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
the 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.
Best wishes,
Claus
{ 19 comments }
Hi Claus,
Great article. back around the end of ’08 or ’09 when the whole financial system “almost ended as
we know it”.
Do you think they should of just let it happen?, and not bailed out the banks.
Ricky
You are telling the truth Claus. I don’t know why some people don’t want to hear it. My wife works at the largest bank in America and we did not want them bailed out. It was wrong. People do need to understand that they did pay the tarp money back with interest. Can Fannie and Fredie say that? Greed is much of the problem but politions trying to get re-elected and paying back their buddies is the larger problem!
America’s last stand ! Stevie Geithner laughed at ! by Chinese intellectuals ! Take Note ! Last year ! Hidden, smoked over, by Corporate news services, from Americans ! Geithner expounded on his American, ‘my way or the highway,’ economic Bull Shiite in Beijing, only to hear peals of laughter from the most important group of intellectuals in the world, and the same folks he wished to seduce into loaning him great gobs of Chinese money to float even another 4 year President’s Follies, and the American Dream lifestyle horse-Shiite from Corporate America’s baloney, bull Shiite generating propaganda machines !
Ever after that watershed moment in Beijing, China, America has and will continue, on a downward economic spiral. Without Chinese loans, and substituting huge amounts of money printing, America can seize up like an engine without oil and burn out, and that is exactly what is happening. Even America is not big enough to bully all Asia, all the world. The Uber-Rich elite in America cannot bully the whole world into sacrificing, living in poverty and squalor, so they can have caviar and steaks, castles and cars. Only the poor of America, from the bottom upwards through the society, can be screwed good by this new pariah corporatism. Even the foreign oil barons, the parasite OPEC countries are deep into the flesh, sucking the blood out of the remaining Middle Class and even Lower Class Americans. A communist China watches over the corpse, for a moment to jump in for rich carrion, American working class flesh and blood, remains of American riches.
This article outlines the drastic decline that show up on charts and graphs around the world. Right about the 2008 point, terrible upheavals, great flux, rapid ups, downs, even catastrophic violence in the other-wise smoothly sloping curves of the statistical world. A sign of the times? Harbinger of what is to come? results of a burgeoning growth in Asia, China? Industrial burn-out in America? Followed by the Detroit City riches to ashes story, in a decade of destruction, folly, ending in Third World conditions, even worse now than Johannesburg? now, lay-offs in Ohio, at the Tank plants, no more WWII battlefields left in the world? Even Egypt, Tunisia, setting and fine example of peaceful revolution, no need for armaments orders to the great American military/industrial complex ? no great battle-fields for heroes to die on ? A new political environment ? Free from blood-letting ? Educated masses standing shoulder to shoulder, singing, chanting? Jericho’s walls once fell this way? Is the old Book story finally vindicated? A new spiritual power loosed on the world? Even this articles chats and graphs, confess, collaborate, witness, date the change of events! An unstable deeply in debt America stumbles, its proletariat, reduced first to precariat, then disenfranchised completely, a new elite rises, masses of ‘unemployables’ die without medical care franchise, for the sin of unemployability in America? Fair, decent, kind, rescuer of the downtrodden, now creating its own ‘untouchables’, unemployables, class? Even this article indicates some basis for this line of thought!
Hello Uncle B.,
I enjoyed reading your words.
I have two professions and one of them is being a Registered Investment Advisor.
Right now I am not conducting any business as an Advisor but I wish to leave my one profession and only work my Investment business soon as possible.
In the past when I would speak to people about economics instantly 100 thoughts would come to mind. So if I believed to have only 5 or 10 minutes I would have to chose what 3 thoughts of the 100 would be best to speak about.
Things have changed considerably. Now I pick and chose from the 3 best of 1000.
But after reading your message I would like to express some thoughts.
First, please forgive my English. My best attribute is mathematics not English.
And second I hope that I do not offend any other advisors.
Whoever wish to understand much truth about the present condition and also try to comprehend what lies ahead in the future, then I believe there is much history that should be understood. And I am not talking about decades I am talking about centuries.
