No essay on inflation can really end with just its description. [Ed note: read Mark's previous article here] Given that inflation exists and is encouraged (quietly) by the big three: Banks, Government and the Reserve Bank of Australia (RBA) the obvious question is why and what are the benefits?
I’ll start with Government. Government loves the stuff because Governments have only one purpose and that is to spend. Oh and when they run out of tax revenue they borrow to spend.
Within the inflation spiral the first spender gets the greatest benefit. More bang for the buck. The monetary trickle to the broader economy takes about six months before prices are impacted, always up. Yet Government usually never pays the debt back and here’s the rub – they push the debt of into the future for as long as possible because as the value of the money declines the real cost of the debt is reduced.
Now I can hear you say “John Howard paid the Government debt off in his last term.” OK! I admit it, he did and left a surplus to boot. First of all “No new Tax John” brought in the GST early 2000 and from a revenue raising point a master stroke, because inflation is now automatically indexed to price raises the government actually gets way more money and very quickly.
Next, as prices go up, wages sluggishly follow. And now comes bracket creep. More money for the Government.
The next stream of inflation revenue – and last point for now, is a tax on savings and super contributions because as they go up well… you know the rest from here.
Now back to our balanced budget, I’ll refer to another ‘poly’ the Hon Kim Beasley. In his farewell speech to Parliament he made reference to this amazing balanced budget and he referred to it as serendipity and begrudgingly I will agree with Kim. I mean the boom in resources started early 2006 so tax revenues would not have started really flowing to the Government to mid 2007. John Howard simply had no time left to spend it. But he tried. The spending was ultimately left to Kevin Rudd.
Why do Banks like inflation, well rather than leave the RBA by itself I will draw it into this discussion as well. I will use an analogy, banks are the monetary spigots of the economy as money flows they control the taps and don’t they charge for that privilege.. Charges for going in and charges for going out. Another term is Money Velocity:
“The average frequency with which money is spent.”
With the advent of computers the transactions for the most part are ‘plastic.’ Cash is relegated to a distant cousin. So why do they like inflation besides the obvious transactional increase they get to co create money both with your help and the RBA?
Recently, Kris made mention of off-balance sheet liabilities in the banking system as a separate entry to deposits. Well take a big breath. First, if you go to the RBA site you will find the published money supply figure:
“Financial Aggregates – March 2009….M3 has grown year to date by 10.9%.”
Put simply they printed 10.9% of the total money supply this last year. Where did it go? Mostly to the banks in the form of loans which are then loaned – supposedly – to us. Here comes the really evil part. Banks on the whole can lend out 90% of the money on deposit, even if they borrowed it. And keep a fraction of it in reserve. That’s called “Fractional Reserve Banking.”
Ninety per cent. So, what’s the big deal? Let me give you an example:
Bank A receives $1000 deposit….lends out $900, and keeps $100 in reserve
Bank B receives $900 deposit….lends out $810, and keeps $90 in reserve
Bank C receives $810 deposit….lends out $729, etc…
Till finally the original $1000 grows to about $10,000
Now the scary bit, there is now $9,000 of loans out in the market but only $1,000 of it was lent at interest. So to pay it, there simply is not enough money out there. So where do you and I find it answer: we borrow it. Confused, I am. Scared? You bet, because if one person in that chain fails to pay their debt, it all unravels. Does this sound familiar? Think: Derivatives.
So in conclusion the addiction to debt or credit fuels money growth, which in turn devalues our money forcing us to work harder and borrow more which in turn increases consumption because we won’t save and we ultimately seek out value in areas like the stock market or the buying of assets which then pushes up asset prices, need I go on?
I will leave you with a small nugget of information…
Throughout history there have been over 3000 Fiat currencies (paper or in our case plastic). Every one of them has collapsed to zero. Is it really possible this time will be different?
Yours in Freedom, Liberty and Sound Money
Mark Thompson
(Thoughts from an old builder)
for Money Morning Australia
{ 2 comments… read them below or add one }
Where can I learn more about the 3000 FIAT currencies?
We are lead to believe that borrowing more and more is good for us, but all we are doing is charging towards devaluing our dollar…..Scary stuff.
We are currently chin deep in a crisis that has been planned for a long time. It is impossible now to escape the resulting calamity. But if you wish to read about the conspiracy for posterity sake, Google this: “Adam Weishaupt 1776″; and this: “Jeckyl Island”; and this: “How Rothschild came to rule”.
“No one can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve both God and Money.” Matthew 6:24
“The world is passing away, and also its lusts; but the one who does the will of God lives forever.” 1 John 2:17