Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
Inflation for Dummies
Excerpts from my book, Money and Wealth: A Lifetime of Learning, Book 2
Imagine two groups of people: Those on Gold Island, who have a moral conscience, and those on Silver Island, who are a mix of those with a moral conscience and those who do not, or who are mixed within themselves. They begin trading with each other. Both have created the same system of money, using gold and silver coins of similar value.
The main difference is that Gold Island money is stamped with the words “Gold Island” and Silver Island money is stamped with the words “Silver Island.”
(Iron Island bandits don’t care about trade and coins, except for those that they can steal.)
Both Gold Island and Silver Island accept the other island’s money because the weight is the same for the same kind of coin. Both islands benefit from trade. The people of Gold Island make the best fishing poles and slingshots. They have skill sets that the people of Silver Island don’t have.
The people of Silver Island also create all kinds of different tools, silks, crafts, and other goods that the people of Gold Island can’t produce.
Since both economies have grown strong, a lot of gold and silver coins get used. Some people are getting very rich. And gold and silver coins are heavy to carry. So one of the good persons on Silver Island comes up with a new idea. Why not become a goldsmith?
A goldsmith is someone who stores gold for travelers and merchants and charges a small storage fee. The idea catches on and someone on Gold Island starts a goldsmithing business as well. Goldsmiths store gold and silver coins, have hired security to prevent the Iron Island bandits from stealing it, and charge people a small storage fee.
In place of the coins, the goldsmith gives the traveler or merchant an official slip of paper that reads something like this: “Tor has on deposit with the Silver Island Goldsmith 20 ounces in gold and 65 ounces in silver. Payable on demand.”
Each note is signed both by the goldsmith and by the traveler. The goldsmith keeps a record of all transactions. The paper is an IOU note for the gold and silver coins that are stored. The traveler can now go to market and wander around town without carrying all that weight in coins.
And the traveler does not have to worry that a bandit from Iron Island (or one of the less honest people from Silver Island) will rob him or her of those coins.
After a while, the goldsmith on Gold Island has an idea. Each paper IOU note is specifically created for each person. What if the IOU notes had a more general design that is not specific to the person? The IOU note might read something like this:
“Will pay to the bearer 20 ounces in gold, payable on demand at the Silver Island Goldsmith.”
What if the goldsmith created different values for different notes? There would be a whole set of IOU notes. And the people could trade IOU notes with each other. In other words, the traveler can get a set of IOUs from the goldsmith:
Four notes would be for 5 ounces in gold, three notes would be for 10 ounces in silver, five notes would be for 5 ounces in silver, and ten notes would be for 1 ounce in silver.
The traveler can go to local merchants and trade the paper notes for goods and services. The merchants know that they can always go to the goldsmith and receive the gold and silver coins. The goldsmith charges a small fee for each storage transaction. And everyone is happy.
Now here is where everyone’s understanding of money begins to break down. Pay close attention:
The paper notes are not money.
Paper notes are IOUs. Paper notes are symbols of money. Paper notes are NOT money. We will be exploring what less-than-honest people on Silver Island can do with paper notes in the chapter on Inflation.
For now, let’s see what other good things can come from the honest people on Gold Island.
* * *
“…banking establishments are more dangerous
than standing armies…” –Thomas Jefferson, letter to John Taylor, May 28, 1816
Thomas Jefferson obviously makes a strong statement about banking. Let’s talk about what can be good about banks run by people with a moral conscience and who believe in free choice.
When real money is saved, when wealth is saved, it can be used to do good work. How? By making money available for capital investments.
The goldsmith on Gold Island (the model island where everyone has a moral conscience) has a thriving business. Everyone trusts him. He stores people’s gold and silver, charges a reasonable fee for the service, and protects their money.
They have found the paper notes convenient to use for trade, and they can get their money from the goldsmith any time they want.
Time passes, and the goldsmith notices something. No matter how many transactions he has every day, the amount of gold and silver never falls below the equivalent of 100,000 ounces in gold.
The goldsmith has an idea. He could loan some of that gold to Tor, who wants to expand his fishing rod business. Tor has all kinds of ideas about how to make fishing rods, nets, lures, and all other fishing equipment in faster and more efficient ways. He just needs some money.
So the goldsmith and Tor talk with some of the depositors who use the goldsmith’s service. They have an idea that will make everyone money. Tor will borrow 10,000 oz. of gold for six months. He will pay it back with an interest rate of 1%. In other words, he will pay back 10,100 oz. of gold for the privilege of borrowing the gold.
