P.S. Inflation is Still Coming… It’s Going to Hurt

In 1976, The Bad News Bears was released. The film tells the story of a motley crew of youngsters who are allowed into an elite little league after a liberal city councilman sues on their behalf. The film stars Tatum O’Neal, then twelve years old, who was making her first on-screen appearance since becoming the youngest person to win an Oscar, which she did for her role in Paper Moon two years earlier.

In The Bad News Bears, O’Neal plays a pitching phenom who is uncomfortable with her tomboy image. She tries to walk away from baseball, and instead spends her days selling road maps to the homes of Hollywood stars. The maps are marked $0.75, but she says the “real price” is $1.25 “due to inflation.” Passing motorists gladly pay the 67% mark-up.

The Bad News Bears was a box-office sensation that spawned two sequels and a TV series, and the original film is now considered a cult classic. The young actress’s comment about inflation undoubtedly played no part in the franchise’s success, but watching the film 35 years later, it demonstrates how inflation had stained the public’s consciousness of the time.

While The Bad News Bears was being shot on the West Coast, an even bigger cultural phenomenon was just beginning to take shape on the East: hip-hop music. Today, you could barely imagine a less likely media to hear talk of inflation, but two pioneering rap songs reference it by name: Grandmaster Flash’s 1982 “The Message” and Run DMC’s 1983 “Hard Times.”

The public’s experience with inflation in the 1970s and early 1980s left a mark on the pop culture of the time, so much so that it sprung up in the unlikeliest of places. But today, even as true inflation is greater than at any time in our nation’s history, talk of inflation is limited to financial periodicals and the occasional Web site headline.  Why is this? Well, to begin to answer that question, we need to look at the true definition of “inflation,” how it has been manipulated over time, and to what ends those in power have changed the definition.

History Poised to Repeat Itself

But first, we need to define another word used earlier in the article. I said that true inflation is greater today than at any time in our nation’s history, and that statement is dependent upon the definitions of two terms: “true inflation,” which we’ll get to in a moment; and “our nation,” which we’ll examine presently.

As students of history know, the United States of America was not founded as “one nation” under God or otherwise, but thirteen separate nations bound together in a loose confederation. After independence was declared and won, the states that comprised the U.S. were sovereign unto themselves under the Articles of Confederation. People who lived in Virginia considered Virginia to be their country, not merely their state. Virginia wasn’t a political subdivision of a “country” called America, it was its own country, and the people of Virginia were their own nation.

Paleo-conservatives and libertarians may view this arrangement as being favorable to the one created by the Constitution, but from a practical standpoint, it definitely had some flaws. Most notably for purposes of this article, it allowed the Continental Congress to issue money, which it did prolifically. In a period of roughly four-and-a-half years, the value of the Continental paper dollar value lost 99.9% of its value, causing many revolutionary patriots to lose their fortunes. Thus, when the Constitution was adopted years later, it did three things on the monetary front: (1) it established gold and silver as the only valid forms of legal tender, (2) it prohibited the issuance of “bills of credit”—i.e., paper money; and (3) it took the power of coining and regulating money out of the hands of the states and put these things under the domain of the national Congress.

Of course, the first two of these clauses were abandoned long ago, and this has set the stage for history to repeat itself. Soon, the U.S. dollar “won’t be worth a Continental.”

Political Manipulation

Historically, economists used the term “inflation” to refer to an increase in the supply of money. When more gold was discovered, or when the government printed more money, there was “inflation.” True, this typically resulted in higher prices, but this was just a symptom of the inflation, and not inflation itself. Nevertheless, if you ask 100 people on the street what inflation is, you’d be unlikely to find more than one or two who’d say anything about the money supply, either by name or by general reference. The public schools have trained us to think that inflation is synonymous with rising prices, to the extent that we think about inflation at all.

