The Hidden Consequence of Inflation

by Claus Vogt

Last Wednesday Federal Reserve Chairman Ben Bernanke repeated what he stands for: A rampant inflationary monetary policy. He seems totally oblivious with the sad history of inflationary policies. And he obviously ignores the grave outcome that his and Alan Greenspan’s money printing policies had on the financial markets, the economy, and general welfare. 

So I’d like to discuss an often overlooked consequence of money printing: The relationship between inflation and poverty.

Inflation Replaces
Thrift with Theft

Inflation leads to an impoverishment of great cross-sections of the population. During hyperinflationary phases, such as experienced by Germany in the early twentieth century or by Zimbabwe in the twenty-first century, this process happens quickly. With relatively moderate inflation rates, it occurs far more slowly. But in either scenario, thrift is replaced by theft — it reduces your wealth.

Why? 

The newly created money, which is not backed by tangible assets, always goes into circulation at some point within the economy. In other words, someone is always the first to possess the new money and the first to spend it. 

These first beneficiaries are the inflation winners — they enjoy an incalculable advantage, for they can make purchases on the market at old prices, before the new demand drives prices higher. 

However, those who are last in line to get the new money are the inflation losers, forced to pay higher prices.

Bubbles Distribute
Wealth Unfairly 

That is also the result when inflation manifests itself in the form of speculative bubbles. Examples include: The stock market bubble of the late 1990s, the recent housing bubble which was accompanied by an echo stock market bubble, and now, during the current echo stock bubble. 

The new money causes asset prices to rise sharply. Those who own them may see their wealth grow significantly, at least in nominal terms. And Fed members even brag about this so called wealth effect. 

But those who don’t own such assets and can’t afford to buy them are left behind, unable to compete or cope. 

The relatively small group of asset holders becomes richer, while those depending on fixed incomes or earning low wages become the losers. The longer this policy keeps going, the wider the gap becomes between rich and poor. 

And now all over the world, especially in the U.S. … 

The Gap between Rich and
Poor Is Growing! 

Today the small number of super-rich holds a far greater share of total wealth than a few years ago. This is not always a bad thing, as long as the wealth is generated by entrepreneurial effort. 

After all, the men and women behind great interventions and products that make the world a better place should be rewarded. This is indeed a necessary mechanism propelling progress and wealth accumulation.

Yet it is precisely this connection — between effort and reward — that is increasingly weakened during speculative booms and inflationary periods based on easy money! 

Here’s what happens: The government bloats the money supply. And rich rewards are lavished on those who contribute little value to society. Then the connection between effort and reward becomes so arbitrary that it becomes meaningless.

In that kind of environment, real interest rates are negative. Consequently, he who saves money is constantly losing buying power, as illustrated in the following chart.

So it’s not a shock that during the late 1990s the savings rate in the U.S. fell to the lowest levels ever seen. 

And as you can see on the chart below, in spite of rising swiftly during the past recession, the U.S. savings rate is still historically low.

Savings are important. They are the source of real investments and therefore the basis of wealth creation. But this important piece of economic knowledge seems to be lost with our politicians and central bankers …

They are in the bubble blowing business — doing everything in their power to discourage saving and encourage risk taking and speculation. What’s more, they’re neglecting the devastating aftermaths of previous burst bubbles.

 

Unstable Money Threatens

Unstable Money Threatens

Tthe Foundation of Society

Stable, reliable money is the foundation of healthy, balanced, and sustainable growth. In contrast, abusing the printing press to create money leads to the impoverishment of broad sections of the population. 

The policy of extreme easy money pursued across the globe, which Ben Bernanke is advocating so emphatically, is highly unjust. It’s in many respects a fundamental assault on society. Not only does it lead to growing income inequality, it also threatens to disrupt the very social harmony that Keynesian politicians pay lip service to.

Ben Bernanke has again made clear that money printing will be with us as long as he is in the lead. This tells me that the secular bull market in gold is not in jeopardy. 

Therefore I continue to suggest gold bullion and gold ETFs, such as SPDR Gold Shares (GLD). Yes, there will be corrections from time to time, even severe ones. However, they should be greeted as buying opportunities.

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