It’s another record-high for the U.S. National Debt which today topped the $12-trillion mark. Divided evenly among the U.S. population, it amounts to $38,974.34 for every man, woman and child.

Technically, the debt hit the new high yesterday, but it was posted on the Treasury Department website just after 3:00 p.m. ET today. The exact calculation of the debt is a 16-digit tongue-twister and red-ink tsunami: $12,031,299,186,290.07

This latest milestone in the ever-rising journey of the National Debt comes less than eight months after it hit $11 trillion for the first time. The latest high-point is not unexpected, considering the federal deficit for the just-ended 2009 fiscal year hit an all-time high at $1.42-trillion – more than triple the previous year’s record high.

Much of the increase in the deficit and debt is attributed to government spending outpacing revenue – both exacerbated by the recession and the government response to it – including hundreds of billions in bailouts and stimulus spending and tax cuts along with decreased tax revenues due to rising unemployment.

In recent days, President Obama has spoken of the need to bring the rising deficit and debt under control.

“I intend to take serious steps to reduce America’s long-term deficit – because debt-driven growth cannot fuel America’s long-term prosperity,” he said in remarks prepared for delivery to the leader’s meeting last Sunday at the Asia Pacific Economic Cooperation summit.

The National Debt has increased about $1.6 trillion on Mr. Obama’s watch, though less than $4.9 trillion run up during the presidency of George W. Bush.

Of course, Obama has only been in office ten months, not eight years.

Since Barack Obama took the Oath of Office, the national debt has increased from $ 10,626,877,048,913.08 to $ 12,031,299,186,290.07. That’s an increase of $ 1,404,422,137,376.99 over 302 days, or $ 4,650,404,428.40 per day, $ 193,766,851.18 per hour, $ 3,229,447.52 per minute, and $ 53,824.13 per second.

Anyone want to bet how long it will take to get to $ 13 trillion ?

My guess is August 15, 2010.

When Ludwig von Mises first arrived in the United States after escaping from Nazi Europe, and pretty much up until the present day, he was essentially ignored by the mainstream economics community in the United States. It was only through the assistance of American businessmen that he was able to get a job teaching at New York University, and, even then, the work he did had nothing to do with official university activities because he was, effectively, shunned for his uncompromising defense of the free-market.

Earlier this week in The Wall Street Journal, though, Mises is given credit for being one of the few economists in the 1920s to foresee the impending Great Depression:

Mises’s ideas on business cycles were spelled out in his 1912 tome “Theorie des Geldes und der Umlaufsmittel” (”The Theory of Money and Credit”). Not surprisingly few people noticed, as it was published only in German and wasn’t exactly a beach read at that.

Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.

Government-imposed expansion of bank credit distorts our “time preferences,” or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption.

Ordinarily, any random spikes in credit would be quickly absorbed by the system—the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.

The system is dramatically susceptible to errors, both on the policy side and on the entrepreneurial side. Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into one with tremendous cyclical volatility.

(…)

We all know what happened next. Pretty much right out of Mises’s script, overleveraged banks (including Kreditanstalt) collapsed, businesses collapsed, employment collapsed. The brittle tree snapped. Following Mises’s logic, was this a failure of capitalism, or a failure of hubris?

Mises’s solution follows logically from his warnings. You can’t fix what’s broken by breaking it yet again. Stop the credit gavage. Stop inflating. Don’t encourage consumption, but rather encourage saving and the repayment of debt. Let all the lame businesses fail—no bailouts. (You see where I’m going with this.) The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher.

That was Mises’ argument in The Theory Of Money And Credit, but he did so much more than that. In Socialism, first published in 1921, Mises laid out in detail the reasons why the centrally planned economy of nations like the USSR could never produce a rational economy and were doomed to failure. He was, of course, proven right in that regard as we learned only twenty years ago. Mises’ magnum opus is Human Action: A Treatise on Economics and while it’s not easy reading it is well worth consuming for even the amateur student of economics.

Here’s hoping people will start taking Mises’ lessons to heart before we make the same mistakes all over again.

I believe that all citizens should become involved in the legislative process by letting their voices be heard, and I appreciate the time and effort that you took to share your thoughts with me. One of the most important aspects of my job is keeping informed about the views of my constituents, and I welcome your comments so that I may continue to represent California to the best of my ability. Should I have the opportunity to consider legislation on this or similar issues, I will keep your views in mind.

