Central Banks and Price Inflation: A Complex Relationship
Government Control and Inflation
Many people believe that more government control of the economy can help control escalating prices. However, this is a flawed perspective. Governments that intervene in the economy rarely reduce consumer prices because they benefit from inflation. Inflation allows governments to dilute their political spending commitments in a constantly depreciating currency. Inflation is essentially a hidden tax. Governments devalue the currency by issuing more units of fiat money, partially dissolving their debt in real terms, collecting more taxes, and presenting themselves as the solution to rising prices with subsidies in an increasingly worthless currency.
Socialism and Hyperinflation
Socialism often goes hand in hand with hyperinflation. It rejects human action and economic calculation, promoting a false image of a government that can create wealth at will by issuing more units of fiat currency. When inflation hits, socialist governments often resort to propaganda and repression. Propaganda blames stores and businesses for driving up prices, while repression occurs when social unrest intensifies and citizens hold governments accountable for scarcity and high prices.
The Need for Free Markets
To achieve lower prices, it's necessary to reduce the economic power of the government. Free markets, competition, and open economies help decrease consumer prices. However, the reality is that we live in increasingly intervened and overregulated nations where central banks and governments work to perpetuate unsustainable public deficits and debt. As a result, they continue to print more money, leading to difficulties for families to make ends meet, buy a home, or for small businesses to prosper.
The "Social Use of Money"
The term "social use of money" refers to the abandonment of one of the main characteristics of money, the reserve of value, to give the government preferential access to credit to finance its commitments. This allows the state to announce larger entitlement programs and increase the size of the public sector relative to the economy, creating a self-fulfilling prophecy. The state issues more currency, which makes people’s money less valuable. Citizens become more dependent on the state, and they will demand more subsidies paid in the currency the state issues.
Price Stability and Central Banks
When governments and central banks talk about price stability, they usually mean a two percent annual depreciation of the currency. However, this is not true price stability. The consumer price index (CPI), which is used to measure inflation, fails to fully reflect the erosion of the currency’s purchasing power. This is why the CPI’s basket calculation fluctuates so frequently.
Government Role in Inflation
Governments create inflation by spending a currency that is constantly losing purchasing power because the state issues more than what the private sector demands. Inflation is a hidden tax and a slow process of nationalization of the economy. It's a way to increase taxes without angering voters and blaming private businesses. Consumers often blame stores or businesses for higher prices, not the issuer of a currency that loses purchasing power.
The Power of Inflation
Governments may want higher prices because it gives them more power. Destroying the currency they issue is a form of control. That's why they need more debt and higher taxes. High taxes are not a tool to reduce debt, but rather to justify rising public indebtedness.
The Limits of Government Borrowing
The notion that the government has unlimited borrowing power and can manage inflation to allow comfortable living is false. The government cannot issue all the debt it wants. It has inflationary, economic, and fiscal limits. Inflation is a warning sign of declining currency confidence and a loss of purchasing power.
Conclusion
If you want lower prices, you should give less economic power to governments, not more. A government that tells you it will borrow $2 trillion per annum in a growth and record receipt economy and will continue to increase debt and borrow well into 2033 with the most optimistic assumptions of GDP and receipt is telling you it will make you poorer.
Bottom Line
The relationship between central banks, governments, and inflation is complex and multifaceted. It's clear that more government control does not necessarily lead to lower prices. Instead, it often leads to inflation and a depreciation of the currency. What are your thoughts on this complex issue? Do you agree or disagree with the points made in this article? Share it with your friends and let's continue the conversation. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.