But how does one measure “rising prices”? And what prices? The prices of computers typically go down, while the prices of food and gasoline typically go up. How can one measure “prices” in the broad, aggregate sense? Obviously, one can’t: There is no way to measure all prices of all things in all places and know how they should be weighted to reflect the “average” consumer’s budget; and even if there were, what use would these figures to be to anyone but the exactly “average” consumer, who doesn’t really exist?

Ignoring this reality for its own purposes, the federal government created several popular measures of “inflation” (or more accurately, price levels), the most famous of all being the Consumer Price Index or CPI. The CPI endeavors to measure the rise and fall of prices by using a “basket” of goods that are supposed to reflect the “overall price level.” It is by this measure that inflation really soared in the late 1960s, the 1970s, and early 1980s, inspiring the makers of The Bad News Bears and the rap pioneers referenced earlier in this article. However, within a few years, this inflation was a distant memory, thanks to the conservative leadership of President Ronald Reagan. But what exactly is it that Reagan did?

Reagan’s administration was truly visionary in fighting inflation because it realized that “inflation”—as it was now broadly understood to mean “rising prices”—was a political statistic subject to political manipulation. In something straight out of George Orwell’s 1984, and happening right about the same time, the Consumer Price Index was redefined to exclude housing, then a leading driver of CPI. Overnight, so-called “inflation” was tamed, but housing prices continued to soar. Nevertheless, people saw the CPI numbers and thought their inflationary woes were over, similarly to how investors now react positively to a company’s earnings going up based on changes to accounting regulations.

To be clear that manipulation of “inflation” numbers is a bipartisan effort, it must be noted that the next man to substantively tinker with CPI was Democratic President Bill Clinton. With the aid of Fed Chairman Allan Greenspan (who, it must be noted, was a Reagan appointee), Clinton devised the CPI manipulation trick known as “substitution.” When the price of t-bone steak, a longtime staple of the CPI, was seen as being “too high,” Clinton substituted chicken breast. By this same token, one could substitute water for gasoline and see an even greater drop in CPI.

Thus, while inflation as measured by CPI has seemed relatively tame since the mid-1980s, in reality, price inflation as measured by the original CPI has continued to soar. A subscription Web site called Shadow Stats still measures CPI under the pre-Reagan, pre-Clinton guidelines, and under this original methodology, CPI has been over 5% per year since 1987, whereas the official CPI only briefly exceeded 5% in 1991. Current CPI, under the original formula, is nearly 10%, whereas it is only around 2.5% according to the post-Reagan, post-Clinton numbers.

Would people be irate if they thought inflation was in excess of 10% for most of the time since 2003? They were in the 1970s, so there’s no reason to think they wouldn’t be in 2011. But simply because the government has redefined what “inflation” means—and not for the first time—people blindly believe that inflation is moderate. “We were always at war with Eurasia.”

Hidden Inflation

In addition to the “inflation” that is understated due to deletion (as with Reagan) and substitution (as with Clinton) in the CPI, as well as the generally unreliable nature of a government-created “basket of goods” representing an imaginary “overall price level,” CPI also underestimates inflation that would otherwise be evident but is hidden by gains in productivity.

For instance, let’s take the case of personal computers. Imagine you purchased a computer for $900 in 2008. Three years later, the exact model is now available for sale at a price of $600. If you view “inflation” only in terms of rising prices, then in this case, you would say that there had been negative inflation (or deflation) to the tune of 33%. However, let’s say that in the time between 2008 and 2011, the overall supply of money increased by 25%. If instead, the money supply had remained stable, then you might expect the price of that computer in 2011 to be 25% cheaper than it otherwise was. Instead of being $600, it would be $450, so instead of a 33% price cut, it would be a 50% price cut. The difference between what the price would have been and what it is reveals the hidden inflation.

What makes computers go down in price even as the money supply expands? The answer is gains in productivity. It becomes cheaper for computers to be made thanks to advances in technology, the accumulation of knowledge, and the recovery of prior investments by computer companies. Thus, even in the face of monetary inflation, prices for goods like computers can go down—but if the money supply had been stable, it is safe to say that the prices would have come down even further. Therefore, it is not accurate to say there is no inflation in the case of computers: There is evidence of inflation, it is just buried beneath the more apparent evidence of productivity gains.