Great… You thank me for sharing my thoughts. I feel empowered!

What you don’t say is anything whatsoever regarding your opinion on the legislation (at least Feinstein gave me *something*). So how do I interpret your letter?

‘I’m gonna put my finger up in the air and see which way the wind blows, because I have a vulnerable seat in 2010 and I don’t want to piss anyone off. If I see any benefit to myself, I might at some point take a position on this legislation.’

So, today, when I was reading United Liberty, I was reminded of S.604, and decided to check to see if there were any surprises. And to my astonishment, there was! Barbara Boxer actually co-sponsored S.604!!

Do I think she’s really all that interested in an audit of the Federal Reserve? Not from the email response I received. But hey, she knows a populist wave when she sees one, and she’s gonna ride this one to Nov 2010.

There are a lot of forces assembling behind the Audit the Fed movement. Those forces are having traction. Enough traction, in fact, to get a California Democratic Senator to fall into line. It may be a political calculation, but if someone like Boxer has to make that calculation, it proves that there’s actually some real mojo here. Congratulations are due to Ron Paul, because without his tireless work in the House, we wouldn’t be this close to a serious review of what goes on at the Fed.

Letter from Boxer:

Dear Mr. Warbiany:

Thank you for contacting my office to express your views on S.604, the Federal Reserve Sunshine Act of 2009, which would require the Comptroller General to conduct an audit of the Board of Governors of the Federal Reserve and its banks before the end of 2010 and to report its detailed findings to Congress.

I believe that all citizens should become involved in the legislative process by letting their voices be heard, and I appreciate the time and effort that you took to share your thoughts with me. One of the most important aspects of my job is keeping informed about the views of my constituents, and I welcome your comments so that I may continue to represent California to the best of my ability. Should I have the opportunity to consider legislation on this or similar issues, I will keep your views in mind.

For additional information about my activities in the U.S. Senate, please visit my website, http://boxer.senate.gov. From this site, you can access statements and press releases that I have issued about current events and pending legislation, request copies of legislation and government reports, and receive detailed information about the many services that I am privileged to provide for my constituents. You may also wish to visit http://thomas.loc.gov to track current and past legislation.

Again, thank you for taking the time to share your thoughts with me. I appreciate hearing from you.

Barbara Boxer
United States Senator

Letter from Feinstein:

Dear Mr. Warbiany:

Thank you for contacting me to express support for legislation to increase transparency at the Federal Reserve. I appreciate your interest in monetary policy and welcome the opportunity to respond.

The Federal Reserve was originally established in response to the country’s need for a sound and independent central bank to manage decisions relating to U.S. monetary policy. I understand your concern with some of the unprecedented steps that the Federal Reserve has taken recently to ease the flow of credit and stabilize financial markets.

On March 16, 2009, Senator Bernard Sanders (I-VT) introduced the “Federal Reserve Sunshine Act of 2009″ (S. 604), which would require the U.S. Comptroller General to audit the Federal Reserve System before the end of 2010. This bill has been referred to the Senate Banking, Housing, and Urban Affairs Committee. Representative Ron Paul (R-TX) has introduced a similar bill (H.R. 1207) in the House of Representatives. Please know that I will keep your support for this legislation in mind should it come before the full Senate.

While I recognize the importance of accountability in the operations of the Federal Reserve, I strongly believe that monetary decisions should be made independent of political influence or motives. You may be interested to learn that I supported an amendment to the Congressional Budget Resolution (S. Con. Res. 13) offered by Senator Sanders requiring the Federal Reserve to disclose how it has disbursed emergency economic assistance to financial institutions during this severe economic crisis. Be assured that I am carefully monitoring the actions taken by the Federal Reserve to help stimulate our economy and unfreeze credit for businesses and homeowners.

Once again, thank you for writing. I hope that you will continue to share your views with me. If I can be of any further assistance, please contact my Washington, D.C. office at (202) 224-3841. Best regards.