I have great respect for the many Advisors today, and I enjoy reading opinions and learning from there great knowledge.
But I do believe the vast majority are not finding all the pieces to this big puzzle.
Prosper and safety right? Though “safety” has become a big word.
Think of it like this, a very long game of chess and it’s not over yet.. These people have been playing this game of chess for a long long time. After much intensive study who in this would believes that they can compete with the grand masters? They know our past, they know what we are thinking now, and they know our next move.
Yes, things have changed, but think again, have they?
Today we must focus on “being out of the box” with great vision.
I feel like this is not going to be easy. But I am going to put my best foot forward and try to assist anyone who seeks my help.
I take great pride in maintaining the highest standard Code of Ethics.
Again, I am sorry, I must hold back since I am Regestered.
Wish you all the best!
An excellent article. Our Fed chief should read it.
Long term capital allocation is being distorted. Look at all the houses we have sitting on the market. Who is that much better for vacant abodes? One can either put capital into a gold mine or a new community plant that manufactures products someone can really use. Ultimately the latter will benefit mankind more.
Americans are short term oriented. We are text messaging to the economy with little thought. The distortions will eventually be wrung out. The time this happens will be remembered for decades.
Excellent article — your views are corroborated by other articles published in the WSJ regarding future trends with investments directed towards gold.
Right on Claus!, It is amazing that simple solutions have been replaced by convuluted ideas in the matter of money and finance. Simple ideas like, YOU CANNOT SPEND MORE THAN YOU EARN. or the embrassing monatary policy, that would have earned a ride on the hangmens rope in years past. by stealing the wealth of past hard work through inflation. Hardly anyone even questions these ideas, if they even understand whats going on. When it comes crashing down, who will get the blame?, speculators, free market people, We can assume anyone but the real culprits.
Excessive, unbacked money printing leads does lead to inflation, which directly hits the poorest pensioners the hardest, as I well know, since I’m one of them. The government has lied about inflation, claiming for two years that COLAs were not called since there was little inflation, all the while, my basic, personal costs shows about a 10% increase. That alone has been devastating and deprecating! In fact at that rate, homelessness may be only year or so away!
Cheap, plentiful (to the rich) money definitely creates bubbles. The speculation raises prices of food and other commodities. The world-wide food inflation no doubt has a lot to do the unrest in the Middle Ease, and elsewhere. The poor in the Middle East blame their dictatorial governments, but, perhaps the biggest culprit is the U.S. Treasury/Fed inflating the money supply and setting near-zero interest rates.
Really, the poor of the world are being taken for a ride. Their level of poverty left no slack to cover the inflated price of food. It’s less than amusing that the U.S. supported the Middle Eastern dictatorships for years because of oil, and now the U.S. money policies are leading to revolts against them.
Obviously, this topic is obfuscated, and kept abstruse so that current policies can remain in tact. Our general ignorance is hardly bliss, to say the least. Sooner or later something has to give, it considering other factors it could lead to some sort of revolution, as it already has in the Middle East.
A system based on dishonesty can only endure only for so long!
“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.”
The concentration of wealth in our country is on par with third world hovels. Real wages for the working class have been dropping for years, while the uber wealthy and their teams of lobbyists pay little or no taxes at all. I don’t quite understand how some hedge fund manager who makes a million per week is contributing anything positive to our society. Then when his investments turn sour, Uncle Sam is there to prop him up with free money and TARP. The only way to stop this nonsense is by raising the taxes to 1960’s levels on these pariahs.
Ricky Billinness May 4, 2011 am31 8:54 am at 8:54 am > One school of thought is that by fending off a financial crash, you just wind the springs tighter – so that you get a BIGGER crash a short time later. I’d like to hear a comment on the validity of this. The only justification i can see for the bailout(s) is that the “Community Reinvestment Act of 1977” – authored by Jimmy Carter, pressured lenders to lend money to people who couldn’t or wouldn’t pay it back. Clinton added pressure during his term by stating that: “Inability to repay is NOT a valid reason to deny a loan. Clinton also told the lenders that if they didn’t make these bogus loans, that the Justice Dept would go after them for being racists. Hence, according to what i’ve heard on this, the Fed Govt is in part responsible for this whole mess. The problem is that the taxpayers are having to bear the brunt of picking up the pieces. However, if you elect these clowns, or allow them to continue in office, you ARE (in a sense) responsible yourself. Cheers.
