartel that is partnered with our government, but not a part of it like the the House, Senate, or Supreme Court.  Most important to realize are its five primary objectives:

(1) limit competition within the banking industry as a whole,

(2) to obtain the rights – which were granted by our government, whence the partnership – to create money out of nothing (fiat money),

(3) isolate smaller banks from banks runs by gaining control over banks’ reserves,

(4) convince Congress to bailout insolvent banks with taxpayer money, and

(5) also convince Congress that the purpose of the Federal Reserve System and bailouts is to protect the public from economic crises (boom and bust cycles).

These, of course, were their unstated goals when the Federal Reserve Act passed in 1913, and the watchmaker has achieved all five. To our central bankers, there have no interest in economic stability (only control), nor on reestablishing it. We are taught in college that its purpose is to mitigate the negative effects of the free-market’s natural tendency of boom and bust. What we were not taught, but becomes prevalent to those who study history, is the Federal Reserve actually facilitates the business cycle.  And with each major crisis, they are able to limit competition even more and concentrate even more wealth.  This is the purpose of our and all other central banks in the world.  That said, any banking system connected to a central government is likely to fall into this trap as history has shown.  Believe it or not, the Federal Reserve System is actually the fourth central bank of the U.S., all others having resulted in the same scenario we see now.  The printing of fiat money and massive inflation to the point that a gold standard is reestablished has been done numerous times throughout history. What makes today’s problem so different is the degree to which globalization has linked the world’s economies. Consequently, when the dollar falls, so too will many other currencies. It is at this point that the idea of a world currency may be introduced to the public under the same guise as the origin of the Federal Reserve – to create stable prices with moderate inflation, which will translate into a stable global economy. It is not to be believed!

But Isn’t Moderate Inflation Good for the Economy?

Moderate inflation, usually around 2-3%, has historically been viewed by economists as a healthy amount.  The purpose is that inflation serves to drive the economy via expanding credit to businesses and consumers.  But inflation from excess money creation without a like increase in the goods and services from which money is needed to circulate is more a political tool than an economic phenomenon.  It is a way to hide the fact that the U.S. government is insolvent.  Monty Pelerin stated, “Without QE it would likely be illiquid. It is doubtful the US could sell enough debt to arms-length buyers to sustain its current spending.  The current estimate of the deficit is $1.7 Trillion.  Without QE there would be added distress for government and the economy.  Domestic interest rates would rise to whatever level necessary to attract market funding.  Higher interest rates would provide a further drag on the economy.  They would also dramatically widen government deficits.”  This would be devastating for the credit rating of the U.S. Treasury, resulting in government expenditures of nearly three times its revenues.  Thus, in order to remain solvent, inflation has become the only monetary tool left at our government’s disposal.

Yet even as a result of economics, inflation promises no long-run tool for stable prices because in order for it to act as a stimulant to economic growth, it must increase exponentially.  Milton Friedman pointed out, “Inflation is like a drug. Its stimulating effect is temporary. Only larger and larger doses can sustain the stimulus, before the chaos of hyperinflation removes all the gains.”  One need only examine the most fundamental of economic assumption to understand why one bout of inflation must be followed by a new, larger one in order to continue the stimulus-effect.  If I believe the value of my dollar will decline in the near future, I am more likely to spend more dollars now, as they will command more goods and services.  This is simple economic incentive.  If inflation has become the only monetary tools left at our government’s disposal (the Federal Reserve exhausted its ability to lower interest rates long ago), then one sees larger and larger bouts of inflation until eventually the U.S. reaches that dreaded state economists call hyperinflation.

Related Articles

Oil Prices Mirror Fall of the Dollar

Ryan Swift highlights the often overlooked, yet strikingly poignant, data that stares all Americans in the face.  Below is a visual prepared by Mr. Swift showing that over the past year, the dollar’s decline has inversely matched rising oil prices. This is not a coincidence and the data actually make sense when one considers that our economy requires both a currency and oil.  While currency serves to circulate goods throughout the economy, oil facilitates their production. It makes sense then that the two would be inversely related.  The more goods we produce, the more oil is required and the higher its cost.  Likewise, a higher quantity of goods require more currency to move them.  The problem, however, lies in the fact that consumer demand is still very low while the Fed is printing money in record volumes.  As more dollars flood the economy, the value of each will naturally fall because production has not yet increased sufficiently.

