When I was your age, I used to go to the movies for a dime. I’d get a big bag of candy for a nickel.
I still remember my father saying those words as I headed off to the movies in the 1970s when the afternoon matinees cost $1.75 per ticket, more than 10 times what my father had paid 35 years earlier. I remember because my father said that every time I went to the movies for my entire childhood and all my teenage years. I doubt I’m alone on this.
Consistently Rising Prices
There isn’t an American alive for whom steadily rising prices haven’t been a fact of life for all his or her life. Most employed Americans risk their savings in the stock market, through 401ks or other tax-deferred investments, because everyone knows merely stockpiling cash is useless. It will lose all its value because of inflation.
Just imagine if it were the other way around. Imagine if you could simply put your cash savings in the bank, and without even considering any interest it would earn, see it gain value over time. Imagine if your father or grandfather repeatedly told you that something you were purchasing today used to cost him a lot more when he was your age.
Yes, technology continued to advance, and Americans continued to produce more per capita than they had previously, but prices ceased falling.
Well, for America’s first full century, that was exactly how it was. Prices fluctuated year to year, but over the course of the 19th century, prices fell dramatically. A basket of goods that cost $100 in 1800 cost less than $50 in 1900. That means one could buy twice as much with the same amount of dollars. Average Americans could simply stockpile dollars over the course of their working lives and realize a return on their investment in the form of dollar appreciation.
Contrary to the absurd notion now ingrained in the minds of generations of Americans that economic growth causes inflation, that the economy can somehow “overheat,” all this price deflation occurred during the Industrial Revolution, a period of spectacular economic growth. That makes economic sense. As more goods and services are produced per capita and compared to the supply of dollars, the dollar prices of those goods should fall. And they did.
The 20th century was a different story. Yes, technology continued to advance, and Americans continued to produce more per capita than they had previously, but prices ceased falling. That same $100 basket of goods in 1800, which had fallen to $48.94 in 1900, cost $1,265.14 in 2007. Today it costs $1,588.81. And that is using the Federal Reserve’s current price inflation methodology, which is riddled with tricks to make price increases look more modest than they are.
Automation and Retirement
What happened? Are Americans producing far fewer products per capita than they did previously, as some politicians claim? Nope. Manufacturing output has steadily increased since the early 20th century, recovering from a pullback after the 2008 financial crisis to hit an all-time high earlier this year. The decrease in manufacturing jobs is mostly due to automation, not free-trade deals. But America produces more products than it ever has in its history.
Americans are producing so much more with so fewer people that another perennial silly idea has resurfaced: that technology will render most Americans unemployed. This idea is easily debunked, but the important takeaway for our purposes here is that the explosion in productivity is a massive deflationary force. It should be driving consumer goods prices down.
There are almost four times as many US dollars in existence today than there were a mere 10 years ago.
Also deflationary is the mass retirement of the baby boomers. Retirees only consume about two-thirds of the goods and services they previously did when they were working. In other words, the wave of retirements represents a huge decrease in demand for goods and services, which should also put downward pressure on the price.
So, with these two massive deflationary forces acting upon prices, why aren’t they falling? Answer: The increase in the supply of US dollars has outpaced the increase in the supply of goods and negated the retirees’ decrease in demand. This is what the Federal Reserve has done since its inception in 1913, accelerating rapidly after 1971 and exponentially after the 2008 financial crisis.
A Federal Reserve chart of the monetary base shows the tsunami of money created by the Fed after 2008 when the monetary base was in the $800 billions. It peaked in the $4 trillions during the quantitative easing period and only backed off to about $3.3 trillion during the modest tightening efforts since 2016. That means there are still almost four times as many US dollars in existence today than there were a mere 10 years ago.
Inflation and the Fed
Are Americans producing four times as much stuff? No, not even close. That’s why prices rise every year despite all the real economic forces that should be driving them down. It’s all Federal Reserve money creation—the true definition of “inflation.”
During the entire Progressive era, and especially since the New Deal, Americans have been taught a whole range of economic fallacies designed to do one thing: keep them from realizing they’re being ripped off every day, every hour, every minute, all for the sake of the so-called “common good.”
At the root of these fallacies is the idea that a currency must be “elastic” to provide “tools” for combatting depressions (now euphemistically called “recessions”). One of the tools is the central bank “adding liquidity” to the markets to create jobs. It all sounds very technical and complicated, but it’s not. All quantitative easing, lowering interest rates, or anything else in the Federal Reserve’s so-called “toolbox” amounts to is creating new money out of thin air. They can dress it up any way they want, but that’s what it is when all is said and done.
The Government Is Stealing Your Money
It’s stealing. It’s not as if the Fed can create new capital goods just by adding more dollars to the economy. The purchasing power must come from somewhere. Otherwise, the Fed could just produce a million dollars for everyone, and we’d all be rich. But if they aren’t creating the purchasing power out of thin air, then the recipients of newly created dollars must be getting their purchasing power from someone else.
They’re getting it from you. Let’s say you have saved $10,000 in US dollars. At that moment, you have the purchasing power to acquire some very small percentage of all the goods and services available at that time. Just to make the point, if there were only $1 million worth of goods and services available, you would have the purchasing power to acquire one percent of all goods and services available anywhere.
Americans are told this is necessary to “create jobs.” But how did it become your responsibility to underwrite creating someone else’s job?
When the Fed creates new dollars and they’re lent out to investors, you no longer have the purchasing power to acquire the same percentage of goods. Purchasing power has been taken from you and given to someone else without your consent. This is “stealing,” no matter how many pretty words politicians and central bankers spew to cover it up.
Americans are told this is necessary to “create jobs.” But how did it become your responsibility to underwrite creating someone else’s job? If it is your responsibility, why aren’t you simply asked for the funds rather than having your dollars surreptitiously depreciated?
Americans Are Being Ripped Off
Answer: They don’t want you to realize you’re being ripped off. They know that if they asked the public to give up their hard-earned savings for the sake of “creating jobs” for complete strangers, they’d never agree. So, the Fed steals your purchasing power without asking you. And, as John Maynard Keynes once said, they do it in a manner “which not one man in a million is able to diagnose.”
As of this writing, the stock markets are selling off again. Media are blaming Trump’s tariff tweet on Friday. That the sell-off started two days earlier is troublesome for that theory. It looks more like the market tested the January 2018 high for a second time and backed away.
When the crisis comes, it will be because of the unprecedented monetary tsunami the Fed loosed upon the world from 2008 to 2016.
Trump’s tariffs certainly aren’t helpful and may provide a pin to burst the bubble. But when the crisis comes, it will have much less to do with Trump and much more to do with the unprecedented monetary tsunami the Fed loosed upon the world from 2008 to 2016.
Media are already gearing up to blame the next crash on tax cuts and deregulation, which is absurd (they’re correct that government spending has something to do with it). They’ll say Trump’s pro-free market policies caused the crash, just as George W. Bush’s supposedly did. Democratic presidential candidates will pile on that bandwagon until the axles break.
How long will the American public keep buying this story and allowing the Federal Reserve to loot them with one hand and claim to save them with the other?