This week on Facebook: Last Sunday I tried to show the inflationary effect of fiat money that was introduced at Bretton Woods in 1971. While I think it was something that I failed to do successfully, I may have indicated how difficult it is to arrive at a figure for inflation that is not subject to government fiscal policy.
When I noticed how the weekly shopping bill kept increasing, I tried to calculate the effects of inflation on groceries, which turned to be extremely difficult to do. Then I remembered The Big Mac Index and wondered if would explain inflation any better. While it doesn’t mention fiat money, the article below does show how governments fiscal policy is used to disguise the true cost of inflation¹ to the consumer.
I am not a conspiracy theorist. But, I am a consumer. I shop around just like the next person. And, it seems more and more every time I look at the price of something, anything, I am almost always baffled by the cost for whatever the item is. The numbers I am trying to show, along with the visual graph, is that there is a disconnect. The Big Mac Index May Be Telling The Truth About Inflation
Money has everything to do with what is called the dismal science of economics and why the government seeks to control its supply in the economy (unsuccessfully for the consumer) with a monetary policy². My posts on money began in 2009 with HMRC Newspeak – The Customer, in 2012 I posted Financial Repression, intending to show how governments quite literally steal your money. Since beginning my posts on economics the government’s fiscal policy has continued to inflate the buying power of money by increasing government debt.
We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step. Higher inflation followed by higher unemployment. We have just escaped from the highest rate of inflation this country has known; we have not yet escaped from the consequences: high unemployment. Labour Party Conference (1976)
The Bank of England’s (BoE) monetary policy is action that a country’s central bank or government can take to influence how much money is in the economy and how much it costs to borrow. As the UK’s central bank, the BoE uses two main monetary policy tools. Firstly by setting the interest rate charged to banks that borrow money from it (Bank Rate) and secondly by creating money digitally to buy corporate and government bonds (this is known as asset purchase or quantitative easing). Monetary policy affects how much prices are rising — called the rate of inflation — and currently the BoE sets monetary policy to achieve the Government’s target of keeping inflation at 2%.
Quantitative Easing has resulted in a transfer of wealth from society at large to the banks and the Government, and has vastly extended the length of what would have been a short but sharp recession. It has made us poorer while benefiting a select few in society. Quantitative Easing and a bankrupt state (2011)
The Bank of England’s inflation calculator for goods and services shows the value of £1.00 in 1947 equates to £2.53 in1970 (equivalent to an inflation averaged at 5.7% a year). In the 23 years from 1972 inflation equates the value of £1.00 to £0.50 in 1955 (equivalent to an inflation averaged at 4.1% a year) and adding another 23 years to £1.00 inflation from 1955 to 2018 show’s a costing of £25.77 (equivalent to an inflation averaged at 5.3% a year). £1.00 in 1972 is £12.96 in 2018 (equivalent to an inflation averaged at 5.7% a year). It may be that The Big MAC Index offers the consumer a better perspective on the cost of inflation than the inflation rate figures issued by the government or its central bank.
The effects of inflation on the economy³ depend at a personal level on accumulated wealth, employment or pension remuneration’s, or reliance on a social welfare programme. However increases in personal income have a negative impact on any government attempts to achieve a budget surplus. The government’s fiscal policy on the economy includes making taxation revenue measures, but inevitably leads to a budget deficit. Those public administrations committed to increasing a budget deficit and that do not contribute to economic growth may well find their budgets reduced.
1. The Age Of Fiat Currency: A 38-Year Experiment In Inflation: If one looks back to the history of paper money, no government has had the discipline to maintain its currency without resorting to the printing presses. All of these paper money experiments have ended in disaster. This is one reason ‘gold bugs’ are so keen on the Gold Standard – because a currency tied to a real asset is better than a currency backed only by the promise of its government not to inflate. But, the era since 1971 is unique in history in that ALL major currencies are fiat currencies. This is truly the Age of the Fiat Currency – unprecedented in human history.
2. How monetary inflation increases inequality: In a fiat money system the costs of money production fall to virtually zero. Thus, the incentive to produce new money is almost irresistible. And all money production redistributes income and wealth, because not all economic agents receive the new money at the same time. Some people get the new money earlier, some get it later. The first receivers of the new money benefit, as they have higher cash balances and can buy at the old, still low prices. Once the first receivers spend the money, it flows to the next receivers who still profit but less than the first receivers since prices start rising. Successively the new money spreads across the economy and pushes prices upward. In the same manner as first or early receivers of the new money profit, there are late receivers that lose, because they have to watch prices increasing before their income increases, if it increases at all. The purchasing power of the later receivers of the new money is eroded.
4. We’ve spent our entire lives in a massive economic anomaly: For most of history, inflation wasn’t really an issue. Prices went up and down, but mostly were flat or only rose very gently over the very long term. And by long term, I mean centuries and even millennia. Then along came the 20th century, and the latter part of it in particular. Let’s just say that, when it comes to inflation, we made up for lost time.
5. Abandoning the gold standard was a seminal moment, and one we’re now all paying for: It was one of those seminal moments whose significance has only gradually become apparent, obscured as it was at the time by Vietnam and then Watergate. But the more one examines economic history, the more obvious it is that this was one of the most important policy decisions in modern history. Were it not for that decision, it is quite feasible that we would not have suffered the financial crisis of the past four years; or indeed the crisis after crisis that have beset the world’s markets. We might not have just faced the most volatile few weeks in markets since 2008.
Referenced Articles Books & Definitions:
- A bold text subscript above and preceding a title below (¹·²·³), refers to a book, pdf, podcast, video, slide show and a download url that is usually free.
- Brackets containing a number e.g. (1) reference a particular included article (1-5).
- A link (url), which usually includes the title, are to an included source.
- The intended context of words, idioms, phrases, have their links in italics.
- A long read url* (when used below) is followed by a superscript asterisk.
- Occasionally Open University (OU) free courses are cited.
- JSTOR lets you set up a free account allowing you to have 6 (interchangeable) books stored that you can read online.
¹Costs of Inflation (url): There are many costs associated with inflation; for the economy, the volatility and uncertainty can lead to lower levels of investment and lower economic growth. For individuals, inflation can lead to a fall in the value of their savings and redistribute income in society from savers to lenders and those with assets. At extreme levels, inflation can destabilise society and destroy confidence in the economic system.
²How Government Manipulates Money And Produces Inflation (url): Inflation is a dishonest and deliberate policy and tool of politicians who do not wish to reduce their spending. The government “creates” new money in order to cover what it spends in excess of its income.
³What are the Effects of Inflation on the Economy? (url): To understand the effects of inflation, consider the following example of the purchasing power of $100 in 1971, compared to today.
- According to the Bureau of Labor Statistics consumer price index, prices in 2018 are 518.5 percent higher than prices in 1971.
- In other words, $100 in 1971 is equivalent in purchasing power to $618.50 today.
The obvious consequence of inflation is that it makes it more difficult for people to afford the basic necessities (like batteries and light bulbs). This causes families to struggle as they attempt to keep up with the price of everything from cornflakes to college tuition.
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