Why the US Central Bank Wants to Create Inflation, Destroy US Dollar

It’s the end of the world as we know it…and we feel fine!

India is booming. China is booming. The latest news from the Middle Kingdom tells us that its trade surplus is rising at a 56% annual rate.

Heck, even Argentina is booming. Its economy has been growing about three times faster than the US model for the last five years.

Last week, your editor and his old friend Doug Casey were invited to lunch at the American Club in downtown Buenos Aires. Our hosts were mostly men who have been living and doing business in Argentina for decades. They’ve seen it all – corruption, hyperinflation, defaults, chaos, riots, depression…you name it. “What’s the real story down here?” we wanted to know.

“I wish I could tell you,” said one gentleman from Texas. “I’ve been down here for more than 30 years…and I don’t know what’s going on. Nobody does.”

“I work in the government,” said another young man. “And I can tell you, they don’t have any idea. It is an incredible, unbelievable mess. Everything is spin…not substance.”

“Hey…how’s that any different from the United States?” asked Doug.

Many people come to Argentina for the tango or the beef or the property values. We come to have a look at the future. Whatever drama lies ahead for the United States of America…we have a feeling it has rehearsed down here on the pampas. 

Yesterday, the Dow went down a bit. But it could still be in a bullish phase. The index is still near an all-time high. And even the homebuilders look as though they may be bottoming out. Not that it particularly matters to us. Even if stocks continue to rise in nominal terms, it is of no interest – because they are too expensive to be good investments. And what we care about is real value, not just the numbers that follow a dollar sign.

In real terms, the Dow has been cut in half since 2000. You used to be able to sell all your Dow stocks and buy more than 40 ounces of gold. Now, sell them and you get only enough money to buy 18 ounces.

No, dear reader, the Dow is a fake-out…a sideshow…a distraction. The real drama is in the dollar itself. And the real excitement is in the gold market. Thursday, gold rose more than US$10 – to a new high for this cycle…at US$758.

Oil rose to almost US$83 last week, too. And the dollar fell to less than US$1.42/euro.

The falling dollar is not just a speculator’s plaything. It is the dollar in which almost all Americans’ hopes and dreams are calibrated. If a house is worth 300,000 dollars…those 300,000 pieces of paper may represent a lifetime’s worth of past effort…and it may also represent hope for future repose. Pensions, insurance plans, stock portfolios, bonds…everything we earn and everything we spend – it’s almost all in dollars.

As we pointed out last week, the dirty little secret of America’s advanced capitalism is that it socialises much of the risk…and most of the losses. The big banks…big financial houses…or even the little householders…get in trouble and the government rushes to their aid. “Here, have some more money,” says the Fed.

Where does that money come from? It’s a long story…but it’s not a new story. It’s a story that was played out in ancient Rome…in 18th century France…in 20th century Germany…and now is a long-running show north of the Rio Grande.

In effect, central bankers create the money – as Keynes put it – “out of thin air.” No harm in that, you say; it’s got to come from somewhere. Except, this new money competes with all the old money that people worked so long and hard to accumulate. But neither an economy nor a person can tell the difference between a dollar that came from the sweat of one’s brow and one that came out of thin air. The result is to increase the overall supply of dollars and reduce the value of each and every one of them. That is the phenomenon we know as “inflation”.

The consequences of inflation are well known. So is its source. Everyone knows, in other words, who gets killed and who fires the gun. What we add today is just an incriminating detail – the motive.

Why would the US central bank want to create inflation? Blame Congress…the politicians always want to spend more money than they can raise in taxes. They make the difference up by borrowing…and then the loans need to be refinanced…and more loans added…and the whole thing just goes down a lot more easily if there’s a little extra money floating around.

Or, blame consumers. They spend money they don’t have on things they don’t need. Who do they think they are, members of Congress? They, too, are a lot happier when the money is flowing. And, when the voters are happy, the politicians are happy…and when the politicians are happy, they don’t put a lot of difficult questions to their central bankers…so the central bankers are happy too. Let’s face it; everyone is happier when there is a little inflation in the system. Economists even came to believe that inflation helped boost employment…and that it encouraged consumers to spend…and that it actually helped created a more dynamic, more robust economy. So, you see, dear reader, even economists are happier with a little whiff of inflation in the air. And if you can make economists happy…aren’t you doing God a service?

Okay…now we’re getting to the deep, dark heart of the matter. Blame God. God created man. And man likes a little inflation. A little extra money makes people feel like they are getting something for nothing. Who doesn’t like that?

But God didn’t stop there. Sure, he made man, and man likes to get something for nothing. But God made sure there was a worm in this apple. “Something for nothing” always comes at a high price. If the dollar had merely retained its value since 2002 and all else remained even, Americans would have about US$10 trillion more of purchasing power today. Instead, they are getting used to foreigners coming in, buying their assets and telling them how cheap everything is. Yes, things are cheap to foreigners; they have real money. But things are not cheap to Americans.

To get an idea of the impact of inflation, just look at what happened to the economy of Argentina. The crisis of 2001-2002 reduced Argentines’ wealth by nearly two-thirds. All of a sudden, if they took a trip to Europe, for example, they found they had only a third as much money as they had had before. Foreigners were coming into the country to buy apartments and farms…the Argentines themselves didn’t have the money to compete with them. Argentina’s rich were fine. They had always kept their money in Miami or Switzerland. They had assets outside of the country. They had sources of revenue and ways to protect them. But the middle classes had their money in pesos. They earned their money in pesos. They counted on the value of their peso-pensions…and their houses…and their savings. But when the crisis came…their money disappeared. Argentina’s middle classes were practically wiped out.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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2 Comments on "Why the US Central Bank Wants to Create Inflation, Destroy US Dollar"

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Coffee Addict

The socialisation of the losses that Bill points to is only half the story.

The other half is that US debt is largely denominated in USD. Significant devaluation shares the losses (of the speculators )between the US middle class and overeas creditors, and of course non US exporters whose forward contracts are (for the time being) locked into a diminishing value currency.

brouxhon george
As an Australian I have to submit to Australian laws, just as you would submit to US laws in the US; otherwie I agree with your comment policy. As you pointed out, the mess we all share in our Anglo Saxon world is mainly attributable to our Central Banks and politicians; both have contributed to the enormous national debt, current account and trade deficits currently experienced by the US, England and Australia. It looks to me that the American model of financial capitalism, which we all emulated, is imploding as did communism under the Yeltzin days in Russia. The two… Read more »
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