Every human being must understand that the Federal Reserve IS inflation. The Federal Reserve was established in 1913 to create inflation and its secondary role is to manage the public's inflation FEARS. Over the past 25 years, the Federal Reserve has done a fantastic job at both - inflation (money supply growth) has gone out of control and the public's inflation fears have been well contained.
Let's review the consumer price level over the past 200 years. It is interesting to note that consumer prices didn't rise at all during the entire 19th century.
However, under the 'guidance' and 'supervision' of the Federal Reserve, consumer prices have risen dramatically. In fact, prices in the economy have increased the most since the early 1970's when gold was removed from the monetary system.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
'But why is that so?' you may wonder. The truth is, prices in an economy respond to changes in the supply of money. When we witness inflation (money supply growth), prices rise as the value of money declines due to an increase in its supply. On the other hand, during deflation (money supply contraction), prices fall, as the value of money increases due to a decrease in its supply.
Latest Videos FromMoneyWeek
The reason why prices did not rise at all during the 19th century is because there was no inflation (money supply growth). In those days, money was backed by gold and the money supply was limited. Therefore, prices remained relatively stable; money held its purchasing power, and savings didn't get destroyed due to inflation.
Once the Federal Reserve came to power, things changed.
Firstly, the gold standard was eliminated and then gold was completely removed from the monetary system in the early 1970's. Once this was accomplished, the Federal Reserve along with other central banks decided to embark on an inflationary rampage. As the supply of money accelerated, consumer prices in the economy surged and savings got totally destroyed due to inflation (money supply growth). This phenomenon shows up in the fact that after remaining relatively stable for 170 years (1800-1970), prices have soared 600% over the past 35 years!
Inflation is an increase in the quantity of money and it is created deliberately by the central banks. As Nobel Prize winner, Dr Milton Friedman said, 'Inflation is always and everywhere a monetary phenomenon. To control inflation, you need to control the money supply.' Inflation is NOT a mysterious by-product, which simply emerges out of the blue in an economy.
But why would central banks create inflation? To answer this question, you have to ask yourself who benefits from the monetization of the economy? Who makes money from issuing more and more debt?
In order for the present monetary system to be accepted by the public, inflation must remain concealed. If the public discovered the truth, there would be tremendous uproar. Accordingly, central banks keep up the propaganda by claiming that inflation is tame and under control.
I'm sorry to disappoint you, but what's under control in not inflation but inflation FEARS. By artificially suppressing the Consumer Price Index through complicated adjustments, central banks continue to please the public. Still not convinced? Consider the following:
The money supply has grown from $302 billion in 1959 to over $10 trillion today - an astonishing explosion of over 3,000%! If this isn't inflation, then I don't know what is! During the same period, the US dollar's purchasing power has collapsed by 85%. In other words, due to money supply growth, the dollar saved in 1950 is worth only 15 cents today. So, you can see that 'money' isn't an ideal store of value!
It's only normal to expect that the standard of living in any civilization should get better with industrialization and advancements in technology. After all, in today's 'modern' world of abundance, food is plentiful and modes of transportation and communication are extremely efficient due to the progress made over the past 50 years. All these factors should've translated into a much more relaxed and comfortable life for everyone.
Unfortunately, if you look around today, you'll realize that despite all these advancements, life for the average person has never been tougher! 50 years ago, families could survive on one income and debt levels were very low. These days, the average household needs two incomes, people are working longer, and everybody is up to their eyeballs in debt!
So, what's gone so horribly wrong? Basically, inflation (money supply growth) has turned people into slaves. No matter how much you save, it's never enough because things always seem to get more expensive.
I'll let you in on a secret: as long as the current monetary system continues, life isn't going to get any easier. However, we all have to live within the system, so it is vital to understand the situation and invest in the appropriate assets that will benefit the most from the ongoing monetary inflation.
By Puru Saxena for The Daily Reckoning. You can read more from Puru and many others at www.dailyreckoning.co.uk
Puru Saxena is the editor and publisher of Money Matters, an economic and financial publication NOW available at www.purusaxena.com. An investment adviser based in Hong Kong, he is a regular guest on CNBC, BBC, Bloomberg, NDTV Profit and writes for several newspapers and financial journals.
