How to secretly rob the people with monetary inflation?

December 10th, 2006

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Quite some time ago, we had learnt that Alan Greenspan, the former US head of the Federal Reserve, had a sign at his desk that said, ?The Buck Starts Here.? While we are not sure of the truth to this, we know that at the very least, the statement itself is true (and funny as well)?the Federal Reserve has the power to create US dollars out of thin air. Since the world is running on fiat currency system, this arrangement is an accepted order of things globally. While we are not pointing a finger at anyone, we cannot help but feel disturbed by the ethical implication of this arrangement.

Suppose someone of great counterfeiting skill forged a million dollars. Who is the first to benefit? Obviously the forger because he can now spend the fake money on whatever he likes. The shopkeeper who receives the forger?s fake money will benefit next as his income increases. As the fake money spread throughout the economy, the money will pass from hand to hand in the forms of incomes and expenditures, raising the prices of goods and services along the way. Who will suffer most? The last person who receives the fake money because by the time he does so, price would have already risen.

Now, let us look at the situation in Shanghai as an example?see our previous article, Cause of inflation: Shanghai bubble case study. (Please note that we are not pointing a finger at the Chinese authorities?this is a universal problem that applies to every country in the world.) Clearly, there are some people who unfairly benefit and some who loses out. When central banks print money, the commercial banks are usually the first in the queue to receive them. The next to receive the money will be the companies and businesses that receive the money in the form of loans through the fractional reserve banking system. As that money made its way into the various classes of assets (e.g. properties and stocks), there will be some who strike it ?rich? as they sell their assets at inflated prices. As we said before in Speculative fervour in the Chinese stock market, the proliferation of ?success? stories of those who achieve their wealth through their ?investment? is testament to this phenomenon. Those who ?made? money will no doubt spend them, thus adding to the aggregate demand of the economy and bidding up prices. The end result is price inflation. Who are the last ones who will receive the money? The common people on fixed salaries and who do not own any ?assets? will have to bear the brunt of price inflation. In Shanghai, the rural migrants are one of the most susceptible groups. What is the end result of this? A redistribution of wealth from the last ones in the queue to the first one in the queue! Usually, the latecomers are the most vulnerable members of society.

Thus, monetary inflation always brings about false illusions of prosperity in the beginning. In reality, if left unchecked and unrectified, will be harmful to society in the end.

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  • Tom

    Take a look at the inflation problem in China right now: China Consumer Prices Rise Most in 20 Months on Food (Update7)

  • Tom

    Take a look at the inflation problem in China right now: China Consumer Prices Rise Most in 20 Months on Food (Update7)

  • Ben

    In London Bankers Fuel House-Price Boom, Rightmove Says (Update2), it says:

    Dec. 11 (Bloomberg) — London house prices rose in the past month at the fastest annual pace in at least four years, fueled by demand from bankers as the bonus season approaches, according to Rightmove Plc, the U.K.’s biggest property Web site.

    Maybe bankers are one of the first ones in the queue to receive the newly printed money?

  • Ben

    In London Bankers Fuel House-Price Boom, Rightmove Says (Update2), it says:

    Dec. 11 (Bloomberg) — London house prices rose in the past month at the fastest annual pace in at least four years, fueled by demand from bankers as the bonus season approaches, according to Rightmove Plc, the U.K.’s biggest property Web site.

    Maybe bankers are one of the first ones in the queue to receive the newly printed money?

  • Hunter

    There’s an interesting argument running through this blog about whether shelter, which is a necessity, should be at a cost determined by the market. I certainly don?t believe allowing the market to determine the cost of necessities is a good thing. I have lived in rental properties in Sydney for more than 10 years and it generally hasn?t been a pleasant experience. I?ve had experiences where I?ve stood my ground when presented with an excessive rental increase and have been served with an eviction notice the following working day. I am convinced that investment property owners and Real Estate Agents will act only more exploitatively towards tenants. The system needs to be overhauled and regulated, but I fear the problem is going to be too difficult for any Government to address. And of course if you ask John Howard or Peter Costello, they?ll tell you with a straight face that tenants have never had it so good.

