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Why do we all suffer from inflation these days? Well, there's only one reason why anyone suffers from inflation, and that's because of the government. The government creates inflation; it's a creature of the government. In fact, it's simply a sneaky way for the government to tax us because inflation, by definition, is the expansion of the money supply.
To inflate literally means to expand. People usually think of prices, but you can't expand prices; it's the money supply that expands. But when you increase the money supply, the value of that money decreases, and now you need more money to buy goods and services. So the price of those goods and services increases to reflect the additional money.
So, the increase in prices is simply a result of inflation, which is created by the government, specifically the Federal Reserve, because the Federal Reserve is expanding the money supply. But the government is ultimately spending that money supply in circulation when it sends out checks without collecting tax revenue.
It has these huge budget deficits. Where does the government get so much of the money to spend if it doesn't collect taxes and gets it from the government, which simply creates it out of thin air? Now, what you just said is so logical. And so obvious and so unassailable because the government doesn't acknowledge what it's doing, or does it intentionally.
Well, certainly the government doesn't want the public to know that inflation is created by the government because then they might object, obviously, because it's a tax. They want to blame the public for inflation, the greedy corporations that rip off their customers, OPEC for driving up the price of oil, the speculators for trading commodities, sometimes the greedy unions that demand higher wages.
The government wants to point the finger at everyone but itself. And part of the problem is that sometimes inflation, instead of driving prices up, prevents them from falling. And so we don't really see the damaging effects of inflation because you don't realize how much your cost of living would have been lower without the government-created inflation.
Because the beauty of capitalism—what little we have left in this country—is that capitalism is a force that leads to abundance, that leads to efficiency and economies of scale. And so, normally, in a capitalist economy, the cost of goods and services goes down. And that means our standard of living goes up because We can afford to buy more things.
But when the government creates inflation, it often prevents those benevolent price decreases from happening, but we don't complain about it because we don't realize the benefit we've never enjoyed. So if prices rise by 2%, but they should have fallen by 5%, the government says, "Oh, we have 2% inflation," but we don't; we have 7% inflation.
Prices are 7% higher because the government inflated the money supply than they would have been if the government hadn't created inflation in the first place. So how does the government tax people with its inflationary behavior? Well, the government needs money to spend, and it has two ways to get that money.
One is the honest way it could take it from us through taxes, right? Where the government literally takes the money from our paychecks so we have money to spend. Or they can persuade us to lend them money. Again, we take the money we could have spent and lend it to the government, and the government spends it instead.
Now, of course, that represents a claim on future taxpayers who will ultimately have to pay taxes to the government so it can pay back the money it borrowed. But in either of those two ways—taxes or legitimate loans— the money is sent from the private sector to the government, and then the government sends it back to the private sector.
So there's no net increase in the money supply, but there is a net reduction in my personal money supply because the money I sent to the government can't be spent. For me, but I have less to spend, so I have fewer things. The other way the government can pay for spending is simply by printing money and then giving that newly printed money to someone else to spend.
But when that happens, even though the government didn't take my money, the government took my purchasing power because now the people who received that money go into the market and spend it. They compete with me to buy goods and services, and that drives up the price of those goods and services. And that additional price is basically the equivalent of a tax.
So let's say the government takes 10% of my money in taxes, and now I have to reduce my spending by 10% because I only have 90% of my money left. So I buy fewer things. But if the government leaves me with all my money but only prints the equivalent of 10% of my money and gives it to someone else, and now that person goes and buys goods and services, the price of those goods and services goes up by 10%.
Now I have to cut my spending by that same 10%, because I don't have an unlimited amount of money. Things cost more now, so I end up in the same place regardless of whether the government takes my money or my purchasing power. The difference is that when the government takes my money, I blame them for raising my taxes.
But when they steal my money through inflation, I'm confused. Especially when the government is lying to the public about why prices are rising, or in fact, they're pretending they are n't rising by using the CPI, which doesn't even capture the true magnitude of the price increase. So I don't even know if they're rising if I believe the government.
But what I do know is that my standard of living is falling because I can't afford as many things with my income. But I don't blame the government, and I don't take out my frustration at the ballot box. That's what politicians don't want. They don't like raising taxes because voters don't like paying higher taxes.
But if they steal purchasing power through inflation, voters don't know they're being robbed, and they can keep electing the same people. People are being robbed. When I was a senior at Princeton, there was a young guy who lived across the hall from me named Jake Powell. Today, that young guy—I can see you laughing—was a good guy when he was 17 and 18.
Today, he's ruining the economy as Chairman of the Federal Reserve. How can they say with a straight face that inflation is transitory when the government is trying to borrow trillions? Yeah, well, apparently they stopped using the transitory work. So I don't know what they're using now, but they still expect inflation to come down.
I mean, if you look at the Fed's projection of interest rates for the end of 2023, the Fed still expects rates to be below 2%. How can that be? How can rates be so low, and is the Fed really committed to fighting inflation? Because even if you believe the government's methodology for tracking prices, prices are up 7% right now.
Well, how are you going to do anything about 7% inflation when your interest rates are below 2%? You have negative real interest rates above 5%. You're not going to make progress in the fight against inflation unless you have positive real interest rates, which means that if inflation is 7% you need interest rates of 8 or 9%.
It means, ask Paul Walker, who's no longer alive, but they didn't raise rates to 20% for nothing. Rates went up because inflation was 13%, and people thought it was going to get even worse, so the Fed had to get ahead of the inflation curve. Although Powell is still well behind the inflation curve, that curve is accelerating now, and it's clear it's going to accelerate even more as the size of the deficits gets bigger and bigger, and the Fed has to print even more money to monetize it.
Now, it 's not legally obligated to do so; in fact, it should refuse to do so. That's what the Federal Reserve is supposed to do, but unfortunately, the Fed follows the orders of Congress, and any deficit that Congress manages, the Fed is happy to monetize. In fact, the Fed is encouraging the government to have bigger deficits, especially so they can monetize them.
So, don't think of cash in terms of yield because you're not going to get anything. Think of it as giving you some choice because you could take that cash if the markets crash, and now you can. You can profit from the collapse by buying cheap stocks. Well, I have a better idea: instead of cash, use gold because inflation is seven and a half percent.
Again, it's 15, but let's use the government's numbers: seven and a half percent. If you stay in cash waiting to buy bargains on the stock market, you're losing seven and a half percent while you wait. That is, if you wait all year, you will have lost seven and a half percent of your purchasing power.
Instead of keeping your dry powder in cash, where it gets quite wet, how about keeping it in gold? That's a much better place to be if you don't want to be in stocks because you have the same option with gold. You can use your gold to buy stocks, and in fact, I think it gives you greater option because while stock prices fall, gold prices will rise, at least to compensate for that seven and a half percent inflation.
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