Sincerely yours, Dianne Feinstein
United States Senator

In his new book End the Fed, though, Paul provides a clear, concise explanation for why we all need to be worried about the fiat paper money system that we’ve lived under for decades. As Paul says, the system itself is unsustainable over the long term, and Federal Reserve itself has contributed to economic instability in the 96 years since it’s founding.

This isn’t a detailed economic treatise, it’s a call to political action, and Paul does an excellent job of making his case for the argument that we need to bring an end to the monetary system that is, slowly but surely and inevitably, destroying us and destroying freedom. Instead, he argues that we need to return to the days of the Gold Standard, which doesn’t even need a central bank to function properly. You may disagree with the end scenario that Paul proposes, but it’s hard to disagree with his assertion that liberty in money is as necessary for a free society as liberty in thought or property.

Paul’s most important insight in this book, though, comes in his concise demonstration of how the “magical printing press” monetary system that we have today makes possible the leviathan state that is threatening to bankrupt us. Without a central bank with the ability to create money at will and in secret, it’s highly unlikely that the welfare-warfare state would be able to exist. Without free money, the state would be forced to either raise taxes or borrow money to finance it’s ventures and adventures and it’s unlikely that either taxpayers or bondholders the kind of unlimited spending that fiat money makes possible.

What this means is this — you’ll never have a truly limited government as long as you have a central bank with the power to create “money” at will.

That’s why it’s important to End the Fed, and that’s why this book is one that everyone should read.

Particularly irksome when we’re talking about an audit is the fact that they’ve just admitted to engaging in gold swaps, influencing the gold price, in opposition to past denials and with the assertion that they should be able to continue hiding the specifics:

The Federal Reserve System has disclosed to the Gold Anti-Trust Action Committee Inc. that it has gold swap arrangements with foreign banks that it does not want the public to know about.

The disclosure, GATA says, contradicts denials provided by the Fed to GATA in 2001 and suggests that the Fed is indeed very much involved in the surreptitious international central bank manipulation of the gold price particularly and the currency markets generally.

The Fed’s disclosure came this week in a letter to GATA’s Washington-area lawyer, William J. Olson of Vienna, Virginia (http://www.lawandfreedom.com/), denying GATA’s administrative appeal of a freedom-of-information request to the Fed for information about gold swaps, transactions in which monetary gold is temporarily exchanged between central banks or between central banks and bullion banks. (See the International Monetary Fund’s treatise on gold swaps here: http://www.imf.org/external/bopage/pdf/99-10.pdf.)

Gold has been flirting with the $1000/oz level for several weeks (topping it a few times). Those in the gold market have long believed that central banks are suppressing the price to keep fears of inflation from hitting the roof.

How much longer do we have to allow the fed to lie to us, and then when we catch them red-handed, assert that they know well enough that we have to let them hide details on top of their lies?

I say we audit the fed. Then End The Fed.

And yet, there was budget director Peter Orszag rushing to a lunch with Chinese bureaucrats on a Monday in late July. To his surprise, when Orszag arrived at the site of the annual U.S.-China Strategic and Economic Dialogue (S&ED), the Chinese didn’t dwell on the Wall Street meltdown or the global recession. The bureaucrats at his table mostly wanted to know about health care reform, which Orszag has helped shepherd. “They were intrigued by the most recent legislative developments,” Orszag says. “It was like, ‘You’re fresh from the field, what can you tell us?’?”

As it happens, health care is much on the minds of the Chinese these days. Over the last few years, as China has become the world’s largest purchaser of Treasury bonds, the government has grown increasingly sophisticated in its understanding of U.S. budget deficits. The issue has become all the more pressing in recent months, as the financial crisis and recession pushed the deficit to record levels. With nearly half of their $2 trillion in foreign currency reserves invested in U.S. bonds alone, the Chinese are understandably concerned about our creditworthiness. And this concern has brought them ineluctably to the issue of health care. “At some point, if you refuse to contain health care costs, you’ll go bankrupt,” says Andy Xie, a prominent Shanghai-based economist, formerly of Morgan Stanley. “It’s widely known among [Chinese] policymakers.” Xie himself wrote a much-read piece on the subject in 2007 for Caijing magazine–kind of the Chinese version of Fortune.

