In Jim Cook's Archive


Left wing economists like Paul Krugman are warning that cutting the deficit will harm the economy.  He heaps scorn on worrywarts who see repercussions from not cutting back on government spending.  He downplays inflation fears.  The absence of any real inflation concerns is the great flaw among Keynesian economists including our central bankers.  They talk a good game about keeping inflation low but their expansionist monetary policies promise to exterminate middle class savers and retirees on fixed incomes.  In fact, monetizing our government’s debt makes runaway inflation inevitable.

The Austrian School economist Murray Rothbard (1926 – 1995) had this to say about the Federal Reserve: “The drum-fire of propaganda that the Fed is manning the ramparts against the menace of inflation brought about by others is nothing less than a deceptive shell game.  The culprit solely responsible for inflation, the Federal Reserve, is continually engaged in raising a hue-and-cry about ‘inflation,’ for which virtually everyone else in society seems to be responsible.  What we are seeing is the old ploy by the robber who starts shouting ‘Stop, thief!’ and runs down the street pointing ahead at others.”

Professor Rothbard and his mentor Ludwig von Mises (1888 – 1973) agreed that money and credit expansion did not necessarily impact prices immediately.  Nor did inflation impact all asset classes, goods and services uniformly.  However, it would inevitably take a toll on the purchasing power of the currency.

Mises further warned, “As an inflationary policy works only as long as the yearly increments in the amount of money in circulation are increased more and more, the rise in prices and wages and the corresponding drop in purchasing power will go on at an accelerated pace.”

Government and its inflationary policies had no greater enemy than Murray Rothbard.  He wrote, “The natural tendency of government, once in charge of money, is to inflate and to destroy the value of the currency.  To understand this truth we must examine the nature of government and of the creation of money.  Throughout history, governments have been chronically short of revenue.  The reason should be clear: unlike you and I, governments do not produce useful goods and services which they can sell on the market; governments, rather than producing and selling services, live parasitically off the market and off society.  Unlike every other person and institution in society, government obtains its revenue from coercion, from taxation.

“If taxation is permanently short of the style of expenditures desired by the State, how can it make up the difference?  By getting control of the money supply, or, to put it bluntly, by counterfeiting.

“Indeed, the best way to penetrate the mysteries of the modern monetary and banking system is to realize that the government and its central bank act precisely as would a Grand Counterfeiter, with very similar social and economic effects.”

Two decades ago I became friends with an economist by the name of John King.  He had written a book stressing the likelihood of deflation.  Since I occasionally talked on the phone with Murray Rothbard who was then the distinguished professor of Economics at the University of Nevada, Las Vegas, I decided to send him John King’s book for his opinion.  I chuckle to this day over his letter of response which dismissed the book as “a veritable tissue of error.”

A much greater threat according to Murray Rothbard was the possibility of hyperinflation.  “As inflation proceeds, people begin to realize that prices are going up perpetually as a result of perpetual inflation.  Now people will say: ‘I will buy now, though prices are high, because if I wait, prices will go up still further.’  As a result, the demand for money now falls and prices go up more, proportionately, than the increase in the money supply.  At this point, the government is often called upon to ‘relieve the money shortage’ caused by the accelerated price rise, and it inflates even faster.  Soon, the country reaches the state of the ‘crack-up boom,’ when people say: ‘I must buy anything now – anything to get rid of money which depreciates on my hands.’  The supply of money skyrockets, the demand plummets, and prices rise astronomically.  The monetary system has, in effect, broken down completely, and the economy reverts to other moneys, if they are attainable – other metal, foreign currencies if this is a one-country inflation, or even a return to barter conditions…The monetary system has broken down under the impact of inflation.”

We are wedded to the view that such an inflationary holocaust has become probable.  It behooves all Americans to factor this possibility into their financial planning.  Fortunately, there are assets available that have a historic record of offsetting a depreciating currency.

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