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Money is not wealth — and the people who create it know that better than anyone. This lecture from Academy of Ideas exposes what inflation is really for. New money does not spread evenly; it flows first to banks, politicians, and the politically connected, who spend it before prices rise. For everyone else, it works as a hidden tax that quietly shrinks savings and paychecks. Drawing on Rothbard and von Mises, it shows how the hidden tax of inflation transfers wealth upward — until the artificial boom has to end in a crash.
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like in their obedience to authority learn more at academyofideas.com members prices are going up
because there is an additional quantity of money asking searching for a not increased quantity of
commodities. And the newspapers or the theorists call the higher prices inflation. But the inflation
is not the higher prices. The inflation is the new money pumped into the market. It is this new money
that then inflates the prices. Central banks have spent decades flooding the global economy with
newly created money. We are told this policy, or what is called a monetary inflation, is needed to
stimulate economic growth and to keep unemployment low. But like so many of the justifications that
politicians and bureaucrats offer for their actions, this one is a lie. For as we will
explore in this video, a rapid expansion of the money supply is economically destructive.
It impoverishes the poor and middle class, exacerbates wealth inequality, permits a
dangerous growth in state power, and sets an economy up for a crash. The real reason those
in government favour the policy of a monetary inflation is because it is an effective means
to transfer wealth from the citizens to the state.
Monetary inflation breeds not only poverty and chaos, but also government tyranny.
Few policies are more calculated to destroy the existing basis of a free society than
the debauching of its currency, and few tools, if any, are more important to the champion
of freedom than a sound monetary system.
Money is a medium of exchange.
Money is not wealth.
Money can be used as a measure of wealth, but paper currencies and digits added to bank
accounts are not a form of wealth.
Rather, real wealth consists of the goods and services produced in an economy, which
can be put to use to better our lives.
A central bank can double the supply of money overnight, but this action would not make
an economy wealthier.
There would still be the same amount of food, houses, cars, planes, steel, lumber, oil,
and all the other things that make up the real wealth of a modern economy.
The wealth produced in an economic system and the total monetary value of that wealth
are separate and distinct phenomena, explains the economist George Reisman.
The one can increase without the other.
While an increase in the supply of money by a central bank is not wealth generating, it
is wealth redistributing.
When money is created, it does not enter the economy in a uniform manner with each member
of a society receiving equal numbers of new dollars, pounds, pesos, euros, or yen.
Rather, newly created money enters the economy through specific channels in the form of loans,
bailouts, or asset purchases by the central bank.
The beneficiary of the new money may be a government, a business, or a certain individual,
but whoever it is, they experience an unearned gain.
With the newly created money they can purchase more goods or services, or make investments
at a greater level than would otherwise have been possible.
It should never be forgotten, writes Reisman, that inflation always represents an unearned
gain to whoever is in a position to introduce the newly created money into the economic
system through his spending, and a corresponding loss to the individuals who make up the rest
of the economic system.
When the recipients of new money spend it, or invest it, one of the results is a relative
impoverishment of the rest of society.
For as the new money percolates through the economy it puts upward pressure on prices,
as more dollars compete for an unchanged supply of goods and services.
The higher prices that result from an expansion of the money supply lowers everyone else’s
purchasing power.
The recipients of the new money, in effect, transfer goods, services, and assets to themselves.
could have been purchased by someone else had it not been for the actions of the central bank.
Or as Murray Rothbard explains in his book, What Has Government Done to Our Money?
Monetary inflation confers no general social benefit. Instead, it redistributes the wealth
in favor of the first, and at the expense of the laggards to the race. And inflation is,
in effect, a race. To see who can get the new money earliest, the latecomers, the ones stuck
with the loss, are often called the fixed income groups. As much of this wealth redistribution
favors the government, this central bank policy can be considered a form of covert taxation.
Unlike the income tax, sales tax, or property tax, where the taxpayer is aware that his or
her money is being taken, the covert tax of a monetary inflation is discrete. Creating new
money to fund government spending allows politicians and bureaucrats to divert wealth
and resources to whoever they choose, but as the money spreads through the economy it
puts upward pressure on prices and diminishes the purchasing power of all those who are
not a direct beneficiary of this government spending.
Like any form of taxation, therefore, a monetary inflation is a wealth transfer from the citizenry
to the state.
Or as Rothbard explains, the essence of inflation is the process by which a large and hidden
tax is imposed on much of society for the benefit of the government.
Using a monetary inflation to fund spending allows governments to expand their powers
far beyond the limits that would be imposed on them were they to rely solely on more traditional
forms of taxation.
For most citizens would not consent to paying the high levels of taxes needed to fund modern
governments, and only do so because a large portion of the tax is covert and masked in
a diminished purchasing power.
If governments were honest and directly taxed the citizenry, most people would realize they
were being fleeced and quickly stop supporting the politicians responsible for impoverishing
them.
