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.
Tags: Alan Greenspan, China, Federal Reserve, fiat money, inequality, monetary inflation
