Operation Enduring Inflation
mises.org
by Llewellyn H. Rockwell, Jr.
[Posted November 8, 2001]
Still on the fiscal side, the government can run up more debt and market it among the investing public. The idea of war bonds, for example, has variously come up. But Keynesians don’t like that idea for fear that it will cause people to save more money just when they believe people should be spending more to keep the economy’s head above water.
Now we move to the most likely scenario of all, the tried and true way in which government funds itself: inflation. I know that talking about inflation now is like warning of a bad winter in the middle of a hot summer. With the price of oil falling and interest rates being forced lower and lower, no one seems to think that there is any danger that general price increase will get out of hand.
But there’s a centuries-old definition of inflation that you will find in your dictionary: expansion of the money supply. Over time, the definition was changed to describe the effect and not the cause, the price increases and not the monetary expansion itself. This served to distract people from the real source of the fall in the purchasing power of the dollar.
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Today, the inflation process is more complicated and shadowy. The Fed can permit banks to keep fewer reserves on hand, thus allowing them to expand loans in return for a promise to bail them out in times of trouble. It can also buy government debt with freshly created money (right out of thin air) and put that debt on the asset side of its ledger.
Then it can lower the interest rate it charges its member banks for overnight loans. This is a rate the Fed entirely controls, and lowering it induces more loans (they hope!) and injects new credit into the economy.
The government benefits from this credit-expansion process because it has a ready buyer for its debt, which is now "monetized," which is to say, bought with money that didn’t exist before. Yes, the people pay, but not just yet. It takes a while for the new money to filter out through the economy and (all else equal) increase prices across the board.
If you understand this, you might begin to understand the business pages a bit better, for example when the headlines announce with glee that the Fed has pushed short-term rates down to the lowest level in forty years. If there is no cost to this action, it would have been done long ago. But there is a cost, two costs in fact. The first is that it risks igniting price increases. The second is that it distorts production processes by leading business to believe that there is a stronger basis for producing for the future than there really is.
In the weeks since September 11, the Federal Reserve has zoomed the money supply (as measured by MZM) at an astounding rate of 35 percent (annualized)--an amazing fact when you consider that the economy has actually shrunk during this time. The demand for dollars has gone up due to higher savings, but not enough to permanently sop up all that extra cash sloshing around the world today, thanks to an incredibly irresponsible policy.
So, yes, you will pay for this war, and you will pay through the arteries. Wave your flag and whoop it up while the party lasts, but never believe that the only thing being destroyed are mud huts and their inhabitants. The hangover will arrive right here at home, and the destruction will be all too evident for everyone to see. |
