INFLATION in Haliburton-Kawartha Lakes-Brock
Part 1: MONETARY Policy Causes Inflation
Part 1: MONETARY Policy Causes Inflation
Polonius advised his son, Laertes in Hamlet.
“Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
Evidently, Shakespeare was not a fan of debt-financing to sustain one’s lifestyle. Many nobles of his day were borrowing lavishly to maintain ‘appearances’ in society and got into financial troubles doing so.
In modern America, Canada included, debt-financing has also produced financial instability for everyone but on a scale that Shakespeare could not have imagined. Personal debt levels are now in the range of 160% of annual earnings for average citizens. Public debt levels are …. well don’t get me started talking about that atrocity.
Tonight, I will be a guest on episode #1 of The Kerstin Kelly Podcast. We will discuss the topic of Inflation, it’s root causes, what can done about it and by whom.
Inflation is largely a story of about Economic decisions made by government officials and politicians at the federal, provincial and municipal levels. Public policies, their supporting legislation and the endless regulations used by government agencies to enforce them are unavoidably Economic decisions. These all contribute heavily to the rising cost of living and this will be discussed on this podcast.
Wisdom is timeless. The the wise words of William Shakespeare are still relent today some 425 years after he penned Hamlet…. Imagine that.
Monetary Policy and Central Banks.
Between 1800 and 1900, no one spoke of “inflation” because it barely existed. $1 could buy the same basket of goods in 1900 as in 1800. A $1 bill was treated like a “warehouse receipt” in that it could be exchanged for the equivalent in gold which was held in vaults at local banks. This Gold Standard monetary system anchored the purchasing power of money to a stable mooring.
In 1913, a few of the richest men in America met secretly at Jekyll Island off the coast of Georgia. In recent decades, small regional banks had failed and public trust in banks was waning. These wealthy men created the plans to introduce a “bankers’” bank to backstop these failures with loans so as to prevent further bank closures. A few years later, their plans became the basis for the US Federal Banking system created under federal legislation a few years later.
The “Fed” legislation evolved quickly to include provisions which would partially reduce the collateral backing the USD from its gold mooring and increase a new form of collateral based on the US government’s ability to tax its citizen.
That’s how citizen labour and capitalist corporate productivity was first introduced to begin the transition away from the “hard money” system based on gold and towards the “fiat” money system that exists today. The timing was perfect because America could not have fought WW1 or WW2 if it had remained on the Gold Standard.
New Found Political Power
America’s politicians had been handed a tremendous gift. Under the “fiat banking” system, they could make bold, expensive election promises with confidence knowing that they could be funded by “fiat money”. The US Treasury could readily raise the money because the Fed could creat the stream of debt-financing required. “Government On Steroids” had become the new reality in America. Canada was established its own “fiat money” system too with the creation of the Bank of Canada and its home-made monetary policies.
The final break with gold was inevitable. This new model of public debt financing, however, had some problems with respect to international trade and monetary exchanges. In 1971, Richard Nixon removed the last link between gold and the USD. This set the stage a decade of misguided monetary policy and unsustainable public spending which culminated in runaway inflation. At its worst, mortgage rates reached highs of 24%.
“Inflation” correctly defined
Among professional Economists, “inflation” refers to an increase in the money supply. The public associates the term with a rising cost of living as stated in CPI (consumer price increases) above the target rate of 2%. The truth is that the 2% target is just another form of tax and that an increase in the money supply as created by bankers is one of the key drivers in the decline in purchasing power of our money.
Fractional Reserve Banking systems are the central mechanisms for increasing the money supply. Leveraging each bank’s reserves to create consumer and business loans is essentially a ‘pyramid scheme’ that pays the bankers handsomely. This is how banks increase the amount of money in circulation within all Western economies.
Fractional Reserve Banking is legislated, crony-capitalist arrangement between central banks and all commercial banks to artificially boost the number and availability of cheap loans while suppressing savings. I urge every citizen to learn about this system to clearly understood the collusion between the federal government and every bank operating in Canada under its legislative and regulatory framework.
About 12 years ago, I asked Dr. William Watson, Head of the Economics Department at McGill University in Montreal, to estimate how big is the effect of federal Monetary policy on inflation. “About 2/3s” was his reply.
Many books have been written about Monetary Policy, a very complex topic. This essay is intended to provide a taste of this topic as it affects our lives. Next, I plan to address Fiscal Policy and Legislated Controls as two other causes of our rising cost of living in two separate posts.
The story of Jekyll Island had been told by others and can be found on the Internet for any reader who loves to read about key moments and people in human history.