Click for Swift’s Article →

What this means is a double-punch to the American pocket-book.  As oil climbs, prices for all other goods rise as transportation and production costs increase.  In other words, higher prices for crude is akin to inflationary pressures all its own.  Add the Fed’s so-called “needed” QE2 (and talk of QE3) and one sees the printing press running at overtime to devalue the dollar further.  The overall result is a lag in production and a delayed recovery for the economy as a whole. As oil surpassed $113 a barrel on Friday, Time reported a fall in annualized GDP growth from 3.1% in the fourth quarter 2010 to a meager 1.8% in the first quarter this year.  Moreover, rising oil prices are likely a result of unrest in the Middle East and OPEC’s mysterious tendency to cut supply while demand clearly indicates the opposite response.  This last factor, Swift points out specifically along with Obama’s declaratory announcement to go after speculators responsible for inflationary pressures.  What Obama will not do – and what the mainstream media still refuses to recognize – is to reign in the Federal Reserve System’s QE policies that are responsible for nearly $2 trillion dollars of inflationary pressures.  So once again, we see the mainstream media attacking the usual foe – the market itself – thereby initiating a call for more government intervention.   One may wonder then, at what point will government meddling in the economy effectively push us beyond the point of no return.  Or are we already there? M9EZ497NU9QH

Inflation News: Federal Reserve’s QE Policies Cause Rising Food and Oil Prices

via Google Images

The following excerpt is from Righteous Investor and discusses the out-of-control spending in Washington and what to expect when inflation hits. For instance, February’s deficit was $223 billion dollars.  That translates into $26 per person per day according to Righteous Investor.  Moreover, the government’s insatiable demand for dollars spurs on the Federal Reserve’s Quantitative Easing (QE) programs, which does nothing more than create fiat money for government use.  This translates into more dollars being pumped into the economy and, of course, the inevitable result of inflation.

“Now here is what has been happening: (1) the US government borrows money but doesn’t find sufficient lenders whether domestic or foreign, so the Federal Reserve bank lends to them the remaining shortfall. This is called quantitative easing because the money is created out of nothing. But that is not the end of QE: for Bernanke is also buying old debt as it turns over and finds no new borrowers (see “Hyperinflation when?“). QE greatly increases the amount of greenbacks that are in the money base: view (chart below) and be afraid and weep. (2) Next, commodities go up in price because too many dollars are chasing too few goods–food riots start happening in poorer countries. (3) Then, consumer prices go up. (4) Lastly, workers will get cost of living adjustments if indeed their employer can pay them at all. In any case, the last thing to adjust to this whole mess is people’s take home pay. But unfortunately, the adjustments will be too little too late because the next round of QE has already taken place and the spiral of hyperinflation has reached the next stage even before they receive their next pay cheque.”


Click for Full Article→

Important to note is the Federal Reserve’s recent announcement that it may have to begin its third round of QE in response to sky-rocketing oil prices.  Atlanta Fed President Dennis Lockhart stated at the National Association of Business Economics in Arlington that “If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation.”  As oil increases, so too does the cost of most, if not all, goods and services. This includes anything that requires petroleum in the production process, not to mention increased transportation costs for moving the product to market.  Such is the rationale for QE3.  Add to this recent reports of record food prices and subsequent riots from increased oil prices, and one begins to see the picture. Here we have three of the four points listed above: QE2 by the Federal Reserve last November when they purchased $600 billion in Treasury bonds; increases in food prices leading to disruption in the global oil supply via riots, and thus subsequent increases in food prices; and finally talks of QE3 if and when oil hits $150 a barrel.

