Update 21st June, 2014
Below I liken central banks’ monopoly on money creation to a Ponzi scheme. Who’s raking in the benefits? See Bill Bonner’s latest post at Acting-Man:
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If I said to you that the country needs a central bank, the goal of which is to issue money, smooth out the economic cycle, ensure full employment, and act as a buffer against bank runs, you’d rightly have some questions. A good many of them, answered honestly, would negate the need for such an institution and put a swift end to the proposal. Leaving those questions aside, assuming simply that I’ve convinced you that the problems I’ve enunciated are real and my “Federal Reserve Bank” is the remedy, there’s still one question you’d likely ask. It has to do with the value of the notes that I issue as money – my “legal tender”.
One of the fundamental characteristics of any medium to be used as money is its ability to transmit value (purchasing power) safely, over distance, and over time. You want to feel comfortable that the money you trade for today will be accepted later by anyone & everyone and at the same value as it is today. So, a fair question for you to ask would be, “Will the notes you issue hold their purchasing power? If I give up something today in exchange for your “Federal Reserve Notes”, will those notes buy me back that same something in the years to come?” If I answered “No, in a century or so those notes will buy back about 2% of what you give for them today”, you’d reject my proposal out of hand. If I answered “Yes”, I’d be lying.
So the real question now is: how is it that the currency issued by the US Federal Reserve has lost 98% of its purchasing power since the Fed began operations? And, as long as we’re on the subject, where did that purchasing power go?
The sad truth is that the devaluation of the dollar has been concomitant to the transfer of purchasing power from the people who created the wealth, (that money was supposed to store), to the issuers of the fiat currency, their cronies, and sundry hangers-on; – the share-holders in the federal reserve banking system and their buddies in “well-connected” businesses, the recipients of “government benefits”, the multitude of beneficiaries of government-mandated “easy credit”, and a succession of government administrations and their army of bureaucrats, – all of whom have, over the last century or so, padded their nests nicely with wealth created by others.
The theft, which is what it is, is perpetrated via support from the trick of inflation. Contrary to popular belief, inflation is not “rising prices”. And contrary to a slightly more sophisticated view, inflation is not “an increase in the money supply”. No, inflation, the reduction in purchasing power of the dollars in your pocket, is the result of an increase in counterfeit credit, which is what US Dollars (and every other fiat currency in the world), ultimately is. Every US Dollar is an IOU, backed not by unconsumed wealth, as it should be, but by the US Government’s ability to borrow endlessly. Its a Ponzi Scheme on the grandest of scales. The notes of the Federal Reserve are created more or less out of thin air, and each new note issued takes a little of your purchasing power away.
So, when Janet Yellen says that “A high degree of monetary accommodation remains warranted…”, meaning that the US will continue to inflate its currency to a target of 2% per annum, remember what that means: your dollars will buy you a little bit less every year. Every dollar you possess, by its very nature, is slowly, but very surely, eroding your wealth. You might also keep in mind that Ponzi Schemes, by their nature, sooner or later run out of suckers and collapse.
Related reading: In case you didn’t click on the “counterfeit credit” link above, consider clicking here now. It’s an article by Keith Weiner, explaining in detail and with far greater expertise than I, the true nature of inflation.