Posted on August 5, 2016 at:
That inflation and interest rates
will remain near-zero for a generation is accepted as “obvious” by virtually
the entire mainstream media. The reasons for this are equally “obvious”: central
banks have the power to suppress interest rates indefinitely by creating money
out of thin air and using this new cash to buy bonds in unlimited quantities;
and
But suppose for a moment that
this confidence in near-zero interest rates and inflation as far as the eye can
see is wrong. As I have demonstrated this week, rising interest rates and inflation
would break the back of the status quo.
What makes inflation difficult to
grasp is its multi-faceted character. Inflation is a monetary dynamic, to be sure, as creating new fiat
currency in excess of increasing production / productivity reduces the
purchasing power of the currency.
Inflation is also tied to the
incentives for fraud in our system: lowering quality as a means of Inflation Hidden in Plain Sight
increases profits at the expense of consumers who have few means to detect and
measure the reduction in the value of what their money buys.
Inflation is also the result of
revenue-hungry governments which jack
up junk fees, stealth taxes and outright taxes while delivering lower quality
services.
As I have noted many times,
inflationary forces are built into urbanization and modern systems of
production. Socio-historian Immanuel Wallerstein listed
three dynamics that raise costs while delivering little additional direct value
to consumers:
1. Urbanization increases the cost
of labor (a reality since the 1400s).
2. Externalized costs (dumping
private waste into the Commons, environmental damage and depletion, etc.)
eventually must be paid one way or another.
3. Rising taxes as governments
responds to unlimited demands by citizens for more services (education,
healthcare, etc.) and economic security (pensions, welfare).
Financialization also feeds
inflation in a variety of subtle ways. The wealthy can keep abreast
of real inflation via Asset Inflation while the
bottom 95% struggle to pay higher prices for everything from burritos to healthcare.
Financiers and corporations with unlimited credit lines at
near-zero rates can buy up rental housing and jack up rents, for example, while
asset inflation has pushed housing out of reach of moderate-income households
living in job-rich desirable areas.
Meanwhile, small businesses without access to unlimited
credit at near-zero interest rates struggle to stay afloat as prices and
overhead costs weigh ever more heavily:
So how could inflation rise
despite near-universal faith that central banks can inflate credit and assets
forever without triggering inflation? History
suggests that rampant creation of fiat currency far in excess of increases in
GDP eventually catches up with central planners
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