The question is, how much longer until the banks begin lending at a healthy rate again.  Despite the media’s on-and-off questioning of large financial institutions’ refusal to lend money, banks still hoard record levels of cash.  Why? According to Project World Awareness, a part of the Emergency Economic Stabilization Act of 2008 encourages banks not to lend. They are not lending because the Federal Reserve is paying them interest not only on their required reserves, but also on their excess reserves.

“But as of October 9, 2008, the Fed began paying interest on all reserves, required and “excess” alike. And not just nominal interest, but interest at a rate which is higher than the “Fed Funds Rate” (the rate banks pay to each other for overnight loans), and even higher than current short-term Treasury yields. At a stroke the Fed eliminated for banks interest-rate risk, principal risk, counterparty risk, and even the capital cost of maintaining an extremely high degree of liquidity. The “cost” to banks of non-lending was driven down substantially.” (I strongly encourage those skeptics of hyperinflation to read this entire article.)

In short, the Federal Reserve is paying our banks not to lend our money to us, and this was signed into law by our government.  Furthermore, once that cash does enter circulation, despite initial feelings of a recovery, prices for all goods and services will leap to a degree that will effectively destroy the greenback’s credibility.  Despite the Fed’s notion that they will be capable of withdrawing excess funds from circulation, many believe otherwise.  According to Monty Pelerin (pen-name), withdrawing the excess funds is not feasible because that would entail selling the toxic waste they bought from insolvent institutions.  Not only did they overpay for those assets, but they have no means of establishing current values.  In this sense, the Fed is simply incapable of withdrawing billions in excess funds from the economy. Consequently, those funds will stay in circulation, continuing to drive up prices.

Additional Notes: I recommend the following article, as it ties in Fed policy to foreign markets and higher food prices around the world with a slant toward U.S. manipulation of currency…an interesting read.

Also, for those not familiar with Federal Reserve Policy, I recommend a previous post of mine written for the interested novice in Fed, money, and inflation matters.

The Federal Reserve: Money, Debt, and Inflation

The Federal Reserve Bank of Philadelphia lobby...

Image via Wikipedia

In my last post, I gave a brief overview of the Federal Reserve’s process of money creation.  In short, money is created with nothing (gold or goods) bolstering its value.  In addition, fractional reserve banking allows the creation of roughly 9-10 times the amount of printed money via electronic entry into the Fed’s balance sheet.  What results in nothing much different from Monopoly (fiat) money, except that this practice is allowed by the American people’s tacit consent.  What I did not discuss is the impact that printing money has on the average consumer and taxpayer.  It is to this that I now turn.

Money Creation Leads to Debt Creation

It is important to remember that before money actually enters the economy (circulation), it is not part of the money supply.  Until money is spent, it does not affect prices and therefore cannot yet be a part of the money supply.  So the next question to ask is how does money enter the economy.  The answer is debt.  For money to enter circulation, it must first be borrowed from the central bank at a given interest rate, termed the discount rate.  Let us say the discount rate is 2%. That means large banks like Chase Manhattan or Wells Fargo, when borrowing from their regional Federal Reserve bank pay a 2% rate on that money. This allows room for those banks to do a mark-up.  They loan that money at higher interest rates, the difference between the two rates being their margin or profit.  However, something is missing from this picture.

If I want to borrow money, I must go to the bank and put up some form of collateral whether it be my house, car, or investment equity.  So I must put up something of actual value in return for money created out of thin air with no real assets backing its value.  This is not a fair market exchange.  If I default on my loan, the bank may confiscate my collateral.  However, a legal contractual agreement requires both parties to put up some form of collateral in the deal, but the bank does no such thing because the money they loan out fails to mirror any form of wealth creation as when a good is produced and sold such as a car, or a given amount of gold is mined and brought to mint.  That money has no real value except by government declaration.  Here we see that the fraudulent nature of our entire monetary system is grounded in the very subtle act of creating fiat money and using it to create debt.  Debt creation, then, becomes the primary impetus for our nation’s money supply.

