The Unsustainable Lie of Inflation

Includes: TIP, UDN, UUP
by: Paco Ahlgren

“I continue to believe that the American people have a love-hate relationship with inflation. They hate inflation but love everything that causes it.”

--William E. Simon

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”

-- Joseph Goebbels

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

-- John Maynard Keynes

You are being lied to.

In fact, it has been going on for almost a century. Your government wants you to believe – based heavily on the work of John Maynard Keynes and his disciples – that the only way an economy can grow is by creating moderate inflationary price increases, through the use of monetary and tax policy.

Some of you will notice that I’ve used both the Keynes and Goebbels quotes, above, in past articles, and I hope you’ll forgive me; I felt they bear repeating because they are so poignant and germane to the way the global economy is being manipulated. You may or may not agree with me, but the propaganda being employed to scotch-tape this crisis at its swelling seams is nearly as imperceptible as it is astonishing.

The word propaganda, in its current accepted usage, has been around for centuries. And just for the sake of thoroughness -- and to avoid any misunderstandings -- I’m going to define what I mean by current usage:

propaganda |ˌpräpəˈgandə| noun. information, ideas, or rumors deliberately spread widely to help or harm a person, group, movement, institution, nation, etc. ( Unabridged. Random House, Inc. 07 Nov. 2009.)

Many historians agree that Joseph Goebbels was the “master” propagandist, and after reading the quote at the beginning of this article, it’s pretty clear he took his duty to his government seriously. But how hard was his job, really? I mean, come on… you plaster a few swastikas all over a well-pressed black suit, throw on some jackboots, put on a fancy military hat, and say something like, “Homosexuals, Jews, and Communists are evil. So we’re going to kill all of them.”

Then you point guns at your audience, at which point, its members shrug and say, “Okay.”

Goebbels was, of course, the antithesis of everything I hold dear and beautiful in this universe. But you’ve got to admire a man who has the stones to be so blatantly honest about the fact that he’s a liar. Granted, he did have brute force on his side. But still.

In terms of human rights, I’d like to think things are improving -- that the world is a better place than it was through most, if not all of the 20th century. I’d like to think the governed have become smarter. At the very least, I’d like to think the average human being is more suspicious of, and cautious about his government. And maybe he is.

But then again, maybe he’s not.

The application of propaganda obviously didn’t stop with Nazi Germany. It has been applied with great success by Joseph Stalin, Mao Zedong, Pol Pot, and many others, to hide all measures of truth from the people these leaders suppressed and murdered. Thank God we live in the United States! Home of the Free and the Brave! Our government would never use propagandist techniques to persuade its population of anything! We don’t work that way. Right?


It’s time to wake up; even if the average human being has become a little more sophisticated and leery, governments (and their co-conspirators) have simply upped the ante -- taking propaganda to newer, subtler levels. In fact, the more I think about it, the more galvanized I am toward the tragic conclusion I used to start this article:

We are being lied to. And we still believe every single word of it. But the most revolting part of all this? Unlike decent German citizens forced to endure the tyranny and coercion of the Nazi regime, we actually have a choice not to believe the nonsense being crammed down our throats. And yet we do.

It’s not just governments anymore, either; it’s lobbyists, religious institutions, social movements, and advocacy groups of every sort. It seems like everyone has a sound byte these days. If you haven’t already figured it out, I’m the world’s most cynical skeptic, but some of these campaigns have even given me pause for a moment or two (just before I recognized them for what they were and became nauseated).

Before I bring this topic full-circle to its financial and economic implications – if only to illustrate the subtlety, sheer pervasiveness, and impact of some modern propaganda -- I want to share a few of my favorite contemporary phrases:

Ethnic Cleansing – This is a polite, yet important-sounding way of saying “If you don’t mind, we’d appreciate it if you, and everyone like you, would dig a ditch so we can shoot you and bury you in it. Thanks.”

Political Correctness – This phrase is just a haughty way of saying, “If you can’t say anything nice, don’t say anything at all.” Am I the only person in the world who finds this hackneyed little Clinton-era lyric to sound a lot like the noise a goat makes when it’s being slaughtered? I’m sorry, was that metaphor politically incorrect? I think I hear an angry PETA member throwing a computer monitor out a window somewhere.

Eminent Domain – This is an extremely sophisticated, legalistic way of saying, “We’re stealing your house. Get the hell out. Now.”

Intelligent Design – This is how a bunch of envious Christians respond to a concept as cool as Natural Selection. I’m still wondering what they’re going to come up with in response to The Big Bang. Maybe Provident Ejaculation? Whatever it is, I’m sure it will sound positively scientific and rational. I can’t wait.

And now for my favorite…

Quantitative Easing­ – This is government’s modern, scientific way of saying, “We’re going to print money and lower interest rates, making you think everything is worth ‘more.’ But in reality, everything won’t be worth ‘more,’ because we are systematically destroying your currency -- along with the economy – as we manufacture this illusion.”

It’s just a lot easier to say Quantitative easing. Plus it sounds sophisticated, which is important when Ron Paul is all but chewing his microphone off its base as he makes you accountable for your irresponsibility.

