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August 03, 2005

Inflation and the Pyramid Builders
by David Taffi

Like waves on the seashore, an incessant drip of a faucet, or the perpetual nag of the proverbial mother-in- law, your dollars as a store of value and labor are continually clipped and filed down by the Central Bankers' silent tax.

From the pyramids to the billion dollar-a-copy gee whiz warplanes we get to see once in a while at an air show or parade, everyone below plutocrat status will pay for the symbols of empire. The treadmill runs faster, the crack of the whip grows more severe. Get ready to sweat, work harder, longer, and perhaps even die at your grinding stone. Your masters have a lot of bricks to pound into dust, and the grinding of the masses into dust is par for the course.

Occasionally you get a real deflation. Like a perfect red heifer, or an albino alligator, or perhaps that elusive blue moon. We all acknowledge it can happen. Sure, a great plague can wipe out a medieval population center, and put the laboring classes in the cat birds' seat for a little while. But short of a mass extinction event where you're still standing, the chances of you hitting a moment in history where you will experience anything other than the steady din of your purchasing power ground down into dust is so remote as to make it a practical irrelevancy.

Perhaps my little rant on the plague of inflation and the destruction of our currency as a store of value and labor should start at the beginning....the very beginning! Quoting God, Genesis 3:17 states "Cursed is the ground because of you: through painful toil you will eat of it all the days of your life. It will produce thorns and thistles for you and you will eat the plants of the field. By the sweat of your brow you will eat your food until you return to the ground, since from it you were taken; for dust you are and to dust you will return."

Ok, it's back to that dust thing we've been talking so much about. Bottom line of our little Sunday school lesson is that life was once pretty good, Adam and Eve blew it, and we've been paying for it ever since. Hence the curse. In other words, life is hard, difficult, and full of sweat because the earth isn't paradise anymore. Ok, fair enough. Most of us don't mind a little sweat and tears along life's journey. But not everyone wants to take a turn at the oars. Some humans, the Pharaohs and modern equivalents, figured out a long time ago that one does not have to sweat if you can get someone else to sweat for you. Voila! No curse for me! Too bad you have to work so hard! We all know slavery is really all about some people wanting to evade the curse of work at the expense of others. Chains and nose rings are considered a little too crass, too vulgar, and just a little too messy now-a-days. What would our friends in polite society think? Perhaps there's another way?

Enter the Central Bankers, the direct descendants of the Pyramid Builders. Yes, we all know the mission statements of the Central Bankers of the world go something like, "maintain price stability and economic growth consistent with maximum employment". The CEO of Enron walked the plank recently. Why? The short answer is because the stock went to zero. Looking back over the history of the dollar, the Federal Reserve Bank's proxy for their "Stock", it has lost somewhere around 95% of its value since 1913. Most of us have seen the chart. For practical purposes, that's close enough to zero for me. The problem is no central banker has ever gone to jail or been held accountable and never will. Why? Because the real mission statement of the Central Bankers can be stated as follows; "To create an environment whereby the governments' deficit spending and debt burdens can be inflated away and paid for through the gradual inflationary coin clipping of the populations' currency thereby diminishing the currency as a store of value and labor." The charts don't lie. Mission accomplished.

Most peoples' lives are so busy and too short to get really angry in the moment. Most politicians' terms are also too short. The point of rage usually comes later in life, when you realize that most of the fruit of your labor has been taxed and inflated away. (As a sidebar, most people don't realize that if you get elected to Congress you're set for life with a full salary pension! Indexed to inflation, of course! Let's listen in; ..."We won't talk too much about our little secret will we, when we're cutting back on people's Social Security and Medicare benefits and raising the retirement age to 120 years. That sure would solve the Social Security and Medicare crisis!" My solution to the Social Security crisis; put all politicians on Social Security and cancel their lavish pensions.)

Of course, if we were to pay as we go for our Federal Governments' excesses under the current budgetary structure, taxes would have to be significantly higher, perhaps double or more and this would be politically unacceptable. The better option is to tax via stealth and hope nobody gets too mad. To encourage endless monetary and credit expansion is to enrich those with the tools to ride the inflationary wave that extracts the speculative profit tranches from whatever asset is inflating this week. Let's just hope the masses will be satisfied with NASCAR and Wal-Mart prices. .... "What? A baseball strike? Better get the VP down there right away to get that resolved. Keep the price of beer and hotdogs reasonable. We might need a Federal Beer and Hotdog Agency to mask and subsidize the real costs. Home prices doubling or tripling every 5 years? Most people own a home, so who cares about the landlords' peasants. Keep the bread and circuses plentiful. Inflation numbers don't look good this quarter, better substitute energy and food prices with rubber doggie toys from China; that should keep the CPI index sedate". And the population sedated. Don't have enough money to buy food and gas? Obviously, if you had substituted in rubber doggie toys from China your personal CPI wouldn't have been affected. Silly you.