A second way inflation can be hidden in prices is through the use of subsidies. Real food prices might rise by 10% per year, but if the government doles out subsidies to farmers and agribusiness to keep the price increases in check, most consumers are none the wiser. However, the government has no money of its own: in order to pay these subsidies, it must either tax its citizens or, more likely in recent years, it must borrow money. By borrowing money, it not only indebts future generations, but it crowds out investments in other enterprises, attracting capital for “risk free” investments in government bonds. This causes interest rates to rise and slows economic growth. Furthermore, about 25% of government bonds are purchased by the Federal Reserve, which creates the money to buy the bonds out of thin air; thereby expanding the money supply and diluting the value of all existing dollars. Thus, even if the inflation doesn’t show up in food prices, it shows up elsewhere, oftentimes in items not included in the CPI’s “basket of goods.”

Inflation: It’s Already Here

Inflation, properly defined as an increase in the supply of money, is not “coming”—it’s already here. In fact, it’s been here since the creation of the Federal Reserve in 1913. But over the past five years, this true, monetary inflation has been accelerating at an unprecedented pace.

In March, 2006, the Fed decided that it would no longer publish reports on M3, which is the broadest measure of the amount of “money” in circulation. Briefly, M0 is the strictest measure of money, counting only notes and coins in circulation and inside bank vaults. M1 adds in traveler’s checks and demand deposits (i.e., money in checking accounts at banks and credit unions). M2 adds in savings deposits and time-deposits (such as CDs and money market accounts) of less than $100,000. And finally, M3 includes everything from M0, M1, and M2, as well as large time deposits, institutional money market funds, and other large liquid assets. In short, M3 is the truest measure of the money supply, but the Fed decided to stop reporting it—ostensibly because it was “no longer important,” but in reality, because they knew that the outrageous growth of M3 that was about to be unleashed would lead to worldwide panic.

Fortunately, Shadow Stats also tracks M3. From the time the Fed stopped reporting M3, M3 grew at an annual pace of as much as 17%, and never fell below 10% until late 2009. Meanwhile, official CPI had “inflation” at a modest pace of 1-3%, and amazingly enough, the general public, Wall Street, and even foreign investors bought the bogus numbers.

The Pre-Emptive War Against Deflation

So prices have been going up, along with the money supply, at much greater-than-reported rates. People on the street know this, but there is no genuine panic since the media parrots the official Washington numbers that have “inflation” numbers in the low single digits. In fact, there are stories almost every week in which some government-paid economist warns that we might be facing the dreaded “deflation”—by which they mean falling prices.

Now, for consistency’s sake, it must be pointed out that the true definition of deflation is the opposite of the true definition of inflation—it means a decrease in the money supply. This, theoretically, really is just as bad as inflation, although it should be noted that neither is necessarily “bad” so long as they occur naturally. If, for example, gold was the generally agreed-upon medium of exchange, then there would be inflation as new gold was mined, and there would be deflation as gold was taken out of the money supply to be used for jewelry or in industrial applications, etc. However, when mainstream media pundits and non-Austrian economists talk about “deflation,” they’re really talking about falling prices—and they have the audacity to suggest that falling prices are bad!

Far from being a bad thing, falling prices are the natural result of the accumulation of capital and advances in productivity in a free-market economy. We already discussed how these forces drive prices down in the case of computers and other goods, even in the face of monetary inflation. However, the Keynesian establishment—led by supposed free-market economist Milton Friedman—has rewritten history so that people are taught that falling prices were the cause of the Great Depression. In reality, of course, falling prices were the result of the Depression, not its cause—notice how mainstream economists frequently conflate causes and effects.

