Inflation Is A Failing Government Policy

Consumer inflation pain and rising food cost or grocery prices surging costs of supermarket groceries as a financial crisis concept with 3D render elements. - The Problem Ain’t The Cost Of Money – It’s The Cost Of Stuff!

Our card-playing friends continually complain about “never-ending, sky-high grocery prices.” When asked, I try to explain inflation in four plays or less…. I can’t do it.

The government’s inflation data and rhetoric are complete BS – fostering the belief inflation is caused by one political party, and can be cured in the next election. If only it were so easy!

Ludwig von Mises explains:

“The most important thing to remember is that inflation is NOT an act of God, that inflation is NOT a catastrophe of the elements or a disease that comes like the plague. INFLATION IS A POLICY.”

Why a government policy of deliberate inflation?

It begins with debt. The gold standard limited what the government could spend. Since Nixon removed it, spending has skyrocketed.

FRED Chart - Federal government total expendituresCowardly politicians avoid raising taxes, borrowing the shortfall to cover their outrageous spending.

Cartoon pig smiling hoarding money dollarsCongress rivals Sam the Sham with their political Wooly-Bully dance, pulling the wool over the eyes of an uneducated public, each time they raise the debt ceiling to buy more votes. Asking politicos to live within their means is asking them to perform an unnatural act. Borrow and spend is all they know.

The US Debt Clock keeps score:

062024 US Debt Clock Screenshot

Current debt is approaching $35 trillion. In 1960, debt was 52.83% of GDP; today it’s approaching 130% – the point many consider the point of no return.

The “uniparty” piles on. They’ve legislated “unfunded” promises to pay government benefits in excess of $215 trillion, 6 times more than the current debt.

062024 US Debt Clock Social Security Liability ScreenshotWhat does this mean?

With inflation spiraling out of control, the Fed was forced to raise interest rates back to historic normal, around 5%. Current interest cost is surpassing our military budget.

The Heritage Foundation explains, American Taxpayers Are Now Slaves to Interest Payments:

  • “Interest on the federal debt is…consuming 40% of all personal income taxes.
  • If federal finances continue on their current path, we are only a few years from the entirety of income taxes being needed to finance the debt.”

Irresponsible fiscal governance has caught up with the politicos. Bill Bonner regularly reminds us – “Inflate or die.”

The Secret Government Policy 🤫

How do governments get out from under debt, without raising taxes, and avoid a citizen’s revolt, while maintaining their power?

Investopedia explains Financial Repression:

“Financial repression is a term that describes measures by which governments channel funds from the private sector to themselves as a form of debt reduction. The overall policy actions result in the government being able to borrow at extremely low interest rates, obtaining low-cost funding for government expenditures.

This action also results in savers earning rates less than the rate of inflation and is therefore repressive….

KEY TAKEAWAYS

  • Financial repression is an economic term that refers to governments indirectly borrowing from industry to pay off public debts.
  • These measures are repressive because they disadvantage savers and enrich the government.
  • Some methods of financial repression may include artificial price ceilings, trade limitations, barriers to entry, and market control.

…. A government steals growth from the economy with subtle tools like zero interest rates and inflationary policies to knock down its own debts.

…. In 2011, economists Carmen M. Reinhart and M. Belen Sbrancia hypothesized in a…paper, entitled “The Liquidation of Government Debt,” that governments could return to financial repression to deal with debt following the 2008 economic crisis. ….

Reinhart and Sbrancia indicate that financial repression features:

  • Caps or ceilings on interest rates
  • Government ownership or control of domestic banks and financial institutions
  • Creation or maintenance of a captive domestic market for government debt
  • Restrictions on entry to the financial industry
  • Directing credit to certain industries”

Those policies are well underway.

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Chuck Butler warned us about government control:

Take Control of Your Retirement“I’m concerned that the Gov’t would require retirement accounts (IRA’s and 401k’s, etc.) to buy Treasuries and nothing else, which would pick up the borrowing shortfall. And since the treasuries couldn’t be sold, retirement accounts would have to wait for maturity to cash out.”

Chuck’s fears are well-founded. Investopedia continues:

“The same paper found that financial repression was a key element in explaining periods of time where advanced economies were able to reduce their public debt at a relatively quick pace. These periods tended to follow an explosion of public debt. …. More recently, public debts have grown as a result of stimulus programs designed to help lift economies out of the Great Recession.

The stress tests and updated regulations…essentially force these institutions to buy more safe assets. Chief among what regulators consider a safe asset is, of course, government bonds.

This buying of bonds helps, in turn, to keep interest rates low and potentially encourages overall inflation—all of which culminates in a quicker reduction in public debt than would have otherwise been possible.”

Fed Chairman Paul Volcker tamed inflation by raising rates higher than the inflation rate, something today’s Fed won’t do.

Chuck explains the Fed’s sham:

“I’ve continually said the Fed wasn’t really interested in taming inflation, but they put on the show of doing that. …. If they were really interested in taming inflation, they would have raised rates to 10%.”

