The Con of the Century Is at Risk of Being Exposed: Inflation

Would you like to pay more or less for rent, food, alcohol, childcare, electricity, medical services, education and motor vehicle expenses?

The obvious reply is…less. Preferably, much less.

Why would I even ask this patently dumb question? Bear with me.

Here’s my next question, is inflation good or bad for the economy?

Most people respond with ‘good’. Why? Because everyone knows that inflation is good for the economy.

Who instilled this society-wide belief in the positive power of inflation? Those good folks who know all there is to know about the theory of economics.

Central banks — from the Fed, Bank of England, ECB, Bank of Japan and RBA — are all trying their hardest to create inflation…each one is committed to a targeted inflation rate of 2% or better.

If they say inflation is OK, then it must be OK.

But is it?

Inflation is calculated on an expenditure weighted basket of goodies:


Port Phillip Publishing

Source: RBA

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Isn’t inflation meant to be good for us?

If you’re a believer in the ‘inflation is good’ doctrine, then you should be over the moon when you receive a higher power bill…electricity costs are included under ‘housing’.

Paying more for power is making a solid contribution to moving our CPI number higher. Well done.

And, if you truly want to help the RBA meet its inflation target, then you can do your civic duty by demanding to pay even more for rent, cigarettes, alcohol, food, education and childcare.

In these days of social media advocacy, we can all do our bit for the RBA’s cause. Let’s start a campaign titled, ‘Consumers who want higher prices’. Anyone want to sign up?

No. Why not? Isn’t inflation meant to be good for us?

This is when the two-handed economist enters the debate.

On the one hand, we (as individuals) want prices to deflate, yet on the other hand, we (as a collective) think it’s good for prices to inflate.

Which is it to be?

Do you want prices to fall or rise?

There’s the conundrum.

The economic academics have told us that inflation is good for us…so the collective simply nod in agreement.

But on an individual level, we want the direct opposite.

Why there’s a society-wide failure to make the connection between the two has always confounded me.

Seriously, how gullible are we, as a society, to sanction this central bank lunacy?

Why on Earth would you ‘nod in agreement’ to a policy that erodes the buying power of your dollar by 2% or more each year?

It makes no sense at all.

The problem is we’ve grown up with not knowing anything different. Inflation has been a constant in our lives.

But it wasn’t always that way.

A century-old doctrine that fails the pub test

After a series of financial panics in the late 1800s and early 1900s, it was decided the US monetary system could no longer be left to the vagaries of market forces.

What was the political, bureaucratic and banking solution to this perceived problem? Central control.

The US Federal Reserve Bank was legislated into existence on 23 December 1913.

The Federal Reserve Act established three objectives: maximising employment, stabilising prices, and moderating long-term interest rates.

Stabilising prices? Hmmm.

Prior to the creation of the Federal Reserve, the market was doing a pretty good job of stabilising prices all by itself.


Port Phillip Publishing

Source: Business Insider

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According to Business Insider (emphasis is mine):

In 1913 prices were only about 20 per cent higher than in 1775 and around 40 per cent lower than in 1813, during the War of 1812.

One hundred years after its creation, consumer prices are about 30 times higher than what they were in 1913. This pattern, in varying orders of magnitudes, repeats itself across nearly all countries.

In 1913, prices were 40% lower than they were in 1813. Looks to me like market forces did a pretty good job. What’s not to like about paying less?

Since the Fed took over, prices have risen 30-fold. If stabilising prices was a KPI (key performance indicator), the Fed would have been sacked long ago.

 

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Prior to 1913, market forces corrected the imbalances between inflation (blue) and deflation (red):


Port Phillip Publishing

Source: Advisor Perspectives

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At times, the corrections resulted in a rollercoaster effect — with deflation of minus 20% followed by inflation of 20%.

Markets can be brutal at times…but very effective in sorting out excesses in either direction.

These large swings in economic activity were the Trojan horse used by the US Congress to convince (hoodwink) the masses of the need for central control.

The public were duped with that old line of ‘trust us, we’re from Washington.’ Big mistake. Huge.

The reality has been altogether different.

The creation of central banks (and later, the abolition of the gold standard) handed control of the monetary system to wasteful politicians, greedy bankers and incompetent academics.

