Inflation: Distorting the Economy

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Inflation is a hidden tax, an insidious crime against the public. It is the easiest way for any government to confiscate the savings of the public and for generations, wealth has been transferred in this manner.

Remember, money is supposed to be a store of value, however due to reckless central bank-sponsored inflation, it can no longer fulfill this critical role. Unfortunately, nobody questions the inexplicable loss of the purchasing power of their savings, thus, central banks get away with financial murder.

Inflation distorts the economy, it brings great harm to the public and it encourages speculation and mindless risk-taking. In fact, inflation acts as a poison for retired people since they are no longer able to earn more money in order to maintain their standard of living. So, thanks to inflation, most senior citizens are unable to enjoy the fruits of their labor.

Before we delve further, we want to make it absolutely clear that inflation is defined as the increase in the quantity of money and debt within an economy. And contrary to what the governments want you to believe, inflation is certainly not an increase in the general price level within an economy. Instead, an increase in the general price level within an economy is a consequence of inflation. Allow us to explain this subtle yet critical difference:

For the sake of simplicity, let us assume that America’s money-supply is US$100 and this is the amount available to buy the five oranges its economy produces. Common-sense dictates that under this situation, each orange will cost US$20. Now, let us introduce a banking-cartel called the Federal Reserve, which is able to extend credit (via its debt-based fractional reserve banking system); thereby inflating the supply of money within America to US$1,000. Under this scenario, with a 10-fold increase in money available to purchase the same amount of produce, each of the five oranges will now cost a whopping US$200! An orange is still an orange; it does not change. What changes is the purchasing power of the paper money that is used to buy that orange.

Hopefully, you can see from the above-simplified example, how an inflation in the supply of money and debt causes prices to increase within an economy.

Furthermore, in its attempt to manipulate the masses, the establishment does everything in its power to suppress the official ‘inflation barometer’. Governments achieve this goal by shamelessly doctoring their Consumer Price Index (CPI) and Producer Price Index (PPI) calculations via various seasonal and hedonistic adjustments. The chart below highlights the discrepancy between the CPI-U published by America’s Bureau of Labor Statistics and the SGS Alternate CPI, which is calculated by Shadow Government Statistics using the old methodology. As you can see, over the past 20 years, prices have been rising much faster than the officials would have you believe.

Understating Inflation

Let there be no doubt, inflation is a total disaster and our world will be a better place without this reckless money-creation. Contrary to official dogma, our world experienced tremendous progress during the 19th century, and there was no inflation during that period. The chart below shows the changes in America’s Consumer Price Index (CPI) over the past two centuries. As you will observe, the CPI fell for most of the 19th century as the purchasing power of the American currency rose. However, since the formation of the Federal Reserve in 1913, the CPI has exploded causing the purchasing power of the US dollar to spiral downwards.

CPI Since 1800

Given the fiat-based monetary system and banks’ vested interest in expanding credit, we have no doubt that most nations will experience very high inflation over the coming decade. Accordingly, we suggest that long-term investors protect their purchasing power by allocating capital to precious metals, commodity producers and fast-growing businesses in the developing world.

Puru Saxena
for The Daily Reckoning Australia

Puru Saxena
Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Puru Saxena is the founder of Puru Saxena Limited, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.
Puru Saxena

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Comments

  1. It becomes a lot more obvious why they don’t teach financial literacy in schools.

    Unpopular Truth
    January 19, 2010
    Reply
  2. i vote The Daily Reckoning
    as the
    Global Economics Ministry
    for a Global Currency
    in the New World Order
    ;-j

    Reply
  3. @Unpopular Truth: don’t worry, help is at hand. Gordon Brown is advocating a program for exactly this in Britain, land of the brave, home of the free. It is, if I read correctly (my eyes don’t align well when I am laughing hysterically and rolling on the ground), going to involve learning about credit cards, and managing debt.

    Gernot Hassenpflug
    January 20, 2010
    Reply
  4. Debt is a way of forcing submission in return for short term material gain – lend something, get it (and more) back, and in the mean time the person is yours – they will do pretty much anything, depending on price. Inflation is a necessary part of the equation, otherwise people (and nations) fail to see the necessity of being in perpetual debt. Indebted people and nations will do as their creditors say, or else – watch Iceland, for example. So be very careful who you borrow from.

    Reply
  5. DAn, 21/01/’10 “…in the mean time the person is yours – they will do pretty much anything…” But remember the old saying “You owe the bank a thousand dollars… you have a problem. You owe the bank a million… the bank has a problem.” (You can probably _double_ those amounts, for more relevance today.) :)

    Reply
  6. That’s what the financial crisis appeared to be, Pete, but is banking going to end up the weaker after all this? They took a hit, but they are going for the grand prize, so I think they are willing to take a battering to get there.

    Reply
  7. There’s no doubt the US and UK banks took a major hit. Even the Canadians were whacked, very temporarily. (Wish I’d bought Bank of Montreal at $26.00! Last time I looked it was well over double that. )

    The ideal is to have, in cash, the identical amount to that you’re borrowing.

    We do live in strange times. It’s entertaining to think that our eldest is getting 6.8% interest from one bank, while we’re borrowing at 6% from another.

    Reply

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