May 26, 2010

How do you measure the value of a dollar? I’ve already written about the cost of living index. That’s mostly a work of creative bookkeeping, a work of fiction to convince us that we only have a little bit of inflation. Could we measure the dollar in terms of British Pounds or Euros or Japanese yen? That wouldn’t tell us whether the dollar was inflating or deflating, or whether these currencies are inflating or inflating. The truth is that all of these currencies are being inflated, but at different rates.
What’s going on here? Why are all currencies being debased in value? The answer lies in Keynesian economics. This is bad economics, riddled with fallacies, but the economics of John Maynard Keynes is the answer to a politician’s prayer.
Keynes was an elitist who felt that the common man existed to support the elite. His economics was fundamentally immoral, for it was designed to deceive the ordinary working class, so they would willingly support the elites (of which he was, of course, the most elite). And, of course, the common people were too stupid to make wise choices; they needed wise men like himself to guide them and their governments.
Keynes explained his economic theory to President Franklin Roosevelt, who was struggling to get us out of the great depression. Workers would accept reduced real wages as long as they were getting increased dollar wages. Inflation, the stealth tax, would support government and provide money to subsidize industry and make-work projects to get the economy back on track. Roosevelt became a convert.
In time, Keynesian economics became the religion of all governments. Their wants had outgrown what their people would willingly pay in taxes. They had to get a bigger share of the wealth by stealth.
Actually, the economics of Keynes was a throwback to mercantilism, an often refuted economic philosophy that keeps coming back. It comes from the false notion that money is wealth, and goods are simply a means to obtain wealth. The idea is to make your country rich by exporting more goods than you import, and piling up the excess money in the government’s vaults.
So if you inflate the currency, you reduce the labor cost of production. You can then sell more goods abroad. Having reduced the value of your money, imports become more expensive so you import less. You pile up reserves of foreign currencies. So? What’s the use of foreign reserves. We have enriched other countries with cheap goods. We have impoverished our newly cheap labor to do it. The money we collect isn’t wealth. It’s useless unless we spend it.
The problem is that each government is playing the same inflation game in a race to inflate your own currency faster than other countries inflate theirs. We are in a race to the bottom, where money has no value at all.
Actually, all governments are in a race with technology. Advancing technology, at an ever increasing rate, creates and produces newer, better, products at decreasing cost. This masks the effect of inflation, so that in the long run, our standard of living improves despite the ever increasing slice that government takes from the annual pie. Although our lives are improving in material wealth, however, growing government means ever growing depletion of our freedom.


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