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This article examines why it is that our daily experience of rising prices and increasing taxes fails to show up as inflation. It explains why governments manipulate this key target to make us believe in the soundness of our money, and exposes the techniques they use.
With inflation at a reported level of 2-3% we can all enjoy the confidence of knowing that our savings are almost retaining their value.
This is just as well, because our savings have accumulated into a sizeable sum. In the richest 30% of US households there are about $4,000,000,000,000 of near cash investments - representing about $120,000 per family. In the UK in excess of £600,000,000,000 now rests in aggregate household bank accounts and national savings - representing about £30,000 [$50,000] of unspent paper money spending power for every household.
This unnerving overhang of savings - matched, incidentally by a colossal quantity of debt from people who have over-spent - provides a strong motivation for government to persuade us all that inflation is low and our money is sound. It would be very bad for the other 98% if even 2% of that big overhang of wealth started to look for a different means of storing its value.
Perhaps this is why each month a key government compiled statistic dutifully reports a fact contradicting our experience, namely that our money is not losing its purchasing power.
But the reality is more sanguine. The inflation issue is disguised behind three wicked statistical sleights of hand.
The end result of all this book-cooking is that the RPI is not measuring the fall in the value of money at all. It only measures the increase in the cost of living after having taken back the value of every technical advance that's been made. So not only is the money you had in 1980 worth well under half what it was then, but to be worth even that much it assumes you adopt a lifestyle which refuses a new watch, a CD player, a computer, a washer/dryer, a video camera, any new car, or indeed any other technically useful thing which might have appeared. The way the inflation figures have been made to look good is by sticking us in a statistical timewarp.
Had these tricks not been used we would have seen true inflation - or the overall reduction in the purchasing power of money - running along deep into double digits for 40 years, and evidencing the systematic evaporation of the worth of our money as it increases in supply. One day soon the sheer quantity of money in circulation will precipitate a crisis resulting in the destruction of almost all private wealth. The 98% will be ruined. The 2% might just be OK.
In case this process is hard to believe try to imagine the action of a modern government in the face of serious economic distress, e.g. when that $4,000bn cash pile, losing credibility, triggers bank runs as it is withdrawn and converted into something less oversupplied.
Which of the following two is the more likely announcement to come from your government?
It is in the interest and power of governments to modify their paper money obligation and in times of crisis they will do so with wide popular support. Most voters will benefit either by having their debts inflated out of existence, or by having a (very) modest element of the lost purchasing power of their frozen deposits returned to them. Only those few who have successfully secured their money balances will be damaged, and under the circumstances no-one will care for them.
So the economic landscape will be levelled, and the additional paper money created will be taken out onto the street, where most of it will be searching for something to hold which provides a tangible store of wealth. Prices of such things will skyrocket. There are more and more people who believe we are approaching the final phases of this process.
"We are about to enter an era of $400 billion to $500 billion annual deficits, and reach the point where it is almost impossible to borrow the money we need. The money we have worked so hard to save all our lives will be worthless." ---Former U.S. Senator, Warren B. Rudman
Mr Rudman was speaking for the 98%.