• Creation of "new" money is the fuel of inflation. Banks do it every day. When bank lends money, new money if created. The actual funds are generated by lending against available cash (deposits) with a marginal reserve factor. Each and every new loan puts more water into the milk. No one actually took cash out of their wallet for the loan; it is simply an accounting principle of banking.

    April 19, 2012 at 10:45 a.m.

  • Like adding water to milk:

    "The money rate can, indeed, be kept artificially low only by continuous
    new injections of currency or bank credit in place of real savings.
    This can create the illusion of more capital just as the addition
    of water can create the illusion of more milk. But it is a policy of continuous
    inflation. It is obviously a process involving cumulative danger.
    The money rate will rise and a crisis will develop if the inflation
    is reversed, or merely brought to a halt, or even continued at a diminished
    rate. Cheap money policies, in short, eventually bring about far
    more violent oscillations in business than those they are designed to
    remedy or prevent. If no effort is made to tamper with money rates
    through inflationary governmental policies, increased savings create
    their own demand by lowering interest rates in a natural manner. The
    greater supply of savings seeking investment forces savers to accept
    lower rates. But lower rates also mean that more enterprises can afford
    to borrow because their prospective profit on the new machines or
    plants they buy with the proceeds seems likely to exceed what they
    have to pay for the borrowed funds." Hazlitt

    April 19, 2012 at 10:13 a.m.

  • Excellent post, Jared. Government cannot spend money they do not first take from someone. Whether it is through taxes or inflation, which devalues our earnings and savings, it is still misguided. One need look no farther than the billions of our tax dollars that have been wasted by the current administration on "alternative energy" suppliers that have taken the money and proceeded to bankruptcy. Government has no business choosing winners and losers in the economy. That it is incompetent to do this has been amply demonstrated.

    April 17, 2012 at 4:35 p.m.

  • BS, that, priceless!

    April 17, 2012 at 4:33 p.m.

  • Monetary inflation is the biggest lie ever perpetrated on the American people (and any other country with a central bank). It's a hidden tax that has transformed our country into an invisible plantation where we have no idea we're working for less & less everyday. The value of our money is being wicked away from us and directed toward corporatist ends. The purchasing power of our 401k accounts are wasting away, and the standards of living for those who've saved for retirement have been diminished, making them inevitably more dependent on gov't. The poor are only getting poorer.

    The Federal Reserve is the root cause of our country's problems, but our elected officials protect their cash cow because they can spend on things that make them popular without anyone feeling the cost immediately. The Federal Reserve act was nothing short of a silent coup d'état.

    Sadly, we've crossed the Rubicon to where that monetary swindle has empowered our government to be so overbearing and forcefully self-preserving that dissent & unrest intended to correct this problem will be met with force — whether direct or indirect, explicit or implicit.

    I've had my eye on the Fed and what it enables for a decade, and it has sent me down a logical path that leads to only one universally-applicable conclusion: "Government IS Force". I invite anyone to disprove this simple idea.

    Jon Stewart recently gave the Fed the treatment:

    April 17, 2012 at 4 p.m.

  • Jared an excellent piece. A while back you published a piece about Hazlitt's economic theories a few days later this was published in the Wall Street Journal. It's more of Hazlitt's wisdom this time about inflation.....

    "Even a relatively mild inflation distorts the structure of production. It leads to the over-expansion of some industries at the expense of others. This involves a misapplication and waste of capital. When the inflation collapses, or is brought to a halt, the misdirected capital investment—whether in the form of machines, factories or office buildings—cannot yield an adequate return and loses the greater part of its value.

    Nor is it possible to bring inflation to a smooth and gentle stop, and so avert a subsequent depression. It is not even possible to halt an inflation, once embarked upon, at some preconceived point, or when prices have achieved a previously-agreed-upon level; for both political and economic forces, will have got out of hand. . . .

    For . . . the causation is never a merely mechanical one. You cannot, for example, say in advance that a 100 per cent increase in the quantity of money will mean a 50 per cent fall in the value of the monetary unit. The value of money, as we have seen, depends upon the subjective valuations of the people who hold it. And those valuations do not depend solely on the quantity of it that each person holds. They depend also on the quality of the money. In wartime the value of a nation's monetary unit, not on the gold standard, will rise on the foreign exchanges with victory and fall with defeat, regardless of changes in its quantity. The present valuation will often depend upon what people expect the future quantity of money to be. And, as with commodities on the speculative exchanges, each person's valuation of money is affected not only by what he thinks its value is but by what he thinks is going to be everybody else's valuation of money.

    All this explains why, when super-inflation has once set in, the value of the monetary unit drops at a far faster rate than the quantity of money either is or can be increased."

    April 17, 2012 at 11:41 a.m.