Two depositors agree to allow the goldsmith to loan 5,000 oz. of gold from each of them. In return, each depositor will get 45 oz. of gold (a total 90 oz.), and the goldsmith will get 10 oz. of gold for making the arrangements.
Everyone understands they are taking a risk. Tor’s idea may not work. Something may happen that will make it impossible for him to pay back the gold.
But everyone thinks the risk is worth it.
Tor borrows the money, hires workers (creates jobs), creates new products (creates wealth in the form of capital goods), and his business takes off. After six months he is already making more than 100 gold oz. each month.
Tor easily pays back the loan, plus interest. Everyone makes money by making the saved money do extra work. The risk paid off.
Now the goldsmith has become a banker.
* * *
“All the perplexities, confusion and distress in America arise, not from the defects in their constitution or confederation, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit, and circulation.” —John Adams, letter to Thomas Jefferson, August 28, 1787
When everyone is honest, bankers, government workers, wealth creators, and taxpayers all benefit.
But what happens when people are less than honest? Let’s follow the thinking of the goldsmith on Silver Island, who sees things just a little different from the goldsmith on Gold Island.
Like the goldsmith on Gold Island, the goldsmith on Silver Island creates paper notes (IOUs) to represent the actual money (gold and silver) that people deposit with him.
The amount of the notes exactly equals the amount of gold and silver coins he has on deposit. If there are 100,000 oz. of gold and silver on deposit, there are notes equaling 100,000 oz. of gold and silver in circulation.
How much money is there in total? If you answered 200,000…
No! No! No!
The total is still only 100,000 in money. Only the gold and silver coins on deposit are money. The paper notes are symbols of that money. Paper notes are NOT money. They are currency.
But the goldsmith on Silver Island (the island with a mix of people with and without a moral conscience) notices that almost everyone who uses the paper notes thinks of them as money. Some people almost never come to redeem their notes for actual money.
They are happy to use the paper notes for trade and payment.
Workers begin asking employers to pay them in paper notes rather than gold and silver coins. The workers know they can trade them in at any time, but why bother?
Paper notes are so much more convenient to carry.
The Silver Island goldsmith then has a crafty idea. What if he printed up extra notes? And spent them? Who would notice?
You can see how tempting it would be to the goldsmith who is normally honest, but who suddenly has a medical expense.
Remember, this is Silver Island. The people here are a mix of good and bad. Sometimes they know it, and sometimes they don’t. On Silver Island, some otherwise good people can rationalize something bad as being good.
The goldsmith’s child needs help and he is short on money. Why not just “borrow the money” now by printing up a few extra paper notes to pay the doctor? Then just pay it back later by destroying the other paper notes when he collects his storage fees? No one would know. And besides, it’s good for the child.
So the goldsmith does print up the extra notes. And nobody notices. And the child gets better. And the goldsmith pays back the “money.” What he does is a good thing, right?
As time goes by, the goldsmith rationalizes other bad actions as being good. Why not print extra paper notes to buy better food, pay someone to rebuild the fence, and get his wife a nice gift? He figures that since nobody notices, why should he even pay it back? He works hard for a living. So what if he has a few extra nice things. Nobody notices. Nobody cares.
Soon for every 100 oz. of gold stored, there are notes circulating for 110 oz. of gold.
And prices around town begin to mysteriously rise.
What the goldsmith on Silver Island does not realize, and almost everyone else as well, is this: When more paper notes are “spent” and put into circulation, merchants notice that more goods are in demand. When demand rises, the value of what people buy rises, and therefore merchants naturally charge more.
More paper notes = Rising demand = Rising prices
Supply and demand. Cause and effect. Choice being exercised in a free society.
A year later, the goldsmith on Silver Island decides to support another islander for election to the local council. Together they hatch a scheme to outspend their opponent. The goldsmith prints up a lot of extra paper notes and donates it to the candidate’s campaign. Because, you know, his opponent has bad ideas, so the extra paper notes are really a good thing, you know, for the good of everybody.
More notes begin to circulate as the candidate spends the extra notes for political influence. And prices mysteriously rise.
The candidate is elected and begins putting pressure on the goldsmith. Print up more notes so that the government can hire extra people. And spend money on community projects.
The goldsmith does. And prices mysteriously continue to rise.
Who is to blame for the higher cost of living? The politician blames the greedy merchants. And the merchants don’t know what to say. They do not understand the real cause of the rising prices. But the merchants, and actual creators of wealth, continue to be called greedy and uncaring. They do not realize that the rising prices are a natural result of the inflation.