The Chinese, unfortunately for them, have worked their way into a suicide pact with America. They are simply too heavily invested here to see any serious problems with our economy, government, or monetary base. Had they not spent the last decade buying up enormous Treasury holdings, they could let us implode our economy and “fix” our debt/spending issues through debasing our currency, and then swoop in to buy assets on the cheap once we hit bottom. But that’s not on the agenda. If we take the low road, we’re towing them along for the ride.

Obama says he won’t accept a bill that adds to the deficit. I don’t believe him, since I’ve already seen him fail to live up to his promises on taxes and legislative transparency. Even worse, though, he’s got the folks who plan to finance that deficit worried. And the last group you want to scare are the ones you’re trying to get to lend you money.

Hat Tip: Ezra Klein

“Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren, America has a debt problem and a failure of leadership.”

— Senator Barack Obama (Ill), 2006

We need to raised the debt ceiling above $ 12 Trillion.

— President Barack Obama, 2009.

Many auto industry analysts and dealers expect sales volumes to fall now that the program is over. They worry that many people who took advantage of the program were merely accelerating purchases they would have made later in the year.

If that’s true, the premature sales could hurt automakers, which increased production in the third quarter to replenish clunker-depleted inventories that had already grown low because of factory shutdowns over the summer.

Cash for Clunkers is essentially an inflationary policy. This is a policy well described by Adam Smith Milton Friedman, with the exact same consequence:

In a dynamic world demands are always shifting, some prices going up, some going down. The general signal of increasing demand will be confused with the specific signals reflecting changes in relative demands. That is why the initial side of faster monetary growth is an appearance of prosperity and greater employment. But sooner or later the signal will get through.

As it does, workers, manufacturers, retailers will discover that they have been fooled. They reacted to higher demand for the small number of things they sell in the mistaken belief that the higher demand was special to them and hence would not much affect the prices of the many things they buy.

The government has arbitrarily and falsely increased demand for a specific good (new cars). They’ve done so by throwing money at it (a locally inflationary policy) and the automakers are ramping up production in response to what they THINK is a more stable recovery. But they may soon find, as Adam Smith Friedman predicted, that they have been fooled.

Here’s what Obama had to say:

Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic freefall

I thought it might be useful to take a look at some highlights of this Solon, this central – planner whom George Bush put in charge of the money supply:

Of course, as usual, Obama is dead wrong: the Federal Reserve’s actions have actually prolonged the downturn, made it worse, and have laid the foundations for an even bigger crash down the road.

In the days before the election, I told many of my fellow Massachusetts residents that Obama was not so much a break from George Bush as a continuation of his worst policies. I am sorry to say that he has been proving me right since. And this is yet another nail in the coffin of an administration that is showing itself to be even more incompetent than the Bush presidency.

Biden: We need to put more on our national credit card to keep from going bankrupt

CNS News provides the following quote (emphasis added) from Vice President Joe Biden:

“And folks look, AARP knows and the people with me here today know, the president knows, and I know, that the status quo is simply not acceptable,” Biden said at the event on Thursday in Alexandria, Va. “It’s totally unacceptable. And it’s completely unsustainable. Even if we wanted to keep it the way we have it now. It can’t do it financially.”

“We’re going to go bankrupt as a nation,” Biden said.

“Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, that’s what I’m telling you.”

My response is simple enough even for Twitter:

Earth to Joe Biden: Spending to avoid bankruptcy is like f***ing for virginity.

Considering the way Congress spends our money, perhaps ” orgy for sexual abstinence” may have been a better analogy.

Insert joke about stimulating the economy below.

WASHINGTON (AP) — Former Treasury Secretary Henry Paulson testified on Thursday that he pressured Bank of America Corp. last year to go through with its plans to buy Merrill Lynch but didn’t tell the bank’s chief to hide potential losses from shareholders.

Paulson acknowledged that he warned the bank’s CEO, Kenneth Lewis, that Lewis could lose his job if he dropped the deal. Paulson also said he pledged government aid to the bank but declined to put that promise in writing because the details would have been vague and would have to be disclosed publicly by the Treasury Department.

…

In testimony to the committee, Paulson said he told Lewis last year that reneging on his promise to purchase Merrill Lynch would show a “colossal lack of judgment.”

Paulson said that “under such circumstances,” the Federal Reserve would be justified in removing management at the bank.

