I. Introduction
Remember the quaint old days of 2019? We were told the U.S. economy was in great shape. Inflation was low, jobs were plentiful, gross domestic product was growing. And frankly, if COVID hadn’t come along, there’s a pretty good chance Donald Trump would have been reelected.At an event in 2019, my friend and economist Dr. Bob Murphy said something very interesting about the political schism in this country.
He said, “If you think America is divided now, what would things look like if the economy was terrible, if we had another crash like 2008?”
Well, we might not have to imagine such a scenario much longer.
If you think Americans are divided today and are at each other’s throats—metaphorically but, more and more, literally—imagine if they were cold and hungry!
Imagine if we had to live through something like Weimar, Germany; Argentina in the 1980s; Zimbabwe in the 2000s; or Venezuela and Turkey today? What would our political and social divisions look like then?
Ladies and gentlemen, we live under the tyranny of inflationism. It terrorizes us, either softly or loudly. I suspect it will get a lot louder soon.
II. Understanding Inflationism
I’ll ask you to consider three things.Deflation was the natural order of things in response to a crisis, a [expletive] crisis in my view, but still a crisis. So, of course, Uncle Sam actively attempted to undo the natural desire to spend less and hold more cash during a time of uncertainty.
This $7 trillion was created on the fiscal side of things. It wasn’t new Fed bank reserves exchanged for commercial bank assets as a roundabout monetization of Treasury debt, as we saw with quantitative easing. This was direct stimulus from the Treasury via Congress as express fiscal policy. Free money.
This money went straight into the accounts of individuals (stimulus checks), state and local governments, millions of small businesses (PPP [Paycheck Protection Program] loans), the airline industry, and untold earmarks. This was actual cash, and it’s being spent. So any economist who tells you today’s inflation is somehow a surprise is either charitably misinformed or gaslighting.
This is a policy. Inflation is engineered. The difference between supposedly desirable 2 percent CPI [Consumer Price Index] and very bad, awful, no good 9 percent CPI is only one of degree. The same mindset produces both. But the inflationists insist a little bit of virus is good for us, like a vaccine. ... So an express policy of some inflation is the mechanism to forestall too much inflation. This is a curious position.
So inflation destroys both existing wealth and future wealth, which never comes into being and, thus, diminishes the world our children and grandchildren inhabit. And it makes us poor and vulnerable in our senior years.
After all, saving is for chumps. Current one-year CD [certificate of deposit] rates are below 3 percent, while inflation is at least 9 percent. So you’re losing 6 points just by standing still! By the way, the last time official CPI approached double digits, in the early ‘80s, a one-year CD earned 15 percent. I’d like to hear Jerome Powell explain that.
By the way, ever since Alan Greenspan began this great experiment of four decades of lower and lower interest rates, guess who hasn’t benefited? Poor people and subprime borrowers, who still pay well over 20 percent for their car loans and credit cards.
But here’s an unspoken truth: Inflation also makes us worse people. It degrades us morally. It almost forces us to choose current consumption over thrift. Economists call this “high time preference,” preferring material things today at the expense of saving or investing. It makes us live for the present at the expense of the future, the opposite of what all healthy societies do.
Capital accumulation over time, the result of profit, saving, and investing, is how we all got here today—a world with almost unimaginable material wealth all around us. Inflationism reverses this.
So this very human impulse, to save for a rainy day and perhaps leave something for your children, is upended. Inflationism is inescapably an antihuman policy.
III. A Story: ‘When Money Dies’
But as most of you surely know by now, we don’t turn the ship around or win hearts and minds simply with logic and facts and airtight arguments. We need stories, or narratives, in today’s awful media parlance, to gain influence. We need emotional reactions, so I will suggest a story with plenty of pathos to shake people out of their complacency and sound the warning.Fergusson’s book should be assigned to central bankers STAT (we wonder how many of them know of it). It’s not a book about economic policy per se—it’s a story, a historical account of folly and hubris on the part of German politicians and bureaucrats. It’s the story of a disaster created by humans who imagined they could overcome markets by monetary fiat. It’s a reminder that war and inflation are inextricably linked, that war finance leads nations to economic disaster and sets the stage for authoritarian bellicosity.
We think Versailles and reparations created the conditions for Hitler’s rise, but without the Reichbank’s earlier suspension of its one-third gold reserve requirement in 1914, it seems unlikely Germany would have become a dominant European military power. Without inflationism, Hitler might have been a footnote.
Most of all, “When Money Dies” is a tale of privation and degradation. Not only for Germans, but also for Austrians and Hungarians grappling with their own political upheavals and currency crises in the 1910s and ‘20s.
The story starts with her comfortable life as the wife of a doctor, and mother to a wonderful daughter and three sons. They are talented and cultured and musical and upper-middle class. They even socialize with Archduke Franz Ferdinand and his wife, the Duchess of Hohenberg.
