“During Great Inflations, Societies Turn On Themselves” And Prosecute Minorities … And We’ve Got A LOT Of Hidden Inflation

Inflation Is A Tax

The father of the theory that government stimulus is the way to fight severe downturns – John Maynard Keynes – famously said about inflation:

By this means government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft.

Fed chairman Ben Bernanke also admits that inflation is a tax on the American people:

Money printing creates inflation.

But quantitative easing doesn’t help anyone but the biggest Wall Street companies (and see this, this and this). We can’t inflate our way out of our debt crisis, and without prosecution of Wall Street, all of the stimulus in the world won’t work. Indeed, Bernanke knew in 1988 that quantitative easing doesn’t work.

(War also causes inflation, and we’ve been on an endless series of wars over the past 10 years.)

Stimulus Versus Austerity: A False Debate

And as I’ve repeatedly noted, the never-ending fight between Keynesian stimulus and debt-cutting is a false debate. It is really a debate between helping the American people or continuing policies which simply redistribute wealth upwards to the richest .1%.

Stimulus could work … if it went to the American people and Main Street, instead of the Wall Street fatcats. And the Fed could easily deploy trillions into the economy if it simply stopped paying banks to park their excess reserves at the Fed.

Inflation Causes Infighting and Oppression … And We’ve Got a Lot Of Hidden Inflation

Société Générale strategist Dylan Grice writes:

By issuing bonds to itself the government seems to have miraculously raised revenue without burdening anyone else. This is probably why the mechanism is universally adopted throughout the world’s financial system. Yet free money does not, and cannot, exist. Since there can be no such thing as a government, or anyone else for that matter, raising revenue “at no cost” simple logic tells us that someone, somewhere has to pay.

But who? This is where the subtle dishonesty resides, because the answer is that no-one knows. If the money printing creates inflation in the product market, the consumers in that product market will pay. If the money printing creates inflation in asset markets, the purchaser of the more elevated asset price pays. Of course, if the printed money ends up in asset markets even less is known about who ultimately pays for the government’s ‘free lunch’, because in this case the money printing sets off its own dynamic via the perpetual Ponzi machine that is the global financial system. The ‘free lunch’ providers will be the late entrants into whatever asset-bubble or investment fad the money printing inflates.

The point is we can’t know who will pay, only that someone will pay. Thus the government has raised revenues without even knowing upon whom the burden falls, let alone telling them. Compare this to raising explicit ‘honest’ taxes, which are at least transparent. We know who levied the sales tax or the income tax, when it was levied, when it is payable, and how much has to be paid. The burden of this money printing, in contrast, seeps silently into the economy, falling indiscriminately but indubitably on unseen, unknowing victims.

The economic hardships this clandestine tax operation imposes are real and keenly felt. But because no one knows from where it comes the enemy is unseen. Thus, during great inflations, societies turn on themselves with each faction blaming another for its malaise: the third century inflation crisis in ancient Rome coincided with Diocletian’s infamous persecution of the Christians; the medieval European debasements coincided with surging witchcraft trials; the extreme Central European hyperinflations following WW1 saw whole societies blaming their Jewish communities. More recently, the aftermath of the historically modest asset inflations in the tech market and the US real estate market have seen society turn on “fat-cat CEOs” and “greedy bankers” respectively.

By now, some of you might feel this all to be irrelevant. Surely, you might be thinking, the plain fact is that there is no inflation. I disagree. To see why, think about what inflation is in the light of the above thinking. I know economists define it as changes in the price of a basket of consumer goods, the CPI. But why should that be the definitive measure, given that it’s only one of the many possible destinations in money’s Brownian journey from the printing presses? Why ignore other destinations, such as asset markets? Isn’t asset price inflation (or bubbles as they are more commonly known) more distortionary and economically inefficient than product price inflation?

I believe economists focus so firmly on product prices in their analysis of inflation not because of any judgment over the relative importance of one type of inflation over the other, but simply because CPI-type measures of inflation are easier to see. In doing so, they resemble the fabled driver who lost his keys one evening and was found looking for them under a streetlamp. When asked by his wife why he was looking there when he’d probably lost them further back, he replied “Because here it’s easier to see.”

