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The Economics of Screwing People

Back in the days of the Mongol and Roman empires, the process of stealing wealth from the peasants and savers wasn’t very difficult. A little extra bronze in the treasury’s crucibles meant that you could create a few extra denarii (plural for the Roman denarius), and the emperor could have himself a nice little shopping spree. If any zealots thought about getting out of line, a spear to the side and a soak in the Tiber would silence any would-be threats.

With modernity comes complexity, though, and cross-border capital movements suddenly meant that the hard-laboring peasant could save his depreciating wealth by moving it into another country’s currency, or simply into a hard asset. But by the sheer act of doing that, the peasant would worsen inflation—because when he sells his denarii (or whatever currency he happens to be using) and buys assets, he drives down the value and the purchasing power of that currency.    

When people howl about the government screwing them, they probably don’t realize that the government has to prevent the peasants from screwing themselves—and therefore the government must screw the peasants. It’s not that the government hates you; it's a product of the system—and all we can do is take advantage of the system.

Inflation is largely a social psychology problem. If people think inflation will persist, it will, and Brazil was no different. Since the 1950s, it had gone through the same cycle: A presidential candidate makes big promises, which get him elected. Once he’s elected he creates currency to build a new capital in Brasilia or invent some new type of social handout. The inflation caused by currency creation would destroy the economy, the president would get voted out or impeached, and the cycle would begin anew. Don't we love cycles?

In 1990 Brazil, inflation was running 80% per month. If eggs were $1 on Monday, at that rate, they would cost $1.03 on Tuesday. By the end of the week, they would cost $1.20, and by the end of the year, they would cost $1,157—nobody said hyperinflation is cheap.

As quickly and as quietly as possible, then-President Fernando Collor froze all financial assets, put caps on prices and salaries, and increased taxes. Needless to say, Collor’s plan failed, and he was impeached in 1992.  

During the Thai baht crisis of July 1997, the government screwed savers and peasants royally. When the Thai government could no longer maintain its currency peg to the dollar, it cut the value of the Thai baht in half, immediately crushing the savings of millions. In order to keep people from fleeing with their wealth, the geniuses at the IMF suggested that Thailand raise interest rates to attract capital. When that strategy instead plunged the country into recession, the Thai government had to resort to locking down savings accounts and instituting capital controls to maintain whatever integrity was left in their currency.

With a U.S. default and another crisis seemingly around the corner, politicians and the Fed seem eerily calm about things. In yesterday’s news, the Financial Times wrote this:

“Wall Street bankers, from senior executives to traders, are complaining that the Federal Reserve is refusing to engage in scenario-planning for a downgrade or default by the US.
“With days to go until the US treasury’s August 2nd deadline to raise the debt ceiling, bankers said they were not getting a response to efforts to discuss the market impact of a failure to reach a deal in Washington or if rating agencies cut the country’s triple A rating.”

Is that non-response U.S. politicians being irresponsible, or are they just playing possum as they consider the ways in which they must screw us peasants in order to salvage what life is left in the dollar? We think it’s safe to assume that, regardless of what solutions the Fed and the Treasury come up with, it will be, as always, the savers and the peasant worker bees who are made to pay.