Credit and monetary expansion in excess of the long-term underlying growth rate of an economy is inflationary and transfers wealth to debt holders at the expense of creditors (i.e. anyone with savings). When the Federal Reserve dropped rates to 1% did anyone you know get to borrow at anything close to that rate? I sure didn't. When a hedge fund takes a leveraged joyride in the financial markets, is it the Central Bankers job to intervene to facilitate a resolution to their unprofitable trades? It might bring down the whole financial system! Will any of these people or the bankers who facilitated the extreme leverage be held accountable? Better to make an example out of Martha Stewart. The really big fish are too heavy to pull into the dock. The next time one of your trades doesn't work out or your credit card debt feels a little heavy, don't hold your breath waiting for a call from Al to help you out. The big fish will be protected and well fed in the Central Bankers Coy pond. The serfs are cannon fodder. It looks like we better revise the Central Bankers mission statement again! Let's add, "Keeping the world safe for speculators and the financial elites at the expense of everyone else". That feels about right.

The reason why credit should always be relatively expensive is because money is supposed to be a store of value of one's labor. The artificial manipulation of its cost and its free creation via the credit markets or direct monetization devalues one's currency and the labor it symbolizes and is always inflationary because it is a counterfeit to the very labor that adds value through the productive process. Time equals money, but money and credit created at low or no cost with no real labor-time-capital inputs is no money at all but only a mirage that dissipates. Free money and cheap credit ultimately cheats you of the produce of your labor. There will always be people who want something for nothing. It really is a shame the prisons are mostly populated with the small fish, the petty thieves, while the really big fish swim free.

Since I've been taking the long view from the very beginning, what about all that healthy deflation that comes from several hundred years of humankind productivity and technological progress that lowers real costs for the little people of the world? ...... "Sorry, but we'll confiscate that as well, thank you very much, because it helps us to mask the real inflation rate". In other words, in addition to the "normal" amount of inflation that irradiates your purchasing power like a neutron bomb, the inflationists also rob you of the benefits of human progress and productivity that adds value at lower cost. So the Central Bankers on behalf of the Federal Leviathan and financial elites extract their tribute and front-load the inflationary burden without breaking a sweat after their first mover profit advantages have been banked through the credit and interest rate money manipulation machine.

From my perspective, the deflationists forget what side of the seesaw they're sitting on. The Feds are sitting opposite them and owe trillions and trillions and trillions of dollars. That side looks heavy. Sure, we may see some short duration deflations, liquidations, supply-demand driven price drops, and mania-busts, but the really big trend is assured.

How big is the real debt of all liabilities in present value dollars, both what we know about and don't? Is it 40, 50 trillion? More? How long would it take the American people to pay it back in real constant dollars? 200 years? 300 years? More? It ain't gonna happen. While we're waiting for the financial day of infamy to arrive, it may be useful to remember a few things. Remember who stands ready to remove all risk, distort any market, and facilitate a resolution to any unsuccessful trade deemed too big to fail. Remember what, God only knows, is taking place right now, behind the scenes, in the shadows, over at Fannie Mae. Remember the Twin Towering Infernos of budget and trade deficits. Remember who owns the paper and electronic printing presses. The next time you pull out a Federal Reserve Note with an incremental cost of production near zero and the electronic version cost of absolute zero, remember what side of the trade you are on. They want inflation. They need inflation. We will have inflation.

So what advice might you want from a fellow sweaty life traveler? At the very least, exchange some of your dollars for some stuff that can't be inflated or whose values cannot be easily manipulated through the money-credit creation process. Oh, and one more thing; stay healthy and plan on working harder and longer and sweating a lot because Pharaoh needs more bricks. The treadmill is accelerating and the speed control and cruel whip reside firmly in the unsweaty grasp of the Pyramid Builders.

David J. Taffi, MBA

Copyright © 2005-2006 David J. Taffi

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