The real reason inflation is good, is because — over time — it diminishes the value of debt.

Spendthrift politicians are given free rein to finance extravagant promises and for the banking sector to profit (handsomely) from unbridled loan growth.

The entitlement and debt legacies we have today, together with banks that have grown ‘too big to fail’, are a result of handing control of the monetary system to central bankers who do the bidding of politicians and bankers.

Cast your eyes to the US CPI chart from 1775 and you’ll notice that after 1940, the central banker commitment to produce inflation made a mockery of the price stability objective. Year after year prices increased.

As the chart shows, inflation has been our constant companion for the last eight decades.

We’ve only ever known inflation. The central bankers have indoctrinated us into believing rising prices are good for us.

And while our incomes and assets rose faster than inflation, we never questioned the doctrine. We bought (and borrowed) into the ‘inflation is good’ creed.

The concept of annually indexed incomes gave rise (literally) to the term ‘bracket creep’.

Rising income levels push wage and salary earners into higher tax brackets, delivering more tax dollars to our squandering politicians.

Politicians want inflation, not because it’s good for us, but it’s good for them and their barrels of pork.

Central bankers know who butters their bread, and they’re determined to give us inflation…whether we like it or not.

In November 2002, Ben Bernanke (before he became Fed Chair) delivered a speech at the National Economists Club in Washington, DC.

The title of the speech: Deflation: Making sure ‘it’ doesn’t happen here.

Bernanke boldly stated:

We conclude that, under a paper- money system, a determined government can always generate higher spending and hence positive inflation.

The central controllers know only too well, the debt-funded economic growth model (the one politicians and bankers covet) is totally and utterly dependent upon inflation.

Without inflation, savings trump debt. Consumers refrain from spending today in the hope prices are lower tomorrow. Tax revenues stagnate or fall. Debt levels reduce rather than increase.

Inflation is central to maintaining this century-old economic fraud.

That’s why central bankers are untied as one in ‘making sure it doesn’t happen here’.

Yet, the central banker inflation doctrine fails the most basic of pub tests.

Let’s imagine that we (us) had the opportunity to interview the Treasurer on this topic.

Us: Thank you Treasurer for agreeing to chat with us today. According to the RBA website: ‘The [RBA] Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over time.

Given that you are party to this agreement, obviously you consider this is a worthy objective?

Treasurer: Absolutely

Us: Why?

Treasurer: Allow me to quote from the RBA site, ‘This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community.

Us: OK. Then if that’s the case, which costs should go up ‘sufficiently low’ enough to achieve this target? Electricity, childcare, petrol, food, rents, insurances or perhaps, all of the above?

Treasurer: Well…ah, ah…it’s not that simple.

Us: Really? I thought CPI is measured on the weighted price movement of a basket of goodies.

Treasurer: That’s correct.

Us: Aren’t these goodies in that basket?

Treasurer: Yes. But…

Us: But what?

Treasurer: Sorry I don’t have time for a detailed explanation now. Suffice to say, we are committed to the RBA inflation target AND determined to reduce cost of living pressures.

Us: How do you do that?

Treasurer: Meet those twin objectives?

Us: No. Speak out both sides of your mouth AND keep a straight face?

Treasurer: Lots of practice.

These past few years have shown central bankers that creating their desired level of inflation is not as easy as Bernanke thought it would be in 2002.

There is simply too much unproductive debt in the system.

Even with the lowest interest rates in 4,000 years, people are either…already up to their eyeballs in debt OR are more interested in paying down what they owe OR would prefer to save rather than spend.

The forces of deflation are proving to be more than a match for the world’s central bankers.

They can take rates lower and provide more liquidity to the banking system.

But unless banks willingly lend to willing borrowers, then the inflation needle will not move.

And, as it stands at present, neither banks nor borrowers are all that willing.

Deflation is in our near future. However, central bankers will not be deterred in their quest to make you pay higher prices for goods and services.

Remain alert to that whirring sound…this will be the helicopters taking to the air to drop money and bypass the banking system.

The stakes in this century-old con are going to get a lot higher.

Regards,

Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion


Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Port Phillip Publishing as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.


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