What is meant by inflation? You know what happens when you inflate a balloon. As more air is pushed into the balloon, the amount of air increases. What increases when you have economic inflation?
The supply of paper notes (currency).
Government, and people who make a living off of debt, will tell you that inflation is rising prices, just a natural force of nature, without anyone causing it. Right?
Wrong!
Inflation is NOT rising prices. Inflation CAUSES prices to rise.
As the currency supply increases, prices are forced to rise. If you think the definition of something makes no difference, then you are a good target for con artists.
What if I can plant the idea in your mind that inflation is merely the rising of prices? I can keep you from seeing the cause-and-effect relationship between printing paper notes (or digital currency) and rising prices.
And if I can plant the idea in your mind that government debt is a good idea, then government can continue creating money out of thin air. To do what? To finance projects, wars, entitlements, and many other government “goods.”
Who pays? Workers who create wealth and become taxpayers are the ones who pay. Not the ones whose income is paid out of tax money.
The bankers and politicians on Silver Island soon tell the public that they have to withdraw gold and silver from circulation. Why? Because there’s not enough to go around, and besides, the paper notes work well as money.
And almost everyone believes them, except a few kooks who talk about some kind of conspiracy between bankers and politicians. But nobody really believes them.
[There’s more in my post on Snap Out of It, Part 3.]
Published in Economics
In our journey to become the 360-circle of awareness and understanding, it’s always an honor to be in the presence of those who have one of those individual degrees filled that we have yet to fill.
One of the great values of Ricochet.
This reminds me of what my master told me long ago, that life is like a pizza: once you have eaten the first slice, you see that you have not even nibbled the crumbs from around the crusts of the many slices that remian. Chew wisely.
That’s how I feel on Ricochet. :)
Even worse are the ones who buy titanium.
If you ever need to get a titanium ring cut off your finger you pretty much need to bring a plasma torch.
Less well known is this tip: If you ever need to get your finger cut off a titanium ring, then a plasma torch will work for that, too.
If you ever need to do both, with a plasma torch you can do both at the same time. Kills two birds with one stone.
Cuts the divorce rate though.
A plasma torch will cut that?
No, the aversion to plasma torches will. “I’d divorce you in an instant, honey, but lose a finger for it?”
“Oh, dear, I don’t see why you’re being so squeamish. It’s self-cauterizing.”
No, the demand for money balances can be met by any value of money supply. That’s a simplified answer.
If you are interested in understanding why, and knowing the details, let me know and I will look up some references where your question of economic theory is addressed by economists. It gets complicated because each answer leads to other questions that all have to be answered by the economist.
Mark, in your reply to my criticism, you make these points:
These are both true.
But if you re-read my comment carefully, I think you will see that they are both irrelevant to my criticism.
You are correct. I was not really addressing your criticism.
Just to be clear, the audience for this book is primarily teens and young adults. I am not providing an academic/theory approach, but rather a more engineering/practical application approach.
For a better understanding of the context, here is the introduction, in four parts:
_______
If you learn one thing only from this little book, then let it be this:
Debt is slavery.
Look at the people around you.
Who is in a better position?
Which person would you rather be—the person who owes money, or the person who never needs to owe money?
Do you want to be the person with DEBTS (student loans, credit card payments, mortgages, car payments)?
Or do you want to be the person with ASSETS (investments, savings, extra cash on hand)?
Perhaps not all debt is bad. In special cases, a temporary debt can provide value that exceeds the debt. But most people these days live in a state of perpetual debt.
And few realize that others actively try to put people in that state by convincing them that buying now and paying later is a natural part of life.
Charles Lamb, an English essayist, wrote in 1823, “The human species, according to the best theory I can form of it, is composed of two distinct races, the men who borrow, and the men who lend.”
The Chinese, one of the oldest civilizations on Earth, have many sayings about debt, including:
After thousands of years of history, could the Chinese be onto something?
(cont)
Around 600 B.C. a Greek writer named Aesop wrote fables to teach children moral lessons. One story is called The Ant and the Grasshopper.
In a field one summer’s day, Grasshopper was hopping about, chirping and singing to his heart’s content. Ant passed by carrying an ear of corn that she was taking to the nest.
“Why not come and chat with me,” said Grasshopper, “instead of working so hard?”
“I am helping to store food for the winter,” said Ant, “and I recommend you do the same.”
“Why bother about winter?” said Grasshopper. “We have plenty of food right now.”
But Ant went on her way and continued working. When winter came Grasshopper had no food and he began dying of hunger. Ant, however, had plenty of corn and grain.