Propaganda is an art form. Yes it is.

I love the Keynes quote at the beginning of this piece. I really do. I mean, here’s the architect of so-called quantitative easing basically saying, “By making you think your house is going to be worth more every year, your government is stealing your money. And you don’t even know it!”

Again, this isn’t Murray Rothbard, or Jim Rogers, or Peter Schiff, or Milton Friedman! This is John Maynard Keynes telling you your government is stealing from you!

There was a time, believe it or not when price increases were the exception, and falling prices were the rule. As humanity has progressed, technology has always increased our standard of living, and created more efficiency. And this has almost always resulted in falling prices.

If you don’t believe me, think about how much bananas must have cost in Norway during the 16th century. Or think about how expensive cinnamon must have been in England in the 10th century. Most people would never even see these commodities – let alone be able to pay for them. Today, bananas and cinnamon are accessible globally, to anyone, at very low costs. Technology caused them to depreciate over time – not increase in price, as your government would have you believe should have been the case.

Or how about the most contemporary – and perhaps best example of all: the computer industry, and Moore’s Law. Prices of computers don’t increase over time -- they decrease with obsolescence and improved technology.

This is the way the economy should work. Instead, however, in order to create the illusion that everything is increasing in value, your government has created a monopolistic fiat currency and a central bank. No one can compete with the primary medium of exchange, and so the Fed prints currency and manipulates interest rates with reckless abandon.

In theory, it’s a great idea. You buy stuff, the Fed keeps inflation at about 3%, and in most cases, after a long period of time, your stuff seems more valuable. You can boast to your friends at work and at parties, “I bought my house for $50,000 in 1977, and today it’s worth $200,000! I’ve quadrupled my money!”

In reality, your annualized rate of return is a little less than 4.5%, and unless you paid cash, your interest rate was higher (and probably a lot higher) than your rate of return, so you’ve actually lost money on your house. And that doesn’t even take inflation into account.

Of course, you did write off all that interest you paid, and you had to live somewhere, but that doesn’t really diminish my point: considering everything I just said, along with the fact that inflation has – in the best case scenario – averaged 3%-4%, your house hasn’t really gained in value at all. And that goes for anything else you’ve bought, for the most part.

Yes, there are exceptions; Warren Buffett has averaged a purported 23% rate-of-return per annum during the decades of his career. But unless you were both lucky and smart enough to have picked up 100 shares of Berkshire-Hathaway (NYSE:BRK.A) when it was trading under $500, you probably haven’t been outpacing inflationary price-increases as much as you think you have – if at all.

But it sure feels like you have, doesn’t it? How many times have you heard this statement: “I can remember when [gas, a coke, a pack of cigarettes] was [insert really low price here]!”

And so the government perpetuates its myth. Why? Because it needs you to believe it’s doing a good job. And how does it achieve this? By creating the illusion that everything is going up in value, when in fact most things – in real terms – aren’t at all. In fact, most goods and services are actually falling in value, when you take into consideration the government policy of artificially perpetuating inflation.

And how does the government create inflation? Again, by printing currency and manipulating interest rates. Just to give you an idea of how consistently the government has been printing dollars since we went off the gold standard in the early 1970s, here’s a chart for you, courtesy of the St. Louis Fed:

click to enlarge

Okay, I mentioned the gold standard before, but I want to be clear about something: if the United States dollar ever was truly and directly connected to gold (and this is contentious), it was a very, very long time ago. But whether or not the relationship was ever direct or not, certainly in the 20th century while the dollar had some relationship with gold, the federal government – for instance, under Franklin Roosevelt – made it abundantly clear that it can, and will simply suddenly and arbitrarily announce how much gold is “worth” in dollar-terms.

Or, worse still, the government can simply dissociate the dollar with gold completely – as it did under Nixon. And – as the chart above demonstrates -- since the 1970s (when Nixon took us off the gold standard), the government has been printing money at will, and at an ever-increasing rate -- in its futile quest to manipulate inflation.

So what would the chart above look like if the dollar were tied directly and invariably to gold? It would be flat. And what would that mean? Simply put, goods and services during that period would rise and fall according to the principles of supply and demand only; there would be no distortions related to currency and rate manipulations. The fluctuations of goods and services would be pure, and their true value would be much easier to ascertain. This would mean more efficiency, more accuracy, and certainly fewer – and less dramatic – economic cycles.

Unfortunately, this has not been the case, and the government has persisted in its profligate and unrealistic quest to manipulate the dollar and the economy. The result? You’re living it: unemployment above 10% -- or, if you dismiss government statistics as unreliable (like I do), double that. Gold is breaking multi-decade highs. Oil and agriculture are climbing fast. These are the inevitable signs of inflationary price-increases, and the signs are huge.

In short, the dam before the Fed has 100 holes, but the Fed only has ten fingers to stop the leaks. The printing has been unprecedented. Rates are lower than ever in history. So what’s next? Well, it looks like the unsustainable myth is finally losing its power to persuade the multitudes, and that can only mean that the ultimate correction is looming before us. Some people call it “coming hyper-inflation.”

Disclosures: Paco is long TBT and Gold. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.