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The real winner: Inflation
November 9, 2012 @ 7:19 pm
By Matthew Stevenson
[1]I buy none of the post-election, prime-time hokum that what decided the presidential race was the Latino vote, women’s issues, the next Supreme Court justices, the view from the fiscal cliff or how drones are winning the War on Terror. This presidential election was, as always, a contest between gold standardists and inflationists.
The victors were the forces of cheap money. William Jennings Bryan would be proud ‑ as would bimetalists and Weimar Republicans.
Inflation won because it is the panacea for all that ails the body politic: a short-term cure-all that promises economic growth, the possibility of paying off runaway national and international debts, new-found prosperity for the middle classes and liquidity for the impoverished, who otherwise would be voting in the streets with rocks and burning tires.
Think of it as doping for those wanting to win political races.
Cheap money defers many liabilities. Real wages for industrials workers have declined since the 1970s. True unemployment ‑ including those too discouraged to look further and others working part-time for unlivable wages ‑ is closer to 22 percent than the official figure of 7.9 percent. The national debt, $16.3 trillion, exceeds the gross national product. With unfunded entitlement programs, such as Medicare and Social Security, the government is eventually on the hook for an additional $46 trillion, which it would rather not pay with pieces of eight.
The hard-money men have not been able to win many elections since the 19th century, arguing as they do for reductions in the monetary supply; an asset-backed currency (preferably with gold) and policies that lead to deflation. These are a boon to lending institutions that want to get repaid with readily convertible cash, not watered stock.
The magic of inflation, before it turns everything to dust, is that it papers over a number of intractable financial problems. The United States is now able to run monumental trade and budget deficits, fight multiple foreign wars, vote tax cuts, extend unfunded pension and healthcare benefits to citizens over age 65 and spend money with Medici-like munificence on myriad federal programs by printing money or borrowing in national and international capital markets.
Were the dollar unacceptable as a reserve currency in investor portfolios here and abroad, these financial sleights of hand would have ended long ago. Imagine the consequences if the Chinese demanded gold, diamonds or barrels of oil as collateral for their U.S. dollar bond investments. Already, the dollar is badly depreciated against many currencies, including the Swiss franc and the euro.
The reason lenders to the American dream don’t demand hard assets in exchange for their full faith and credit is that most marketplace debt, as well as the circulating currency, comes with the guarantee of the U.S. federal government ‑ perhaps why a pyramid is printed on the back of a dollar bill.
Think about it: Bank deposits, mortgages, the balance sheets of large banks and hedge funds, Social Security, Medicare, defense spending and General Motors all fall under the rubric of being “too big to fail.” They have the implicit aval (endorsement) of the federal government, which pays its obligations with inflated money ‑ as opposed to doubloons carried around in a sack.
Why, then, does the economic data never show inflation as a problem, one that might have become a discussion point in the election? Since 2000, the consumer price index has shown inflation hovering between a manageable 2 percent and 4 percent per year.
The reason the inflation statistics alarm few is because it is far easier to manipulate economic data than it is to control runaway inflation, which ought to be synonymous with four-year college tuition at $200,000, one-bedroom apartments in New York City priced at $1 million, gasoline at $3.46 a gallon and carts of groceries that routinely cost at least $250. Nonetheless, the September consumer price index showed inflation at a modest 2 percent per year.
Another reason inflation enjoys such electoral pull is that it allows the political classes to maintain the illusion of power and authority. Without the ability to print and circulate paper money to balance the books on $16 trillion in national debt and $1.4 trillion in budget deficits, U.S. presidents would be riding Greyhound on their appointed rounds, not the magic carpet of Air Force One.
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Inflation carries the swing states of the American imagination because the tenets of a democracy are not consistent with deflationary politics, which favor landed and moneyed interests. In the 19th century, when deflation had its halcyon days, the winners were the railroad trusts, J.P. Morgan and John D. Rockefeller, all of whom demanded gold-based assets in settlement of obligations due in their favor.
The reason inflation finds so many willing partners is that, initially, it seems a painless way to pay off thorny debts; raise the illusions of prosperity (“Wow, I got a raise”) and provide society with a veneer of fairness. Nonetheless, inflation is best understood as a direct tax on the savings of American citizens, especially those of the middle classes, who lack hedges against its effects ‑ large real estate portfolios, say, or vaults of gold.
What stops the inflation Ferris wheel is when the currency is reduced to worthlessness. During the worst of Weimar’s inflation in the 1920s, robbers would steal suitcases of money and throw away the cash before fleeing.
In the case of the United States, the economic carnival will end when the dollar is no longer acceptable as a reserve currency, first in international markets and later domestically.
Part of the reason that a barrel of oil costs $85, not $10, in world markets is because traders discount the value of the dollars that they will receive when accepting payments. The only reason the Chinese hold debts denominated in dollars is because it helps them maintain the artificially low exchange rate of the renminbi.
Whether or not the United States goes over the fiscal cliff, it will remain unified as a nation of debtors for whom the goal is always to repay their loans with debased currency.
Adam Ferguson, in the introduction to his book, “When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany,” writes: “This is, I believe, a moral tale. It goes far to prove the revolutionary axiom that if you wish to destroy a nation you must first corrupt its currency. Thus must sound money be the first bastion of a society’s defense.”
No wonder Adolf Hitler, when he led a beer hall putsch in 1923, spoke of addressing “the revolt of starving billionaires.” For that kind of money, he could have also paid for a political campaign.
Matthew Stevenson, a contributing editor at Harper’s Magazine, is the author of “Remembering the Twentieth Century Limited,” a collection of historical travel essays. His next book is “Whistle-Stopping America.”
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