We know that revenue cannot be raised for one person without costing someone else. We know that money printing generates revenue for the public sector. So we also know that money printing must be a tax. We know that the magnitude of that tax – the inflation rate – can be reliably measured by the increase in the rate of base money growth. Since we don’t know which markets new money will end up in or even when, we know we can’t reliably count on measures of inflation in those markets to tell us what the ‚inflation rate? is. Thus, the only reliable measure of inflation is the expansion of the monetary base. So to those who say there is no inflation, I give you the following chart.

By now, the more polite economists among those still reading may be thinking something like: “What utter drivel you are full of Grice! When there is a recession/depression on and the pressure faced by an economy is deflation, which can become self-fulfilling, the only correct thing to do is to create inflation to protect jobs.”

To this I would reply that every right thinking person wants to see job creation. Those advocating the creation of inflation, or fiscal stimulus are doing so because that’s what the system of logic known as ‘theoretical macroeconomics’ teaches. Yet this system of logic with its deeply flawed epistemological foundations is what brought us here in the first place! The macroeconomic body of knowledge represents no such thing – a cacophony of faiths would be more accurate. The instruments and gauges it recommends policy makers rely on – CPI, trend growth, output gaps, NAIRUs, budget deficits, debt/GDP – are subject to such wide conceptual ambiguity, not to mention estimation error, as to render them utterly meaningless. The fact is the captains of our ship have no reliable gauges. They have no understanding of what a yank of this lever, or a push on that button will ultimately achieve. They just think they do. Intoxicated by trumped up notions of what they know and understand, the drunk driving of macroeconomists is what led us to where we are today.


However, societies work on trust too, and there are equally firm evolutionary foundations for honesty. I know honest economists, honest investors, honest journalists, even … deep breath … honest bankers. Indeed, there is a demand for honesty. There is a demand for honest brokers, fund managers, lawyers, dentists, doctors, plumbers etc. And there is a demand for honest currency.

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  • Nick

    agree with all of it, except “stimulus COULD work”.


    Now, IF they are going to do stimulus, would I rather it go to the people than the banks? Sure. But it still wont help the economy, in fact it would hurt it.

  • Nick

    My point is, you can’t say that the keynesian/free market debate over how to fix the economy is a “false debate” and then act like everyone knows that keynesianism is the way.

  • mikael

    In order for a society to prosper, the cashflow has to be oriented to comon people. That comon people have a stable and sustaiable income or ability to sel or by goods.
    To give the topp more money dont alter anything in the marked, simply by the fact that they are the marked,not us. So its just a ilusion, to “help” the rich, it just piles up on the topp and only helps them.
    And the other aspect is tax cuts, any idiot that is capable of %calculus know that taxcuts helps the allready stinking rich. High rates of intress is a gifgt to get even more money for nothing, the best way of looting a exploiting and helping the allready rich.
    Its plain math, cue bono.
    That system is created only to give the topp 1% hugh amount of income, for nothing.
    Intress or not, we loose.

    Like the comodoty shortings and all that casino/boble industry realeted to food, has to end. The world dont deserve a parasit class, playing with basic nesessetis, that is beyound moral and reason. Its killing people all over the world, and poverty is the basiss.
    Its chrims against humanity. People are dying, not because of a Lack of food, no, because of inflation. A slow but shore way of killing people.
    Its not anything near reasonable, its plain chrime.

    Only when the basic fundaments in any society, food and shelter is sheared so it covers the basic needs, do we all prosper.
    Not before.

  • Before we go groping for honesty, we should demand understanding. This essay clearly doesn’t understand the principles of the proper management of a medium of exchange. And this misunderstanding seems to be universal and goes back through all recorded history.

