In
ordinary parlance, when there is a lot of paper or “fiat” (Latin for “let it
be”) money in circulation, prices go up and our dollars buy less. This is
inflation. In two famous photographs of 1923, a German housewife burned “marks”
in her kitchen stove because it was cheaper to burn money than to use them to
buy firewood and a gentlemen pushed a wheelbarrow full of cash to buy a loaf of
bread.
The
U.S. government issued its first money in 1862. They were called greenbacks because of the peculiar green
ink that distinguished them from gold certificates. Before greenbacks, banks
used paper money called scrip. The
dollar could be exchanged for fractions of its stated value.
Dollars
were backed by gold and silver reserves and, until 1963, U.S. bills were called
silver certificates. Today dollars are
called Federal Reserve notes and are backed by the economic integrity of the
U.S. government. In 1971, the Nixon administration ended the backing of the
U.S. dollar by gold and silver.
The
oldest surviving paper money is the Kuan,
issued in China by the Ming dynasty in 1368. Sweden printed the first European
bank notes in 1661 and France had paper money in wide circulation in the 18th
century. The British issued promissory notes
in place of paper money.
Massachusetts soldiers received these promissory notes in 1690 after the siege
of Quebec. There was not much to steal in order to pay the grunts.
The
Federal Reserve keeps a count of the paper money in circulation by M1, M2, and
M3 (money stock). M1 includes all money in spendable or liquid form: cash and
money in checking accounts. M2 includes M1, savings, and short-term deposits
such as CDs (certificates of deposit). M3 includes M1, M2, and the assets and
liabilities of financial institutions such as long-term deposits.
In
a strong economy, demand for currency goes up without any Federal Reserve
intervention and the money in circulation goes up. In a weak economy, demand
for currency goes down.
When
the Fed (Federal Reserve System of banks) follows an easy money policy by increasing the money supply, the economy tends
to grow, companies hire workers, consumer confidence grows, consumer spending
grows, and the economy improves. It would stand to reason that our economy should
have rebounded long time ago since the government and the Fed have been
spending and printing money as fast as presses, or electronic transfers could
go. Unfortunately, money has been going to Europe, the Middle East, and other
overseas entities instead of boosting and creating new jobs in the U.S. The
rest was squandered on TARP, bailing out GM and Chrysler to the benefit of Fiat
and unions, bankrupt green energy companies, unions, Democrat re-election
campaign coffers, United Nations, wars, and fomenting “democracy” in the Middle
East.
When
the Fed adopts a tight money policy
to slow or combat inflation, the economy worsens, spending typically slows, and
unemployment increases. As our economy has worsened, unemployment has climbed,
inflation grew, but the Fed did not adopt a tight money policy and the
government spending has not slowed down, while consumer spending has declined.
We
seem to be in an unusual economic period, which defies the traditional economic
experience of the past. The intensive care of the U.S. economy has revealed a comatose
patient. New factory orders, new housing starts, durable goods, unemployment
figures, M2 money supply, the S&P 500 stock index, and the spread between
the 10-year Treasury and the federal funds rate are the predictors for our
economy’s health. If you were an emergency doctor with the finger on the pulse
of this American economy under the current administration and Congress, you
would be calling code blue.
Consumer
confidence and business confidence are also at an all time low, further proving
that the U.S. economy, the comatose patient, needs a heart defibrillator. Small
business owners are not hiring because they are worried about the liabilities
imposed on them by the high record of new regulations passed last year and the
Obamacare. The looming health care regulations, rationing, uncertainty of fees,
penalties for non-compliance, taxes, and costs associated with such a massive
bureaucratic undertaking with so many loopholes and exemptions has the potential
to bankrupt or destroy many businesses.
The
Consumer Price Index (CPI) is the measure of inflation. The Bureau of Labor
Statistics (BLS) cobbles CPI each month by recording prices of 80,000 goods and
services deemed to reflect the expenditures of a typical urban American
consumer: housing, clothing, transportation, health care, recreation,
education, and others. Currently the CPI is reported at 3.16 percent. Curiously,
food and gasoline are not included and Americans know that gasoline prices have
more than doubled across the country since President Obama took office. Food prices have also grown steadily.
The
CPI uses a baseline year to compare the current inflation rate to, such as
1982-1984. CPI does not take into account the quality of things consumers buy
(which affects price) or a consumer’s change in taste.
In
a recession, the Fed creates money to make borrowing easier and keeps interest
rates low. As things pick up, sellers sense rising demand for their products or
services and begin to raise prices. The rule of 72 is a guide to assess the
impact of inflation. Divide 72 by the reported annual inflation rate to find
out how many years it will take for prices to double.
The
people hit hardest by inflation are those living on fixed incomes such as
retirees. Welfare recipients, Social Security recipients, union contract
salaried employees, and government employees receive COLA (Cost Of Living
Adjustment) remuneration and
benefits.
If
inflation is slow, it is called disinflation.
Deflation is a widespread decline in
the prices of goods and services. Deflation does not stimulate employment and
production because a declining (contractionary) economy puts people out of work
and they cannot afford to buy even at cheaper prices.
Runaway
inflation, deflation, or defaults on loans, balance-trade-deficits, and bad
economic policies are the sign of an economy and a country in turmoil. Traders
manipulate various currencies by trading on the spot, forward, or swap
contracts. Some traders have been banned in certain countries for their illegal
and overt attempt to bankrupt their currency.
If
you think inflation is a modern phenomenon, consider Diocletian’s edict of 301
A.D. to curb inflation. If anyone broke his list of regulations, the punishment
was Death. The edict fixed prices for 1,000 items, such as food, raw materials,
textiles, transportation, and wages.
When
the previous emperor, Valerian, was captured by barbarians in 259 A.D., people
all over the Roman Empire, expecting hard times, rushed to spend all their
money on goods, causing 1,000 percent inflation over 17 years.
Diocletian’s
prices and income policy did not work
but it did not stop him from diverting attention from his government’s
shortcomings by putting the blame on speculators and rich people. Diocletian’s
edict preamble blames “men who have nothing better to do than carve up for
their own advantage the benefits sent by the gods…men who are themselves
swimming in a wealth that would satisfy a whole people, who think only of their
gain and their percentage.”
I
believe that Diocletian’s preamble would please the Occupy Wall Streeters, the
unions, people on government dole who pay no taxes, ACORN, the current
administration, Hollywood sympathizers of Marxism, and the MSM. They pay
constant lip service to “spreading the wealth” and “paying a fair share,”
without specifying when that “fair share” is enough and why perfectly healthy
citizens do not work and prefer to accept government handouts for their entire
lives, from someone else’s stolen wealth. If I think about it, it is a form of
reversed slavery, forcing those who work hard to support those who love sloth.
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