Why we need the inflation fraud

Posted: December 19, 2014 in Economics
Tags: , , , ,

Central banks have been mandated to keep the level of consumer prices rising at modest levels. In the UK, this level is set at 2% per annum; what this means is that it is their duty to destroy the value of the money you hold by a small amount each year.

But have you ever wondered why economists favour the need to have any inflation at all, even at modest levels? What are the theoretical reasons taught to all pupils of this field which enforce the desire to do this as opposed to doing nothing?

Consider this extract from Wikipedia, stating just one of the positive effects of Inflation

Financial market inefficiency with deflation The second effect noted by Tsaing is that when savers have substituted money holding for lending on financial markets, the role of those markets in channeling savings into investment is undermined. With nominal interest rates driven to zero, or near zero, from the competition with a high return money asset, there would be no price mechanism in whatever is left of those markets. With financial markets effectively euthanized, the remaining goods and physical asset prices would move in perverse directions. For example, an increased desire to save could not push interest rates further down (and thereby stimulate investment) but would instead cause additional money hoarding, driving consumer prices further down and making investment in consumer goods production thereby less attractive. Moderate inflation, once its expectation is incorporated into nominal interest rates, would give those interest rates room to go both up and down in response to shifting investment opportunities, or savers’ preferences, and thus allow financial markets to function in a more normal fashion.

Let us decode this

The role of the financial markets is undermined when savers choose to hold funds. We shouldn’t hold our own cash, why would we not trust the ‘Markets’ (the elite, the powerful, the manipulators)? If we hold our cash, prices can’t rise – the prices of goods we don’t need, that we have been told to want, and have been hoodwinked into consuming as if they are a scarce resource, enabling corporate shareholders to profit at our demise.

No price mechanism, perverse movements in physical asset prices. As is arguably happening with property prices in certain regions, particularly London. But the effect of these has not been caused by consumers hoarding their cash, and we are still experience positive inflation rates – it has been the commercial and central banks creating too much money through additional debt, flooding assets with funds which are chasing a higher yield than available from deposits. This is not to mention the decades of under investment by the public and private sector to increase the supply of new homes, and of the government to liberalise planning red tape.

When have price mechanisms ever been wholly reliable? With so much behavioural science at play, larger institutional players able to sway bigger portions of the market with their heavyweight capital, ratings agencies rubber stamping firms with a questionable seal of approval, on top of an Efficient Market theory which took a huge bruising in the wake of the 2008 crises. We all have to question what fair value really means? If reality isn’t as rosy as some make out, then how can a price accurately reflect the fundamentals.

Consumer goods less attractive. God forbid we arrive at a point in time when producers truly act upon what is needed, not what we are told and coerced into buying. True freedom would dictate that we should be free to not consume if we choose, regardless of the loss of ever-increasing profits, the loss of tax generated and the freeing up of labour to put our minds and talent to use doing what we are best suited to, not being part of a workforce until we die in service, or develop chronic mental and physical issues directly related to our lifetime of fruitless effort.

Rates have room to go up or down, thus allowing markets to function in more normal fashion How do we define what is ‘normal’ There is huge subjectivity in use here. I can’t help but think the normal function has more to do with setting the pieces on a game board, dictating the rules of play, and watching it all unfold, bust after boom, after almighty bust. Play on…

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