To think that falling prices in consumer goods could actually be a bad thing shows the disconnect that Beltway economists and the politicians they serve have with mainstream America. Obviously, lower prices means your money goes further, and that’s a good thing. But the “official story” is that what they call “deflation” is bad, and this is in fact a smokescreen for them to use as an excuse for their rampant money creation. When the Fed’s entire house of cards comes crumbling down in the next few years, they will point out newspaper headlines that quote “respected” economists citing a fear of deflation. They will say, “Yes, in retrospect, we over-inflated—but we had to. There were serious fears of deflation, and we all know how disastrous deflation is! It caused the Great Depression, for goodness sake!”

The Real Purpose of Real Inflation

Monetary inflation is ruining the economy and will be the death of the once-great United States. Those in high positions, though drunk on power and fervent in their belief in the religion of Keynesian statism, are not stupid, and thus, at least some of them have to realize this on some level. Therefore, it must be asked: to what end is the political class perpetrating all of this inflation?

Economist Richard Cantillon answered this question in 1730, 46 years before Adam Smith wrote The Wealth of Nations. In what is now known as the Cantillon Effect, Richard noted how those who get newly created money first benefit most, because the inflationary effect of the money entering circulation is yet to be fully realized. In other words, if the money supply were increased by 10%, you could expect the “overall price level” to go up by roughly 10%, but as this is an effect of the monetary inflation, it would not be realized all at once. Those who first got the new money would spend it almost on par with all of the money previously in existence, and prices would rise only as that new money began to circulate, competing for purchasing power with all of the money previously in existence. The last to get that new money would get it when it was at its lowest value—this is the true meaning of “trickle down economics.”

So, with this in mind, consider how money is created in the modern U.S. economy. Banks effectively create money when they issue loans, as they are allowed to lend $10 for every $1 they have on deposit—the $9 difference is created out of thin air. In this case, the banks are the first to receive the money, and they lend it as if it is as valuable as all of the money already in existence. The next to get the money are the borrowers, and while middle-class individuals and small businesses definitely get bank loans, those loans are getting harder to come by and represent a tiny fraction of the total dollar value made in loans, anyway. Instead, it is the rich and politically connected who get most of this new money, and they spend it at its full value. Those on the bottom—i.e., the working class, especially those outside of the corporate system—receive the money last, when inflation has already taken its toll.

Another way for money to come into creation is for the Fed itself to create it in order to purchase government bonds. In this case, the government gets the money first, and then uses it to pay government workers and contractors—i.e., the political class. Since all money in existence at that point is slowly devalued, this represents theft—not in money, per se, but in purchasing power—and thus, inflation truly is a “hidden tax.”

The purpose, therefore, of inflation, is to redistribute wealth from the middle and working classes to the rich and politically connected. This is why the definitions of inflation and deflation have been changed. This is why history has been rewritten to blame the Great Depression on falling prices. This is why CPI was created in the first place and then altered to yield numbers that served the government’s interests. And this is why there was no mention of inflation in the 2006 remake of The Bad News Bears or in modern rap-music hits.

Inflation: It’s Going To Get a Whole Lot Worse

And now for the truly bad news: Inflation is going to get a whole lot worse before… it gets even worse yet! And as a result, we are going to see massive price inflation, too.

Right now, for the first time in history, the Federal Reserve is paying interest on excess reserves held by banks. Publicly, the government is chiding banks for not lending, but privately, they are—again, for the first time ever—rewarding them for holding on to their money. All of this is part of the smokescreen mentioned earlier, and will be an excuse for the Fed to engage in hyperinflation—rampant money printing—which will in turn result in massive price increases. The purpose of this will be to redistribute wealth into the hands of the elites, who will use it to buy real property before the entire system collapses.

Yes, more inflation is coming, and it will literally be a killer. People will die as a result of the economic events that are already preordained. But you need not be one of the casualties: By buying gold, silver, consumable goods, and other physical commodities, you will be preparing yourself to not only survive the coming hyperinflationary apocalypse, but to thrive amid it. Do all you can to warn those you care about, but most will not listen. They are too busy watching American Idol. Instead, they should consider renting The Bad News Bears.