If you listen to government officials and central bankers talk about price inflation, you might think they don’t have the foggiest idea of what caused it. It might have been supply chain problems, or perhaps it was Putin’s fault. Maybe greedy corporations are jacking up prices. Or it could be that consumer expectations are driving price inflation higher.
They can’t tell you exactly why prices keep rising, but trust them… they’re doing their best to stop it!
But this is all deflection and obfuscation. They’re causing price inflation. When they point fingers everywhere else, they’re either unforgivably ignorant or they’re lying.
Economist Milton Friedman was right – inflation is always and everywhere a monetary phenomenon.
Or as economist Daniel Lacalle put it, “The government’s destruction of the purchasing power of the currency is a policy, not a coincidence.”
But why? Why would the government devalue its own currency?
The answer is simple – it’s the only way they can keep making the government bigger without causing a revolt.
Nothing the government does is free. The citizenry ultimately forks over every penny the government spends. But the government people know they can only raise direct taxes so high before the people pull out the torches and pitchforks. To avoid this, the government borrows money.
But borrowing doesn’t really solve the problem. It just piles up debt, and debt has to be repaid.
The U.S. national debt stands at nearly $34.6 trillion. The Biden administration spends more than half a trillion dollars every single month, running massive deficits that push the debt higher at a staggering rate.
But that’s just a drop in the bucket compared to unfunded liabilities that the government will have to cover in the future. The estimated unfunded Social Security and Medicare liability alone amounts to $175.3 trillion. That’s six times the U.S. GDP. As Lacalle put it, “If you think that will be financed with taxes ‘on the rich,’ you have a problem with mathematics.
So, how do politicians and government functionaries try to “fix” it?
With the inflation tax.
This is precisely why governments want to devalue their currency. As Lacalle explains, inflation is the equivalent of an implicit default.
“It is a manifestation of the lack of solvency and credibility of the currency issuer.”
But the average person doesn’t realize it. Because government people have effectively redefined inflation and can blame rising prices on “the reasons.” Inflationary policies allow government people to continue their borrowing and spending malfeasance out from under the cloud of blame.
As Lacalle explained, “Governments know that they can disguise their fiscal imbalances through the gradual reduction of the purchasing power of the currency.”
This allows them to achieve two things.
“Inflation is a hidden transfer of wealth from deposit savers and real wages to the government; it is a disguised tax. Additionally, the government expropriates wealth from the private sector, making the productive part of the economy assume the default of the currency issuer by imposing the utilization of its currency by law as well as forcing economic agents to purchase its bonds via regulation. The entire financial system’s regulation is built on the false premise that the lowest-risk asset is the sovereign bond. This forces banks to accumulate currency—sovereign bonds—and regulation incentivizes state intervention and crowding out of the private sector by forcing through regulation to use zero to little capital to finance government entities and the public sector.”
The result?
An ever-growing government at the expense of the private sector and the economic well-being of average people.
“When governments have exhausted their fiscal space, the crowding-out effect of the state on credit adds to the rising taxation levels to cripple the potential of the productive economy, the private sector, in favor of constantly rising government unfunded liabilities.”
Gold Tells the Story
Real money – gold – tells the story of government monetary malfeasance.
Lacalle noted that financial asset reflects “evidence of currency destruction.” The dollar price of gold has gone up 89 percent in the past five years. Despite setting records, the S&P 500 is up slightly less – 85 percent. And government bonds? The U.S. aggregate bond index is up a paltry 0.7 percent.
Gold and equities continue to climb higher while bonds do nothing. Lacalle said, “It is the picture of governments using the fiat currency to disguise the credit solvency of the issuer.”
And even equities are getting a hidden boost from price inflation. Money Metals Exchange CEO Stefan Gleason pointed out that, yes, stocks do indeed continue to race higher – in terms of depreciating fiat dollars. But stocks are actually losing value when priced in gold. U.S. stocks haven’t hit a record in terms of gold in more than two decades.
Lacalle argues that gold isn’t expensive at all when viewed through the lens of price inflation.
“It is exceedingly cheap. Central banks and policymakers know that there will be only one way to square the public accounts with trillions of dollars of unfunded liabilities. Repay those obligations with a worthless currency. Staying in cash is dangerous; accumulating government bonds is reckless; but rejecting gold is denying the reality of money.”
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