Post on Bloomberg

As I mention from time to time, I can never rely even on topical and polite posts to make it through moderation, so since I take the time to type them, I repost them here so I’m sure they will at least appear somewhere. Here is the original link: http://www.bloomberg.com/news/2012-03-14/watch-bernanke-s-little-inflation-capsize-u-s-amity-shlaes.html

Inflation is a vitally important topic. As an extension of the overall concept of monetary policy, I think it is at the core of what everyone needs to know about economics.

Here are a couple of vital points, generally missed by the public and the people who are supposed to understand these things:

1) Inflation is always wealth transfer. It moves, invisibly, the ownership and value of real goods and services from one place to another. Take the case of Weimar Germany. The inflation was VASTLY helpful to the German government, German industrialists, and to everyone who owned means of production. All of them had borrowed enormous amounts of money in the war, and all of them were able to pay their debts easily in inflated notes. Quite simply, absent the inflation if the early 1920’s, the Third Reich could never have been created. People forget that the inflation was brought under control nearly instantly by a man named Hjalmar Schacht, who I think we might call the German Keynes, simply by pegging the value of the mark to something outside Germany. I think it was initially tied to the pound or dollar, then some value of gold.

Inflation was created to transfer wealth from ordinary Germans, in the form of a tax they did not understand, then stopped when that transfer was complete. As I understand the matter, the only reason they did not also pay off their war reparations was because those had to be paid in gold and other real goods.

2) Even though the Fed is uniquely empowered to create money, per se, most price inflation is created as a result of the fractional reserve banking system. Every dollar the Fed creates can, in a hot economy in which a lot of people are borrowing money, create some 20 more dollars as a result of bank pyramiding. That is how Bernanke can increase our money supply by a third or more, and us still not see price inflation. What the Fed does is primary, though.

I deal with these topics at greater length in a treatise I collated for the Occupy Wall Street people. It includes a proposal to democratize inflation to pay off all of our debts. Inflation normally only benefits power elites, but it is a double edged sword, whose polarity can be reversed. Here is that treatise: http://www.goodnessmovement.com/Page23.html