A history lesson on inflation

The history of money and credit is that the separation of the two always ends in the destruction of credit. We appear to be edging close to that event again.

“While it is the duty of the citizen to support the state, it is not the duty of the state to support the citizen” – President Grover Cleveland (1885—1889)

The point President Cleveland made back in the 1880s was that individuals and vested interests had no rights to preferential treatment by a government elected to represent all. For if preference is given, it is always at the expense of others.

Those days are long gone, and the last president to take this stance was Calvin Coolidge in the 1920s, a whole century ago. He was followed by Herbert Hoover, who was very much an interventionist. As Coolidge reportedly said of his Vice-President, “That man has given me nothing but advice, and all of it bad”. Hoover was criticised for his disastrous intervention policies by Franklin Roosevelt, who succeeded in ousting him in the 1932 election, and then outdid him with even more intervention. The outflows of gold generated by accelerating government spending and the Fed’s monetary policies led to the suspension of gold convertibility for American citizens in 1933 and the devaluation of the dollar in 1934 from $20.67 to $35 per ounce of gold.

Interventionsism has increased ever since, not just in America but in all other advanced nations. The socialisation of earnings and profits and the regulation of our behaviour by governments dominates economic activity today. Despite the warnings of sound-money theorists, a process that commenced a century ago has not yet led to economic collapse, though the dangers of escalating state liabilities to buy off this inevitable outcome are a growing threat to economic stability. 

A point that is ignored by nearly everyone is that government spending is an expensive luxury for any economy, tying up capital resources in the most inefficient way. Furthermore, governments through taxation, the diversion of savings to government spending, and by monetary inflation destroy personal and national wealth. Yet, it is clear through observation and economic logic that a successful economy is one that maximises personal prosperity instead.

However, the problem is likely to become more of a public issue in the coming months, triggered perhaps by an increase of US Government bond issues to cover a rising budget deficit, particularly if the US economy slides into recession. We have already seen a sharp increase in bond yields over the last two months, with the benchmark 10-year US Treasury yield increasing from 3.6% to 4.3% currently despite markets expecting lower short-term dollar interest rates. 

On an historic basis and given that the Fed’s inflation target of 2% is not too far away, current T-note yields might appear reasonable. Assuming, that is, consumer price inflation is at the level officially stated. But perhaps markets should give more credence to independent estimates such as Shadowstat’s as measures of price inflation which are consistently higher than self-serving government estimates. And the currency debasement story of persistent and growing budget deficits, which is the engine driving consumer price inflation, is clearly not over and looks set to accelerate.

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