“By referring to the Federal Reserve’s supervisory powers, I intended to deliver a strong message reinforcing the view that had been consistently expressed by the Federal Reserve, as Bank of America’s regulator, and shared by the Treasury, that it would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis and which would show a lack of judgment,” Paulson said.

Paulson said he believed his remarks to Lewis were “appropriate.”

Federal Reserve Chairman Ben Bernanke has denied threatening to oust Lewis and said he never told anyone else to, either. But another Fed official suggested otherwise in an e-mail obtained by House investigators.

Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said in a December 2008 e-mail that Bernanke had planned to make “even more clear” that if Bank of America backed out on the deal, “management is gone.”

Paulson said Bernanke never asked him to relay the message. But, he added, he believed he was expressing the Fed’s opinion that dropping the deal “would raise serious questions about the competence and judgment of Bank of America’s management and board.”

I’ve previously covered this type of activity by Paulson & Bernanke here and here.

The below letter should be read as a potential template for readers to use when writing to your own Senators and Congressmen. However, there are two caveats to this. First, there are a few points here about California, as we have had some special challenges throughout the tech crunch and the housing collapse. Second, the tone of the letters is geared towards Democrats. If you’re sending this to Republicans, it would make sense to change the language in certain areas.

Either way, I wanted to provide potential talking points for readers who want to contact their Senators and get this ball moving.

July 9, 2009

Dear Senator XXXXX,

Senate bill S.604, a bill to require the Comptroller General of the US to audit the Federal Reserve, is currently under review with the Senate Committee on Banking, Housing, and Urban Affairs. I am writing to urge your support for this bill.

California has been the epicenter of two asset bubbles over the last two decades: the high tech bubble and the housing bubble. Both brought the illusion of wealth to our state, and both caused much pain to our residents and our state government when they collapsed. There are many causes of asset bubbles, but chief among them are the loose monetary policies of the Federal Reserve. These policies cause malinvestment and excessive speculation, the hallmark of any bubble.

The Federal Reserve policies of Alan Greenspan and continued by Ben Bernanke are placing the financial system of the United States in jeopardy. These policies are largely undertaken without Congressional or Federal oversight, and benefit the interests of our financial sector at the expense of our citizens.

Most recently, the Fed has expanded their balance sheet to $2T buying securities, all the while engaging in a policy of “quantitative easing”, which is the euphemistic term for “printing money”. These policies are unprecedented in American history, and their long-term effects may be far worse than the problems they’re expected to address today.

S. 604’s sister bill in the House (H.R. 1207) has widespread bipartisan support, and over 250 cosponsors – including 25 from California. S. 604 is rapidly gaining sponsorship in the senate, with three additional cosponsors added in the last several days to a (now) total of 7 sponsors.

The Federal Reserve is adopting policies that affect every American at the core of their economic life – the value of our dollars and the value of our homes. They are making these decisions without meaningful Congressional oversight and without allowing anyone to “check the books”.

Congress has a duty to Americans to ensure that the Federal Reserve is acting in our interests, and the first step to doing so is to understand what they’ve already done. An audit is necessary. I hope that I’ve convinced you to support and possibly cosponsor S.604.

Sincerely,
Brad Warbiany

(Followed by contact info)

Give it a shot. I prefer to fax things to elected officials, as I believe there to be a more definitive tactical feel to actual paper. When they see that it’s printed out and faxed, I think it carries a little bit more significance than an email. I also emailed this to both of them, just in case their staffers are more likely to read one than the other.

VATICAN CITY — Pope Benedict XVI on Tuesday called for a radical rethinking of the global economy, criticizing a growing divide between rich and poor and urging the establishment of a “world political authority” to oversee the economy and work for the “common good.”

He criticized the current economic system, “where the pernicious effects of sin are evident,” and urged financiers in particular to “rediscover the genuinely ethical foundation of their activity.

I have to ask the question to my Catholic friends who believe in Papal infallibility that also happen to believe in free market capitalism: how do you square the two philosophies? (Argument withdrawn; I am by no means infallible and was lacking in my understanding of this concept)

The article continues:

In many ways, the document is a somewhat puzzling cross between an anti-globalization tract and a government white paper, another indication that the Vatican does not comfortably fit into traditional political categories of right and left.