Debt Creation Leads to Inflation

There is more however.  Keep in mind that the value of money, typically termed as the value of the dollar, is determined largely by how many dollars are available (supply).  As the law of demand dictates, the more of something that is available, the less that commodity will bring at market.  In other words, the more money put into circulation, the less valuable each dollar becomes and the less it will purchase.  This is inflation and results in what we know as a decrease in real income or a decrease in purchasing power.  We are lead to believe that inflation is a natural phenomenon, but in reality it is a manufactured product of our monetary system.  Inflation occurs when our money supply increases at a greater rate than the production of goods and services on which to spend such money.

To illustrate this, I will use a simple thought experiment.  Suppose instead of stimulus spending, the government simply printed enough money to write each household in America a one million dollar check.  This would certainly stimulate spending, as everyone would suddenly have much more purchasing power.  Demand for goods would increase greatly, spurring job growth and economic prosperity in general.  However, such gains would be only temporary because that additional money would push prices up until the market demand adjusted to the new supply of money.  This is best illustrated if we simplify our market.  Let us assume our market consists of only two people and they are buying bread. Let us say that each person has $10 to spend.  The supply of bread is determined by how much each person is willing and able to pay.  If they are only willing to pay $.50, the market will supply 40 loaves of bread. However, if they are willing to spend $10, the market will supply only 2 loaves.  How much each is willing and able to spend is their demand. And as the supply of money increases, so too does each consumer’s willingness and ability to pay a higher price.   If those two people suddenly have twice as much money to spend on bread, the end result would be prices twice as high with no more purchasing power for the consumer.  Thus, we see the concept of inflation manifested as a natural product of an increase in the money supply without a like increase in goods and services.

Money Creation Leads to Inflation

As if this is not shocking enough, the story is not over.  What results is a double whammy for the average consumer and taxpayer.  My argument above is as follows:

P1: Money creation leads to debt creation.

P2: Debt creation leads to inflation.

C1: Therefore, money creation leads to inflation.

The implications of this are staggering.  Not only does our monetary system utilize the mechanism of fraudulent debt obligations to the Federal Reserve Bank by the public, but the consequence is perpetual inflationary pressures.  The data below looks at the trends between the rate of inflation since 1957 as measured by the chained Consumer Price Index for all urban consumers (C-CPI-U) and the rate of growth in the total money supply (TMS).

There are different measures economists and bankers use to monitor the money supply.  The most basic is M1, which includes all cash held by the public plus demand deposits.  The TMS accounts for the following: all cash currency and public demand deposits, government demand deposits and note balances, and demand deposits from foreign governments and private institutions.

Inflation then, acts as a hidden taxation via the erosion of consumer purchasing power, while debt acts as a hook by which the borrower must put up real wealth for fiat money.  Moreover, imprudent government spending on bailouts, stimulus, and earmarks increases the future burden of taxation by states and the federal government.  This practice is known by Keynesian economists as deficit spending and was largely a product of the Great Depression.  What is clear is that creating money for deficit spending devalues the dollar and damages the solvency of the U.S. government because government, as well as private, debt perpetuates inflationary pressures on the dollar.  What we have here is a great potential for future insolvency.  Think what might happen if developing countries like China decided to cash in all their U.S. Treasury securities in fear of the declining value of the dollar.  Given that China owns a significant portion of the American debt obligation, such an act would devastate our economy as trillions of dollars would flood our markets in an attempt to convert them to tangible assets (goods that represent real wealth), plummeting the value of the dollar further and resulting in massive and rapid inflation.  This is just one scenario scholars and our more prudent politicians have examined.

The only solution to this predicament is the absolute abolition of the Federal Reserve Bank and reinstatement of the gold standard.  Only a gold standard can provide the base valuation of a currency.  Without a base by which to regulate the monetary unit, its value can and will be manipulated.  Our Federal Reserve Act of 1913 was not the first.  Believe it or not, a national bank has been tried before in America more than once, and each time it failed due to massive devaluation of the monetary unit.  Again, the only aspect of our monetary system that keeps it in place is the tacit consent of the people to keep playing by and paying for these fraudulent rules.