Doug Casey on the Destruction of the Dollar

by Doug Casey, International Man:

“Inflation” occurs when the creation of currency outruns the creation of real wealth it can bid for… It isn’t caused by price increases; rather, it causes price increases.

Inflation is not caused by the butcher, the baker, or the auto maker, although they usually get blamed. On the contrary, by producing real wealth, they fight the effects of inflation. Inflation is the work of government alone, since government alone controls the creation of currency.

In a true free-market society, the only way a person or organization can legitimately obtain wealth is through production. “Making money” is no different from “creating wealth,” and money is nothing but a certificate of production. In our world, however, the government can create currency at trivial cost, and spend it at full value in the marketplace. If taxation is the expropriation of wealth by force, then inflation is its expropriation by fraud.

To inflate, a government needs complete control of a country’s legal money. This has the widest possible implications, since money is much more than just a medium of exchange. Money is the means by which all other material goods are valued. It represents, in an objective way, the hours of one’s life spent in acquiring it. And if enough money allows one to live life as one wishes, it represents freedom as well. It represents all the good things one hopes to have, do, and provide for others. Money is life concentrated.

As the state becomes more powerful and is expected to provide more resources to selected groups, its demand for funds escalates. Government naturally prefers to avoid imposing more taxes as people become less able (or willing) to pay them. It runs greater budget deficits, choosing to borrow what it needs. As the market becomes less able (or willing) to lend it money, it turns to inflation, selling ever greater amounts of its debt to its central bank, which pays for the debt by printing more money.

As the supply of currency rises, it loses value relative to other things, and prices rise. The process is vastly more destructive than taxation, which merely dissipates wealth. Inflation undermines and destroys the basis for valuing all goods relative to others and the basis for allocating resources intelligently. It creates the business cycle and causes the resulting misallocations and distortions in the economy.

We know the old saw “The rich get richer, and the poor get poorer.” No one ever said life had to be fair, but usually there is no a priori reason why the rich must get richer. In a free-market society the sayings “Shirtsleeves to shirtsleeves in three generations” and “A fool and his money are soon parted” might be better descriptions of reality. We do not live in a free-market society, however.

The rich and the poor do have a tendency to draw apart as a society becomes more bureaucratic, but not because of any cosmic law. It’s a consequence of any highly politicized system. Government, to paraphrase Willie Sutton, is where the money is. The bigger government becomes, the more effort the rich, and those who want to get that way, will put into making the government do things their way.

Only the rich can afford the legal counsel it takes to weave and dodge through the laws that restrict the masses. The rich can afford the accountants to chart a path through loopholes in the tax laws. The rich have the credit to borrow and thereby profit from inflation. The rich can pay to influence how the government distorts the economy, so that the distortions are profitable to them.

The point is not that rich people are bad guys (the political hacks who cater to them are a different question). It is just that in a heavily regulated, highly taxed, and inflationary society, there’s a strong tendency for the rich to get richer at the expense of the poor, who are hurt by the same actions of the government.

Always, and without exception, the most socialistic, or centrally planned, economies have the most unequal distribution of wealth. In those societies the unprincipled become rich, and the rich stay that way, through political power. In free societies, the rich can get richer only by providing goods and services others want at a price they can afford.

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