Financial Repression policy includes lying to the public about what true inflation really is. The Bureau of Labor Statistics regularly makes adjustments to the calculations in an attempt to hide the truth. Here is one example:

DeepNewz explains:

Emoticon emoji shocked long nose lies liar lying“The U.S. Bureau of Labor Statistics (BLS) has decided to exclude coffee prices from the Consumer Price Index (CPI) inflation data starting April 2024. …. This decision comes amidst reports of a significant increase in coffee prices, which rose 27% last month and 78% since September 2023. The April 2024 CPI inflation report,…will be the first to omit coffee price inflation, a move criticized by many as a method to manipulate reported inflation rates.”

Chuck makes it clear in his Daily Pfennig:

“See why I call CPI, STUPID? When items in the basket of goods gets too expensive, they just remove it and put something in its place that’s not expensive, thus they are able to keep inflation from really showing its true rate!”

John Williams at Shadowstats calculates inflation as it was done in 1980 (Volcker years), comparing it to current reported numbers. Without the “arbitrary adjustments,” reported inflation would be more than double the BLS phony numbers. It’s no wonder our card players are complaining:ShadowStats Chart - CPI and ShadowStats Alternate Inflation 1980 BaseA flaw in the theory

If financial repression helps advanced economies reduce their public debt at a relatively quick pace, why isn’t it working? We’ve had control over the banks, caps on interest rates, and double-digit inflation, yet our debt is going through the moon.

I reviewed the entire report, “The Liquidation Of Public Debt”. Page 40 explains:

Inflation is most effective in liquidating government debts when interest rates are not able to respond to the rise in inflation and in inflation expectations.

This disconnect between nominal interest rates and inflation can occur if:

  1. the setting is one where interest rates are either administered or predetermined (via financial repression);
  2. all government debts are fixed rate and long maturities and the government has no new financing needs (even if there is no financial repression the long maturities avoid rising interest costs that would otherwise prevail if short maturity debts needed to be rolled over); and
  3. all (or nearly all) debt is liquidated in one “surprise” inflation spike.”

Volcker raised interest rates sky-high, we had a surprise inflation spike, a short, difficult recession, but the economy got back on track.

The study provides examples where Financial Repression drastically reduced government debt as a percent of GDP, but it took a decade or more. The primary losers were savers losing wealth to high inflation. Chuck Butler regularly uses the UK as an example, they had to hit rock bottom before things came back.

“We have two parties here…. One is the evil party, and the other is the stupid party…. Occasionally, the two parties get together to do something that’s both evil and stupid. That’s called bipartisanship.”

— M.S. Evans

The flaw in the theory today is “the government has no new financing needs.”

The uniparty wastes trillions, favoring the elite and their donors. Bipartisan spending means everyone gets something; expenses don’t get cut.

I asked Richard Maybury if this will stop. He explained:

“I don’t think it will stop. What generally happens in such situations is the power junkies run the country into the ground, until a wave of despair sweeps both the general population and the civil servants. The political class realize they have wrecked any possibility of fixing what they broke, and they quietly panic.”

A reset will eventually occur, most likely including the dollar losing reserve currency status. Throughout history empires have spent themselves into oblivion, gone through the doldrums, recovered and still exist today.

For government-sanctioned financial repression to work, it requires high inflation (stealth taxes) robbing wealth from citizens. We are well along the way. It also requires spending restraint – and that isn’t happening.

A responsible media would explain inflation is the engine that drives the secret government policy of Financial Repression- robbing wealth from the citizens to enhance their political power. If it’s not stopped quickly, the middle class will soon be wiped out.

This reinforces my belief in what Chuck Butler and Richard Maybury regularly preach; those who survive the process (and do well) will own gold and other inflation-beating assets. Not everyone will be wiped out…

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On The Lighter Side…

Thanks to all the kind readers who dropped me a note about last week’s personal article. I wasn’t sure how well it would be received, and it apparently hit home to many of you. Taking the time to write was much appreciated.

While I’m no longer advertising on Facebook, I still have a Miller On The Money Facebook page. I make one post each day with a timely quote and graphic. Readers can help out by following the page and liking the posts, it helps give us more visibility. Feel free to forward our letters to any and all…and suggest they sign up – it’s FREE.

If all goes as planned, today we will be motoring across America “from the mountains to the prairies.” While it is a long drive, I never get tired of the majestic beauty of our country. It’s almost as though big cities, versus the rest of the country are two different worlds. Small-town values still exist in America’s heartland. Midwestern summers are very special.

Quote(s) Of The Week…

We will let Ludwig von Mises do the honors this week:

Money Vs. Votes - honest vs corrupt politician concept“The advocates of public control cannot do without inflation. They need it in order to finance their policy of reckless spending and of lavishly subsidizing and bribing the voters.”

“Inflation is the fiscal complement of statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism.”

And Finally…

My wife Jo sent along some clever sign humor for our enjoyment:

  • It’s an awkward moment when a zombie looking for brains walks right past you.
  • Anything seems possible if you don’t know what you are talking about.
  • Talk is cheap because the supply always exceeds demand.
  • I wish I was as thin as my patience.
  • There is no “I” in team, but there are three in “narcissistic.”
  • It wouldn’t have been Wright if Ford invented the airplane.
  • Baseball umpires want more money! Talks of calling a strike are in progress.
  • If you wear a sweater and sweat, are you the sweater?

And my favorite:

  • I married my wife for her looks, but not the ones I’m getting lately.

Until next time…

Dennis Miller

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken

 

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