Grasshopper learned a harsh lesson:
It is best to prepare now for harder times.
What the story does not reveal is how Grasshopper had spent the summer maxing out his credit cards in clothing stores and shopping malls, ordering video games online, and buying a new car with six years of payments.
And when he went to college, he took out over $100,000 in student loans for his major in a specialized, non-technical field. And the job he landed paid so little he had to live with his parents instead of buying a home and starting a family.
So when winter came, he had nothing to fall back on. And he had creditors at his door threatening him constantly.
We’ll talk about credit cards later on. But for now it’s just enough to admit:
There are people in the world who benefit from your desire to have things now and pay later.
These people may, just may, be willing to convince you that debt is always a good thing.
But there’s an old adage, TANSTAAFL (There Ain’t No Such Thing As A Free Lunch). Anyone who tries to convince you that something is free is not being honest with you.
Someone always pays, and often you pay in ways you don’t see.
How This Little Book Can Help
Most people do not understand economics, money, wealth, credit, debt, inflation, currency, and circulation.
As a result, they are targeted by con artists. Not just con artists in your neighborhood, but con artists on Wall Street and in government (at all levels).
And often these con artists don’t realize they are con artists. They think they are doing the right thing.
You probably already know that money gives you more freedom to choose. After studying this little book, you will know how to protect yourself more effectively against the con artists who take advantage of your ignorance and pick your pockets.
(cont)
This little book simplifies difficult concepts, and it provides practical guidance.
Now for a glimpse into what follows:
Chapter 1: What Is Wealth? explains how wealth and money are not the same thing, and that you can even have wealth without money.
Chapter 2: Trade shows how honorable people, with wealth and the freedom to choose, naturally create free trade.
Chapter 3: Jobs explores how honorable people with wealth and skills naturally create jobs when they are free to choose how to work together.
Chapter 4: Government points to the first legitimate role of any government and suggests what roles government should not adopt in a free society.
Chapter 5: Taxes distinguishes between productive and destructive taxation.
Chapter 6: Money defines the four characteristics of true money and explains the nature of counterfeiting.
Chapter 7: Paper Currency draws a clear line between real money and what symbolically represents real money.
Chapter 8: Banking reveals the origin of institutional lending, and how it can build the wealth of a community.
Chapter 9: Inflation offers a real definition of inflation (hint: it’s not “rising prices”), and how con artists actively perpetuate a misunderstanding of what inflation is and how it works.
Chapter 10: A History of U.S. Money shatters some common illusions about the nature of money, coin, paper currency, and banking.
Chapter 11: Credit and Debt offers you a look at how people profit from enslaving you through perpetual debt.
Chapter 12: Investments suggests how you can start protecting your assets and increasing real wealth.
Several chapters end with a special Deep Dive section. Where the main text explores topics in an easy-to-understand way, the Deep Dive gets into more complex, challenging, and even controversial topics.
For some, it may be best to read the main text first throughout the book, and then later come back to the Deep Dive sections.
At the end of the book is a Money and Wealth checklist and a recommended reading list. You will also find appendixes that offer details for the more scholarly readers.
The key understandings in this book, faithfully applied, do deliver results. You have to experience the results yourself to realize fully the value of this new way of looking at money and wealth.
(cont)
As we saw in the first book of this series, Creating Your Life (A Lifetime of Learning, Book 1), your mind can create blind spots to the truth. When it does, the truth can look crazy and create some anxiety.
Be aware that your mind may rebel against some ideas presented here. The mind creates anxiety when faced with an idea that conflicts with its picture of the world.
Your mind may want to label and categorize these new ideas so that you can dismiss them and avoid anxiety. For example, a mind can avoid looking at a truth when it can label the person expressing that truth as a political progressive, liberal, or conservative.
But truths are truths.
Be thoughtful; do not immediately discount any idea that creates anxiety or makes you feel you must dismiss it as ridiculous or not worth examining.
Accepting new truths is not always easy. But it is worthwhile.
If you experience some inner conflict or anxiety, take time with the new ideas. Examine your assumptions. Evaluate why you have them. Be open to new, challenging points of view.
You may discover that you have cherished opinions that you automatically accepted from others. You may want to critically examine those opinions.
When facing an inner anxiety arising from the conflict of ideas, you invite the possibility of enlightened discovery.
So let’s begin this marvelous adventure.
The problem is we live in and inflationist system that requires you to lever up at the right time to hold down your cost of living. If you don’t buy a house at the right time, you aren’t going to be able to control your cost of shelter.
