“Confiscate, Secretly and Unobserved”

“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”

John Maynard Keynes penned these words after World War I (The Economic Consequences of the Peace); and all Fed governors, certainly Chairman Ben Bernanke, should be required to read them out loud each morning.

When inflation isn’t particularly hot, it’s praised as something desirable, though in its gradual, nearly invisible way it continues its insidious work. And the inflation data released today (BLS PDF) fall into that category: flat for the month and up 2.3% over the last 12 month. It will trigger palliative lingo such as “moderate” or “well anchored,” and any spikes would be “temporary.” But spikes in inflation, along with moderate, well-anchored, and temporary inflation, unless followed by deflation, become permanent. Result: a CPI-U index value of 230.085, where “100” represents price levels of 1982-84. Hence, 130% inflation over the last 30 years. In the process, the Fed “debauched” the dollar, to use Keynes’ term, by 56.5%.

CPI without food and energy was up .2% for the month and 2.3% for the year. While again in the soothing category of “moderate,” it shows a pernicious trend: the consistent rise in core inflation, part of it imported from China and other countries:

Energy was a mixed bag: overall -1.7% for the month and +.9% for the year. Gasoline, which finally dropped 2.6%, was the hot topic. But there was one item that will soon contribute to inflation: utility gas services (natural gas), -1.8% for the month and -11.6% for the year. After a long and steep decline, natural gas hit a 10-year low on April 19, of $1.91 per million Btu—far below production cost. The impact has been brutal, rig count is falling off a cliff, and production companies are reeling.

Healthcare costs are a perennial inflation nightmare. Medical care services rose .4% for the month and 3.7% for the year; health insurance jumped 1% for the month and 12.4% for the year. The industry appears to be immune to free-market price constraints. Over the last 30 years, medical inflation, according to a study by the Commonwealth Fund, was close to 700%. And healthcare costs have ballooned to over 17% of GDP. At about $8,000 per capita, healthcare eats up a significant part of a family’s income, either directly or indirectly, even if the family is securely ensconced in the middle-class.

And there are … televisions! Symptom of the many quirks in the index. They dropped 19.6% for the year, continuing a decade-long decline that began when flat-panel TVs hit the market. Back then, if you wanted a 48-inch TV, you could choose between a CRT based TV for $450 or an amazing flat panel TV for around $7,000. The index picked up the new technology at the introductory price, and as that price collapsed, flat-panel TVs had a deflationary impact on CPI—though consumers ended up paying several times more than they’d paid for a TV before!

There are a few winners in an inflationary environment, as Keynes pointed out. It allows companies to show a sales increase. Aspiring or actual billionaires favor inflation because they no longer struggle with paying for tuition, healthcare, or retirement. They’re in it for the game, and the game is to make more billions—and inflation speeds up the process. Debtors favor inflation, but only when central banks push yields below free market rates, thus blocking creditors from pricing inflation into the loan. And Congress, which refuses to live within its means, loves inflation; it’s the cowardly way of mitigating the consequences of endless budget deficits.

For the rest, inflation is an insidious hidden tax. There are no monthly statements or invoices. It quietly eats away at assets. It’s a nasty tax on wage earners whose wage increases haven’t kept up with inflation since the real-wage peak of 2000. And when combined with the Fed’s zero-interest-rate policy, inflation turns into financial repression. It hits savers, retirees, and pension funds. It pushes desperate people into Ponzi schemes. It punishes the prudent middle-class family that is trying to save for college or healthcare expenses. But banks and the government get money for free.

And so John Maynard Keynes continues his essay: “As the inflation proceeds…, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.” A gamble and a lottery, indeed!

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