The fact is that most Americans are short term greedy and long term stupid.They have no understanding of economics,incentives or what kind of govt would produce the most prosperity.They only know which politician promises them the most “something for nothing” in the short term and that’s who they vote for.Obama was elected by promising the 95% of “good” people that he would help them by stealing from the evil, rich 5%. How do you expect America to get better with it’s citizens thinking like this?
There is a big difference between wage push inflation and giving future debt obligations(money) to investment bankers to manipulate up all those commodities involved in measures of inflation.
Claus, I like your articles and insights but they don’t tell the whole story either.
You ought to read the prospectus of the GLD. You will find a similar built in inflation wherein the higher the price goes the less it is backed by actual gold.
Seems to me, the weasels are working in concert to scare the public into buying GLD so the investment bankers will have someone to sell theirs to and cash out with a huge profit. They don’t want to be holding the bag like they were in the housing bubble.
Wages are Not up.
Employment is not up.
Therefore Real Demand
The question is whether or not you understand the prospectus: http://seekingalpha.com/article/235929-gld-is-not-overdue-to-buy-200-tonnes-of-gold-an-etf-lesson-part-ii
“How will we know when the gold boom is near an end? We believe we have a contrarian indicator that will give us some valuable clues: it will be when the world’s leading central banks begin to *publicly* consider increasing their gold reserves. That’s a signal to sell your gold.” — The Global Debt Trap
The inflationary policies will actually help America, I now eat a lot of brown rice and am starting to give up beef, pork, chicken, and bacon, and what I like to eat, I might be more healthier in the long run just for being broke. Michelle Obama wants a healthier America, Yes she maybe can say “mission accomplishedâ€. Just like the asshole before her, I smoke less because of price, and drink less because I cannot afford it either, Yes if you are flat broke maybe it is just crazy enough that the healthcare plan might just work. However I had to stop my healthcare insurance, and 401K plan because I’m broke and broken, however I got to keep filling my car to get to work, Something is way wrong here. The people that own the company I work for will make 2-7 million each. Something is way wrong here. Claus I’m just venting on your blog, nothing against you, not trying to shoot the messenger or anything, however I am angry about this whole situation, between SSI and my pension, 15 years ago I thought I was set for life. Everything else was gravy, well things changed. I will be working maybe till 70 now, taking a job from the young that need one for an extra 5 years. What happened to the elderly when England’s dollar collapsed and they lost their reserve currency status of the world? How might this all work out for me? I assume not good, however how bad was it last time around?
Therefore Real Demand is Not up.
I’d rather not buy into their bubble or be super ready to bail and let them hold their own bag of bubbles.
Good luck to all.
“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.”
This is one of my favorite quotes from your book, The Global Debt Trap. Great book, by the way.
The Fed by law must pursue (l) stable prices (2) low unemployment. But whether legal or not it must pursue also (3) a stable international exchange rate for the dollar and (4) economic growth. It isn’t possible to pursue all four simulataneously. How is it doing on (l)? Poorly How about (2) ? Poorly How about (3) Very Poorly. How about (4)? Mediocrely. So the policy of the Fed is to juggle all four of these the best it can which overall is not very good.
Is Bernanke so stupid he really doesn’t understand that destroying the value of a country’s currency is the same thing as destroying that country’s economy, and perhaps the nation, too.
If he isn’t stupid, then he must really want to destroy this country. That would be treason, of course. So, that’s his choice — stupidity or treason — and I don’t think he is a traitor.
Get the man out of there before itr’s too late.
Bernanke and Geitner are financial terrorists and traitors. They should be thrown in jail.