A History of Inflation, Deflation and Monetary Meddling

“Forget football,” a friend told us when we arrived in Buenos Aires a few weeks back. “Avoiding taxes is the national sport down here.”

There are few things in life a freedom-loving wanderer appreciates more than a healthy distrust of the state. More on that later in the week. But first, the noise…

Stocks inched higher again yesterday, up almost half a percent by the close. Gold was up too. The anti-dollar investment had retreated a few dollars off another record high, last we checked. An ounce, as of this writing, will cost you (or bring you, depending on whether you are buying or selling) around $1,309. Not bad for a metal that, just one short decade ago, was shunned from polite conversation.

So we get gold’s mood. At least, we think we understand why the metal is moving higher. Put simply, there are trillions of reasons for it to, most courtesy of the Federal Reserve. Even the mainstream media is beginning to notice.

Writing in the UK’s Telegraph, Ambrose Evans-Pritchard explains…in an admirably penitent kind of way:

“I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.”

Kudos to Mr. Evans-Pritchard. Anyone can make a mistake. It takes a steely resolve to admit it…and to a mass audience, no less. Like many before him, the Telegraph’s International Business Editor believed that the Fed was capable of the one thing it most sorely lacks: restraint.

“My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION,” he wrote. “If the Federal Open Market Committee cannot see the difference, God help America.”

And therein lies the problem. Unlike Mr. Evans-Pritchard, who can cop to folly with few repercussions for the greater public, Mr. Bernanke enjoys no such leeway. The Fed Head must – and will – follow his convictions through to their inevitable end. One turn of the lever begets another. A tinker here, an adjustment there, each movement grounded on the fallacious assumption that one man, one panel of experts, can truly know and set the price of money itself…and before you know it you’ve got the credibility of an entire currency weighing on your back…and debtors from around the world knocking on your door. Like a spineless man in a bad marriage, Mr. Bernanke will follow his promises to the grave, from health to sickness, from better to worse, forever and ever. Amen.

Since 1913, when the Federal Reserve first assumed its role as money-printing monopolist, the value of the dollar has fallen some 97%. And with each freshly inked bill that hits the streets, the value of every one that preceded it erodes a commensurate amount. Pretty soon, the price of the “stuff” those dollars are chasing begins to go up. Inflation begins at the bank. Or, as Milton Friedman better phrased it, “Inflation is always and everywhere a monetary phenomenon.”

In this instance, not only is gold “stuff”…it is also the right stuff. Not only is it a commodity in and of itself, in other words, it is also the one true money, the sound alternative to a fiat anchored, papier-mâché economy built in the path of a rising tide.

This is what happens when planners get to planning. Whether it is your education, healthcare or the price of money itself, meddlers always find a way of making a reasonable situation worse.

Take, for example, Social Security. As of tomorrow, September 30, 2010, your retirement “fund” officially begins shelling out more money than it is taking in. Over the past couple of weeks, our special reports correspondent, Ian Mathias, has provided a few essays on that so-called retirement “lock box” and the millions of Americans who are counting on it to supplement their golden years [click here to see Part I, “The End of Social Security as We Know It” and Part II,  “Opt Out of Social Security”].

Here’s what a few readers had to say:

Thank you for your article on Social Security. Let me offer you another slant on that awful program.

One argument that I have used in the past against SS is a rather religious one, mainly the 4th commandment: Honor thy father and mother. When I was growing up, of course that always meant I was suppose to obey my parents…well, at least try. But as I got older, that also meant to take care of my parents when they became elderly. What I have argued is that SS short-circuits that process. Why bother with taking care of them monetarily? After all, they have Social Security, and that frees me from that responsibility.

In addition, it seems to me, that it diminishes the connection between generations. Obviously, there’s going to be more interaction between you and your parents if you’re helping to support them. And then there is the resentment that drives a wedge between generations. Why should I pay more and more into a program that isn’t going to be worth a damn once I retire? They’re going to get theirs, but I’m not going get anything.

I will be eligible for SS in 5 years. Believe me, I’m not counting on it. God help the people who are because they’re going to be in for one hell of a jolt.

And this:

The system may “go into the red”…but the federal government owes the trust 2.7 trillion dollars and the program is solvent for many years to come…unless the government defaults on its commitment to the trust…

And, finally:

As I fast approach the age of 70, I think back to the time when I first got a SS card. I was 11 years old, living in New York. I had a chance to get a paper corner on the crossroads of two busy streets, 5th Avenue & 5th Street in the Bronx. I had to get an SS card to get the corner. I was excited and when I got my first payment for the job I was doing, I questioned the card that came with the cash about the deductions that were withheld.

SS was explained to me and I have been paying into this fund for almost 60 years. During those years I seem to remember the government borrowing from the fund for some crisis or something a couple of times. My grandfather made the comment to me before his passing that SS should always be there unless the government does not pay back what they borrow.

Is this in fact what happened, and if so, did they ever pay back what they borrowed?

Thank you to all our Fellow Reckoners who wrote in with thoughts and concerns regarding this very important topic. For more insight on the Social Security bankruptcy and government meddlers, take a look at Ian Mathias’s brilliant essay “What’s Really in the Social Security Trust Fund?”

Joel Bowman
for The Daily Reckoning