Some people may contend that the ability of governments to finance their spending through
the creation of money is a benefit of this central bank policy.
For during times of crises, governments claim a heightened need for resources, and printing
money to fund these needs allows them to act without having to take the unpopular action
of raising tax levels.
But as Robert Murphy explains in his book, Understanding Money Mechanics, to claim that
monetary inflation is needed to deal with a crisis really just means that the citizens
of the countries involved wouldn’t have tolerated the huge increases in explicit taxation.
Instead, to finance such unprecedented expenditures, their governments had to resort to the hidden
tax of inflation, where the transfer of purchasing power from their peoples would be cloaked
in rising prices that could be blamed on speculators, trade unions, profiteers, and other villains,
rather than the government’s profligacy.
The insidious nature of a monetary inflation does not end here.
It also drives wealth inequality.
For second to politicians and bureaucrats, the rich are the greatest beneficiary of money
creation.
To understand why we must recognize that one of the key mechanisms by which central banks
expand the supply of money is by artificially suppressing interest rates. Low interest rates
entice people to borrow newly created money through the banking system. And who are the
people most capable of borrowing this cheap credit? Those in the upper class, as they possess
more of the assets needed to act as collateral on loans. With access to this cheap credit,
the rich can spend it to purchase real estate, equities, fine art, vintage cars, precious metals,
and other forms of wealth. The elevated demand for these assets pushes up prices,
and this increases the net worth of everyone exposed to these asset classes, which again,
is primarily those in the upper class. The greatest beneficiaries from the Fed’s policies
of the 21st century, writes Edward Chancellor, were the financial elite, who got to enhance
their fortunes with cheap leverage at a time when asset values were driven higher by easy money,
As one commentator put it, the top 1% of income-earning households that are most exposed to the market economy are dramatically outperforming the remaining 99% that are exposed to the real economy.
In addition to allowing politicians, bureaucrats, and the upper class to leech wealth from the rest of us, there is a further reason why a monetary inflation is economically destructive.
The low interest rates that drive this policy act as false signals, enticing individuals to over-consume and businesses to over-expand, to a degree not warranted by the long-term fundamentals of the economy.
Easy money, explains the economist Henry Hazlitt, creates economic distortions, encourages increased borrowing.
It tends to encourage highly speculative ventures that cannot continue except under the artificial conditions of low interest rates that have given birth to them.
On the supply side, the artificial reduction of interest rates discourages normal thrift, saving, and investment.
It reduces the accumulation of capital.
A commonly used analogy is to compare the flooding of an economy with easy money to a drug addiction.
When an addict is using a drug, he is in euphoria.
idea.
But when the drug is taken away his body and mind crash.
For a booming economy, the drug is the easy money fueled by the low interest rates.
But when interest rates rise and the easy money stops flowing through the arteries of
the economy, a crash ensues.
But the analogy can be taken further.
The crash for a drug addict is necessary to return an individual to a state of sobriety
and health.
And so too is the economic crash needed to return an economy to health.
The crash clears all the economic deadwood, or malinvestment, out of the system and transfers
capital away from inefficient uses and away from unsustainable entrepreneurial endeavors,
or as Rothbard explains,
The depression phase is actually the recovery phase.
Most people would be happy to keep the boom period, where the inflationary gains are visible
and the losses hidden and obscure.
The stages that people complain about are the crisis and depression.
But the latter periods, it should be clear, do not cause the trouble.
The trouble occurs during the boom, when malinvestments and distortions take place.
The crisis-depression phase is the curative period.
Central banks have been flooding the economic system with easy money for decades.
This has been a boon for the growth of the state.
It has enriched the upper class, and it has created bubbles in the price of assets such
as equities and real estate.
But in the process, it has impoverished the middle class and the poor.
And we are now facing the menace of an accelerated rise in consumer prices.
Central banks are trying to tame this increase in price levels by raising interest rates
and tightening credit conditions.
But with so much debt in our system, at an individual, corporate, and governmental level,
A rise in interest rates threatens to collapse the house of cards upon which so much of the
economy is built.
Removing the drug of easy money, in other words, is setting us up for a crash.
Will central banks keep fighting the rise in consumer prices with higher interest rates
and allow a curative crash to unfold?
Or will they follow the pattern of the past several decades and at the first sign of a
serious collapse in equity or real estate prices cut interest rates once again.
If they choose the latter, they will be flirting with fire.
For as Ludwig von Mises explains,
If once public opinion is convinced that the increase in the quantity of money will continue
and never come to an end, and that consequently the price of all commodities and services
will not cease to rise, everybody becomes eager to buy as much as possible and to restrict
his cash holding to a minimum size. Everybody is anxious to swap his money against real
goods, no matter whether he needs them or not, no matter how much money he has to pay
for them. Within a very short time, the things which were used as money are no longer used
as money. They become scrap paper. Nobody wants to give away anything against them.
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Source: Academy of Ideas