  • Hunter

    There’s an interesting argument running through this blog about whether shelter, which is a necessity, should be at a cost determined by the market. I certainly don?t believe allowing the market to determine the cost of necessities is a good thing. I have lived in rental properties in Sydney for more than 10 years and it generally hasn?t been a pleasant experience. I?ve had experiences where I?ve stood my ground when presented with an excessive rental increase and have been served with an eviction notice the following working day. I am convinced that investment property owners and Real Estate Agents will act only more exploitatively towards tenants. The system needs to be overhauled and regulated, but I fear the problem is going to be too difficult for any Government to address. And of course if you ask John Howard or Peter Costello, they?ll tell you with a straight face that tenants have never had it so good.

  • Hi Hunter!

    Thanks for your comment. A few note to let you think about…

    You said:
    I certainly don?t believe allowing the market to determine the cost of necessities is a good thing.

    We agree with you that the price of necessities is very important and that as a nation, we have to help those who are less fortunate.

    However, in this case of housing affordability and rental problems, the predicament that many people face is the result of interferences on the free market. See our reply to Tom’s comment in Wasteful investment not the cause of housing un-affordability for more explanation on this. Basically, the problem is caused by monetary inflation (resulting in mal-investments) at the root.

    You said:
    I fear the problem is going to be too difficult for any Government to address.

    Actually, we are not optimistic on the government to do things to solve this problem. The reason being, the housing affordability and rental problem that we face right now is cause by a distortion on the free market. Further intervention by the government will distort an already distorted free market that can make things even worse in future.

    The ideal outcome will be for the market forces to liquidate all these mal-investments in the economy i.e. house price deflation, builders and property developers out of business, property ‘investors’ cutting loss on their property ‘investment’ and so on. Such an outcome will clean up all the excesses in the economy. But obviously, this will be politically suicidal for the government.

    In summary, the affordability and rental problem that we face right now is caused by a distortion on the free market via the ‘printing’ of money (commonly known as price inflation). As we said in this article, this distortion results in a transfer of wealth from the asset poor to the asset rich, which is manifested in the form of your personal experience.

    We do sympathize with your bad experience. If you find our articles and explanation useful to you, we hope that you will tell others about them so that they will understand the truth of the problem. Only then, can we demand our politicians to do the right thing that is in the best interest of our nation.

  • Hi Hunter!

    Thanks for your comment. A few note to let you think about…

    You said:
    I certainly don?t believe allowing the market to determine the cost of necessities is a good thing.

    We agree with you that the price of necessities is very important and that as a nation, we have to help those who are less fortunate.

    However, in this case of housing affordability and rental problems, the predicament that many people face is the result of interferences on the free market. See our reply to Tom’s comment in Wasteful investment not the cause of housing un-affordability for more explanation on this. Basically, the problem is caused by monetary inflation (resulting in mal-investments) at the root.

    You said:
    I fear the problem is going to be too difficult for any Government to address.

    Actually, we are not optimistic on the government to do things to solve this problem. The reason being, the housing affordability and rental problem that we face right now is cause by a distortion on the free market. Further intervention by the government will distort an already distorted free market that can make things even worse in future.

    The ideal outcome will be for the market forces to liquidate all these mal-investments in the economy i.e. house price deflation, builders and property developers out of business, property ‘investors’ cutting loss on their property ‘investment’ and so on. Such an outcome will clean up all the excesses in the economy. But obviously, this will be politically suicidal for the government.

    In summary, the affordability and rental problem that we face right now is caused by a distortion on the free market via the ‘printing’ of money (commonly known as price inflation). As we said in this article, this distortion results in a transfer of wealth from the asset poor to the asset rich, which is manifested in the form of your personal experience.

    We do sympathize with your bad experience. If you find our articles and explanation useful to you, we hope that you will tell others about them so that they will understand the truth of the problem. Only then, can we demand our politicians to do the right thing that is in the best interest of our nation.