“There are paragraphs that sound like Ayn Rand, next to paragraphs that sound like ‘The Grapes of Wrath.’ That’s quite intentional,” Vincent J. Miller, a theologian at the University of Dayton, a Catholic institution in Ohio, said in a telephone interview.

“He’ll wax poetically about the virtuous capitalist, but then he’ll give you this very clear analysis of the ways in which global capital and the shareholder system cause managers to focus on short term good at the expense of the community, of workers, of the environment.”

Indeed, sometimes Benedict sounds like an old-school European socialist, lamenting the decline of the social welfare state and praising the “importance” of labor unions to protect workers. Without stable work, he notes, people lose hope and tend not to get married and have children.

Sorry padre, you can’t have it both ways. If you truly believe the Communist/Socialist model is morally superior to Capitalism (an admittedly selfish system by honest supporters such as Ayn Rand) just come out and say so! If one honestly reads the scriptures, one will see that the teachings of Christ are much more in line with Karl Marx than Adam Smith.

But wait, it gets worse…

Benedict also calls for a reform of the United Nations so that there can be a unified “global political body” that allows the less powerful of the earth to have a voice, and calls on rich nations to help less fortunate ones.

In other words, the U.N. should force the citizens of the most efficient and productive nations at gun point to give money to people in nations who are less efficient and less productive in large part because they subscribe to the philosophy of the Pope: “From each according to his ability, to each according to his need.” There’s a word for this; it’s called extortion.

*So does this mean that perhaps Pope Benedict XVI is the AntiChrist?

Unfortunately, the effects of inflation are poorly popularized, meaning that most people have a very limited understanding of inflation.  As a result when confronted with symptoms of inflation people all to often pin the blame on other “causes” such as Jews or greedy white landowners.  These false accusations are heavily promoted by the ruling classes;  after all it’s better that the mob chase some Jews or hedge fund managers with pitch-forks than coming after the rulers who inflated the currency.

What Inflation Isn’t

The primary misconception of inflation is that it merely is the rise in prices.  The news media encourages people to believe this, reporting the inflation rate in the same way it reports on changes in the weather, as if it is some natural phenomenon over which people have no control.

Price increases are a result of inflation, yes.  However, inflation has the same relationship with price increases that war has with the number of burials per month at Arlington Cemetery.

The Mechanics of Inflation

Inflation is the phenomenon where additional money is created.  In the case of the Unites States, the Federal Reserve purchases some asset, such as a United States Treasury Bond, paying by check.  The seller deposits the check in a bank, which then records the additional money as part of its demand deposits.  This is the moment where the inflation occurs.  The bank then loans out 80% of those deposits to borrowers. Those borrowers spend the loaned money. This spent money is deposited back into the banking system. The banks loan out another 80% of this latest round of deposits. This cycle of loaning out money which then spent and then deposited back into the banking systems continues until eventually an equilibrium is established where banks list $4.00 in outstanding loans for every dollar created when the Federal Reserve Bank wrote that first check.

The Math:

A mathematical analysis of the growth of the money supply when central banks create money out of thin air.

The people spending this newly created money bid up prices;  people selling stuff tend to sell stuff to the highest bidder, and the people holding the newly printed money are competing with other buyers to purchase the stuff they want.

The result is that this new money slowly disperses out through the economy, leaving higher prices in its wake.  The people who spend it first get the benefit of being able to buy stuff at pre-inflation prices, the people who spend it last do not.  The people who have access to the newly printed money are left better off, the people who don’t are left poorer.  Inflation invisibly and without much fuss transfers purchasing power from those who are not closely connected economically with the central bank to those who are.

Follow the Money

The price increases generally show themselves in the sectors of the economy where the new money is spent.  For example,  let’s say that President Obama directs the Secretary of the Treasury to sell a bond to generate the money needed to build yet another bridge over some stream in West Virginia named after Robert Byrd. The bond is purchased by the Federal Reserve Bank with newly printed money.  The money is spent by the Federal Government on tools and materials needed to build the bridge.  The price for cranes, hourly employment of road-crews, concrete and steel increases.