Furthermore, you have to speculate in stocks without the benefit of getting any interest in a savings account. All of that stuff as a percent of GDP is ridiculously priced.
It’s a dumb system that is coming to an end.
All of this bitcoin stuff and Reddit speculation is financial nihilism and it’s happening for a reason.
The system is set up to destroy human capital, not grow it.
https://investresolve.com/podcasts/mike-green-the-fourth-turning-and-reimagining-the-american-dream/
This is a real bitch to listen to, but he lays everything out really well*.
His interview on the block works YouTube channel is probably easier to start with.
* I mean that he lists the issues comprehensively. It’s a total mess to listen to and some of the topics are extremely technical about finance.
This is an excellent beginning. But tongue in cheek, if you point out Debt is slavery., wouldn’t it be right to add taxation is theft? I know you will talk about good taxation and bad taxation, but I thought these two maxims go so well together.
Slightly more seriously, I don’t mean to criticize your book, but is using “con men” really the right descriptor? Confidence men always have deceit and and injustice at the heart of their scam. I’m not sure that conning someone is something that can be done inadvertently. You have thought this out and I’m not even sure I can come up with a better term anyway, perhaps “takers”.
Other than this insignificant quibble, it looks like an excellent book.
Oh, and Mark, do you get into inflation destroys three percent of the ant’s savings every year? :)
If the government sticks to actual, strictly defined public goods, taxation is not theft. Same thing with unfunded liabilities or not.
The federal reserve has to quit pushing the economy around. Just back up the banks in a punitive way. Otherwise, that is theft.
If modern central banking was going to be a dependable thing they needed to do some things in my opinion. The central bankers should have read the riot act about all of the deflation that was coming from globalized trade, automation, and computers. They should’ve had the foresight to do this by 1995 or the whole exercise is destructive.
The other thing is, there should be a big sign in Times Square with what interest rate breaks the government. Right now it’s two points on the five year treasury. 2% up as most people say it. Every single western government goes broke.
The other thing is, instead of this BS about one CPI, they should publish at least two dozen of them and put them in times square. Every family has a different one. They should be able to plug it into a computer and find it out.
The whole system is stupid.
Most taxation, today, qualifies I think, as theft.
Supposedly this is hard to calculate, but some economists think that the government is 80% non-public goods.
You know how the Democrats repeat words like parrots? That’s what the GOP needs to do with the term public goods.
I swear everything comes down to, too many non-public goods, the Fed pushing the economy around too much, and not enough citizens following the Judge Learned Hand ‘Spirit of liberty’ speech. You do that long enough, and after a while the GOPe has nothing to add anymore.
It’s been a long time since I’ve seen this, but I remember it being brilliant. He talks about how the government got so centralized extra-constitutionally. Now he’s voting for Democrats for some reason.
In case you aren’t familiar, this guy is brilliant. Ivy League math major, but he is just exceptional at explaining all kinds of things for the average person. I cannot recommend his yahoo interviews enough.
I have an idea what you mean by “public goods” but it brings to mind a 50-lb bag of flour for sale at the general store, or railroad tracks. Do public goods include things taken by Kelo or civil asset forfeiture?
Do public goods include only roads, post offices, coinage, and a standing military? Or telephone lines, stop lights, and police departments? Does it include expenses and salaries for a legislature, justice department and executive branch? Trucking weigh stations and public parks? A space program to Mars?
I really don’t know what public goods means.
Sorry.
The easy definition is stuff that the government obviously has to do unless you want to get in to some complicated discussion with an anarchist about what we can privatize.
When you look up the actual definition on the Internet they use the terms nonexcludable and non-rivalrous. What that means is everyone clearly benefits and it doesn’t compete with anything else. The obvious one would be the military and border control. The absolute loosest one would be a city park. As long as you don’t crack open a 40 and start smoking dope, anybody can use it. Most economists would say that is not a public good, really.
Education is not a public good even though people think it is. It gets messy. I would still collect funds for K through 12 and pay for that collectively with tax money. I would not have government schools, I would just cut a check to the parents.
So then the Democrats always talk about how having a fire department is Socialism blah blah blah. They are idiots.
That’s basically the structure I have in my head about it.
Also, you sort of have to have Medicare and Social Security, which are not public goods. Obviously we are screwing those up big time.
I forget which thread it was I was explaining this to people. Everybody thinks I’m nuts and a lot of people don’t like me, but dammit I have something to offer. lol
If you start at about 19:00 he’s talking about how you have to stuff the economy with government debt or it’s going to collapse. I didn’t think it was quite this bad, but the way he describes it is worse than I thought.