    Money is just an efficient extension of simple barter. As such, money stands for “a promise to complete a trade”. Money must be managed (created, distributed, collected and extinguished). This is the job of the Exchange Medium Manager (EMM). When a trader wants to trade, he comes to the EMM for a “loan” which is freely granted. He then proceeds to enter into commerce, acquiring things he wants and dispensing with what he has … all using money. When he has completed his trades he “pays back” the EMM and the EMM extinguishes the money. If he doesn’t keep his promise, he DEFAULTS. The EMM must protect the market and thus stands behind all trades. He is governed by the simple relation:


    He is required to maintain inflation at zero to protect the marketplace. Obviously he does this by collecting INTEREST amounting exactly to his DEFAULT experience.

    This relation is every bit as obvious as that common relation: NET WORTH = ASSETS – LIABILITIES. It requires virtually no explanation because it is so obvious.

    The fact that no EMM has ever been able to tell you the level of DEFAULT he has incurred proves we’ve never had an EMM that knows what he’s doing.

    Todd Marshall
    Plantersville, TX

    • Todd, I understand your equation. The excess money (inflation) in the market is a result of borrowers not paying back (default) offset by the amount of money taken out of the market (interest).

      I could agree with your point of view if I could agree with the precepts, that the EMM is responsible for the money and the market. You don’t explicitly state EMM is responsible for the market, but you imply it by saying that EMM must protect the market from inflation.

      In my way of thinking, the market and the medium of exchange are independent of the EMM, however the EMM as a holder of market resource may choose to enter the market as function of capital lending. Capitalism is born of this concept. The same holder of market resources may also choose to consume rather than invest, hence capital expenditure.

      My question: How does your model (or mine) apply to our current financial structure, which is what this blog article is about?


      • In my way of thinking, the market and the medium of exchange are independent of the EMM, however the EMM as a holder of market resource may choose to enter the market as function of capital lending. Capitalism is born of this concept. The same holder of market resources may also choose to consume rather than invest, hence capital expenditure.

        In my way of thinking, capital is not necessary to have an efficient medium of exchange. What is really being managed is trust, not capital.

        My question: How does your model (or mine) apply to our current financial structure, which is what this blog article is about?

        Our current financial structure is very close to my model. The Fed is our EMM. Other EMMs are the credit card companies and concerns like PayPal. The Fed is a bad manager in that they lend to governments which always DEFAULT. Further, they collect INTEREST arbitrarily. And most importantly, they have totally failed at maintaining INFLATION at zero. The credit card companies probably operate closer to my model but something is keeping more competitive concerns from entering the market. The proper EMM will be one that gives me a 15 year mortgage repayable monthly at 0% because for 45 years I have borrowed and paid back a huge amount of money and have never defaulted, in spite of paying usurous and arbitrary INTEREST. This is because I use the golden rule. I won’t borrow if I wouldn’t lend to me (i.e. if I’m not absolutely certain I will complete the trade). Re your essay: I looked back over it and couldn’t find the thesis statement. My closes assessment of it was directly addressed by my comments. The Fed is a bad EMM and following my relation would make them a good EMM. But with the special character of “legal tender”, the EMM should be the federal government (dept. of Treasury); not the Fed. And their operation should be totally open and transparent.

        • Ben Wolf

          Firstly governments do not always default. It is, in fact, impossible for an autonomous currency issuer with a floating exchange rate (the U.S. Federal Government) to involuntarily go bankrupt. It is not revenue constrained. Your argument ignores empirical evidence in favor of personal bias: if governments always default why are Japan’s bond yields at a new low despite twenty years of growing debt? The market is signalling the exact opposite of your assertion that governments “always” default.

          Secondly, keeping inflation at zero effectively means zero economic growth can occur. There must at all times be sufficient currency in circulation to purchase every good and service available within our economy. If the economy grows the supply of money must grow with it, so it isn’t a simple matter of inflation = bad as you suggest, rather the appropriate rate of inflation is entirely dependent upon what the private sector is doing at a given point in time.

          Thirdly fiscal policy also acts as a manager of the money supply, not just the Fed. Taxes and spending are utilized to manage a base value and demand for the dollar, and are arguable more effective at it than any monetary policy.

      • but you imply it by saying that EMM must protect the market from inflation.