The Rise of the Ersatz Product

The other users of these raw materials find themselves struggling to buy the  supplies they need.  For example, a manufacturer of prefabricated steel sheds might find that he has to pay more to get the metal he needs.  He is caught in a squeeze; the price his customers are willing to pay has remained unchanged while his production costs have increased. The manufacturer can’t raise his prices, so naturally he decides to cut costs by attempting to reduce the amount of steel he uses by substitution or adulteration.  The end result, the steel shed might cost the same, but the quality of the steel, the strength of the steel, or its toughness will be inferior, resulting in a shoddier product.  Candy bars are packaged to look like their sizes are constant, while the volume of candy is reduced.  Houses are built less sturdily.  Automobiles are manufactured with lower quality steel, with engines that wear out more rapidly, etc.

The Rise in Prices

As the money percolates out through the economy, the people coming into possession of it bid up prices.  In fits and starts, at different rates in different sectors of the economy, the price levels go up.  People on a fixed income find themselves becoming poorer and poorer.  The unpredictability of  the price levels causes  accounting to become more uncertain.  Investments and projects that otherwise would be attempted are foregone.  A majority of the population is left poorer as a result of the inflation.

Increased Political Repression

These people naturally lobby for relief.  However the political classes that benefit from the inflation don’t want to stop,  and the people are too ignorant of economics to recognize the fact that it was the printing presses which caused their problems.  Instead the people attack profiteers or greedy manufacturers or the greedy bankers.  They call for price and wage controls, which if instituted, further wreck the economy.

People also try to abandon the unreliable monetary system for alternatives.  They try to do business in foreign currencies or even use commodities such as cigarettes or gold chains as money.  Governments typically react savagely, criminalizing attempts to do business using alternatives to the rapidly devaluing currency.

Stop Me Before I Inflate Again!

Typically, when a government or central bank engages in inflation, they find it hard to stop – the political incentives are too great to resist. They cannot fund their operations if they stop the printing presses. The more the economy falters, the more the tax-base is disrupted, the lower the productivity of the industrial base, the more dependent the elites are on the printing press to fund their lifestyles and the operations of the state.  In private, the central-bankers will admit that the currency debasement is wrecking the economy.  But the central-bankers’ fear of the negative personal consequences if they should stop inflating the currency overrides any impulse to do the right thing.

America’s Peculiar Institution

Some economists argue that since the Federal Reserve is not part of the U.S. government such a doomsday scenario cannot play out here.  They claim that the Federal Reserve, being independent, is immune to political pressure.  Yet throughout its existence it has acted to support the U.S. government; periodically, the Congress threatens to update or revise the Federal Reserve Act to mandate greater congressional oversight of the Fed’s operations and the ‘independent’ organization suddenly becomes quite accommodating.

Historically, the Federal Reserve has purchased only a small fraction of the bonds issued by the U.S. Treasury;  it didn’t have to – there were always sufficient buyers willing to buy Treasury Bonds to keep the U.S. government operating.  That is changing.  The U.S. government will have to borrow more than a trillion dollars a year to fund its operations.  At the same time the U.S. Government is borrowing at such unprecedented levels, the willingness of voluntary investors to purchase the bonds is collapsing.  If the Federal Reserve were passive, within a year or so we would see U.S. Treasury Bonds routinely going unsold at auctions. The Federal Reserve, inevitably, will begin purchasing those bonds to keep the U.S. government solvent.

Protecting Yourself

In an inflationary economic regime, the formal economy is generally a suckers game.  To avoid being taken to the cleaners, consider doing the following:

• Start or purchase a business making something in relatively widespread demand that is not likely to have price controls slapped on it.
• Go into a profession where your skills will be in wide demand.
• Learn how to fix broken things.
• Cultivate circle of associates with whom you can engage in gray-market or black-market business deals.
• Befriend a policeman or a judge! They can get you out of hot water should you get tagged for committing an economic ‘crime’.
• Get to know local gold-dealers, particularly ones who buy and sell gold chains.
• Learn how to defend yourself; police take time to respond, and are prone to prosecuting economic crimes when confronted by evidence of contraband.
• Buy an old “Whip Inflation Now” button. It will be about as helpful as it was in the 1970’s

You don’t have to be helpless as the Democratic and Republican Party Apparatchiks loot the economy.  Prudent steps taken now can pay off in the coming dark years.