But in May 1914, their happy life is shattered. Ferdinand is assassinated at Sarajevo, and war breaks out. Wars cost money, and the gold standard wisely adopted by Austria-Hungary in 1892 is almost immediately seen as an impediment. So the government predictably begins to issue war bonds in huge numbers, and the central bank fires up the printing presses. This results in a sixteenfold increase in prices just during the war years.
But the human effects are catastrophic, even apart from the war itself.
Frau Eisenmenger is luckier than most Viennese women. She owns small investments which produce modest income—fixed in kronen. Her banker quietly urges her to immediately exchange any funds for Swiss francs. She demurs, as dealing in foreign currency has been made illegal. But soon she realizes he was right. There’s probably a lesson here for all of us!
As the war unfolds, she’s forced into black markets and pawning assets to procure food for her war-damaged children. Her currency and Austrian bonds become almost worthless. She exchanges her husband’s gold watch for potatoes and coal. The downward spiral of her life, marked by hunger and hoarding anything with real value, happens so quickly she barely has time to adjust.
But her misery doesn’t stop with the end of the war. On the contrary, the Saint-Germain Treaty in 1919 gives way to a period of hyperinflation: The money supply increases from 12 billion to 30 billion kronen in 1920, and to about 147 billion kronen at the end of 1921 (does this sound like America 2020, by the way?). By August 1922, consumer prices are 14,000 times greater than before the start of the war eight years earlier.
In just a few short years, she endures countless tragedies, all made worse by privation, cold, and hunger. Her husband dies. Her daughter contracts tuberculosis and dies, leaving Frau Eisenmenger to take care of her infant daughter and young son. One son goes missing in the war, one son is blinded, and her son-in-law becomes crippled following the loss of both legs. Food and coal are rationed, so her apartment is a miserable hovel—and she’s forced to dodge searches by the “Food Police” looking for illegal hoarding. Ultimately, she’s shot in the lung by her own communist son, Karl, in a fit of rage.
Once friendly neighbors become suspicious of each other’s stores of bread and cheese, while prostitution becomes rampant. Angry people jostle in line, waiting for the butcher to open, and when he does, only the most attractive women receive the scraps of meat available that day.
Fistfights become common. Starving children beg for food in front of restaurants and cafes like stray dogs. Everything familiar and beautiful in society becomes degraded and cheapened seemingly overnight.
Like a Stephen King horror movie, something very familiar changes into a strange and menacing place. Your neighborhood takes on a different light. People you thought you knew become malevolent strangers. Scapegoating, blame, and snitching become commonplace.
Is this beginning to sound familiar, especially after Biden’s sick speech earlier this month?
IV. The Lessons for Today
How do we apply this grim historical lesson from the Weimar period to the United States today? How do we tell this story?First, we explain inflationism in human terms, to personalize it and debamboozle it. Make monetary policy vital and immediate, not boring and dry and technocratic. Again, there are enormous moral and civilization components to monetary policy.
Don’t let them hide behind complex Fed speak the simple reality: Monetary policy is nothing less than criminal theft from future generations, from savers, and from the poorest Americans who are furthest from the money spigot. The idea that reasonably intelligent laypeople can’t understand monetary policy, that it’s too important and complex for anyone but experts, is nonsense. We should expose it.
Second, ridicule the absurd idea that “policy” can make us richer. More goods and services, produced more and more efficiently, thanks to capital investment—and thereby creating price deflation—make us richer. That’s the only way. Not legislative or monetary edicts.
A fake economy depends on enormous levels of ongoing fiscal and monetary intervention. We call this “financialization,” but we all have a sense that our prosperity is borrowed. We all feel it. Capital markets are degraded: A lot of money moves around without creating any value for anyone. Companies don’t necessarily make profits or pay dividends; all that matters to shareholders is selling their stock for capital gains. It always requires a new Ponzi buyer.
But we know intuitively this isn’t right: Consider a restaurant or dry cleaner that operated without profit for years in the hope of selling for a gain years or decades later. Only the distorted incentives created by inflationism make this mindset possible. So down with “policy”—what we need is sound money!
Finally, let’s not fear being accused of hyperbole or alarmism. Let me ask you this: What happens if we’re wrong, and what happens if they’re wrong? What they’re doing, meaning central bankers and national treasuries, is unprecedented. Fake money is infinite; real resources are not.
Hyperinflation may not be around the corner or even years away; no one can predict such a thing. But at some point, the U.S. economy must create real organic growth, if we hope to maintain living standards and avoid an ugly inflationary reality.
No amount of monetary or fiscal engineering can take the place of capital accumulation and higher productivity. More money and credit are no substitute for more, better, and cheaper goods and services. Political money can’t work, and we should never be afraid to attack it root and branch. We need private money, the only money immune from the inescapable political incentive to vote for things now and pay for them later. If this is radical, so be it.
History shows us how money dies. Yes, it can happen here. Only a fool thinks otherwise.