        I do not say the EMM must protect the market from inflation. I say the EMM must protect the medium of exchange (thus the exchange media) from inflation. The market can inflate and deflate all it wants. But the exchange media can not. This is a very important distinction and points directly to why commodities make very bad medias of exchange. The only responsibility the EMM has to the market is guaranteeing trades it lends into. This is just emulating direct barter. Another important attribute of a good EMM: He has no interest in prices whatever … the traders set the prices. By observing the relation INFLATION = DEFAULT – INTEREST he has guaranteed that the media itself can have no effect on prices. To do this he need only add up DEFAULTS he experiences and add up INTEREST he collects and those sums must be equal. He doesn’t care if the economy is hot or cold. He doesn’t care about mal-distribution of goods. He only must assure there is never a mal-distribution of exchange media and that it is always in free supply (albeit that may be meaningless to irresponsible traders whose DEFAULT history has caused them to be charged unbearable INTEREST).

  • Dave Mowers

    Wow! So let see if I understand it correctly. If the federal reserve printed money and then fed ex the money to me at home instead of forcing me to get a loan from an intermediary like a “bank” then that money would cost society less and if my interest rate was high it would force me to run my business conservatively while pushing me to drive sales- expansion constantly and putting a large percentage of my profits back in the hands of the federal reserve- my lender who thereby would be controlling inflation by loaning my interest to competitors in my market while not causing hyper-inflation due to over printing?

    Gee, this system must be great for those who got free rides back in the beginning or those who can directly tap the federal reserve for money. I wonder who those people are…..oh yeah the super rich America aristocracy who seem to enjoy endless free rides under this system but would soon find their capital eroding if everyone could do business directly with the federal reserve right?

    So economics has nothing to do with science and everything to do with maintaining existing class structures. Inflation is a lie and so is deflation they are consequences of a causality, a single way of doing something. We all know the solution is to allow people to use anything they want as currency and abolish the single method for transactions which only allows for existing wealth to remain that way while causing poverty. Inflation = wealth creation, Deflation = poverty, Federal Reserve monetary policy = Redistribution. So just like under the King of England everything “economic” is designed to steal money from the commoners and give to the nobles and we have come so far….yeah right so obvious what an advanced society we are!

    • What “system” are you referring to. It’s certainly not the one I describe.

  • Ben Wolf

    The fed has not “printed” money. QE is the purchasing of bank bonds in exchange for cash; an illiquid asset is swapped for liquid assets. The assets swapped net to zero, so there’s no increase in the money supply. There is no mass of hidden inflation waiting to jump out and kill us all, and saying there is simply induces panic to no end. The excerpt posted from Gryce is clap-trap, balderdash and economically ignorant.

  • Forget the economics. We’re a rich society, still one of the richest in the world. If we are going to succeed as a *nation* our rich need to share more, take care of the poor with income support (that goes right back into the national economy in the spending stream), health care, education for the children.

    It’s not about sterile, ideological economic thinking. It’s about answering the question, “Are we rich enough to help the people who need help?”

    I have advocated from the beginning of the crisis poverty-level workfare for the unemployed, single payer health insurance like that in the countries that have health outcomes far better than ours.

    I have the belief that the economy is no healthier than the values that drive the people in it.

    • mark

      Sterile Ideological thinking has no place nor comprehension for questions about rich helping people. Avarice dresses itself as high mindedness.
      Agreed, mean spirited values corrode all social and economic health.

    • Management of a medium of exchange is not about distribution of wealth. It’s about more efficient trade than barter. The medium of exchange is an enhancement of direct barter. Thus, what is being exchanged is “promises to complete trades”. Proper management of a medium of exchange (unlike ours which is defined by our agreement to give the Fed a monopoly in exchange for full employment and zero inflation) is not about full employment. It’s about guaranteeing trades over long periods of time and support of a universally accepted, non-counterfeit-able, hoard-able media of exchange in an environment guaranteed to have no imbalance between the media itself and traders propensity to trade. Further, it is guaranteed to operate with zero inflationary (or deflationary) influence.

  • mark

    Inflationary environments reward the risk takers(geared borrowers) with asset price increases.
    ie Rich get richer
    So monetary policy (towards inflation) is still encouraging risky behavior!? ie instability ie gfc2+?