In Part 1 of this post, we examined the facts concluding that inflation is caused by monetary debasement. In this follow up, we’ll observe the reason behind why common belief is that inflation is at 3% – 5%. First, let’s recap what was already covered:
What is Inflation?
Inflation is the steady, continual rise in the price of goods. It is typically measured using a “basket of goods”. In this approach, the prices of many different goods are tracked and then integrated using some sort of logical weighting calculation.
What causes inflation?
In most developed countries, money is created by a central banking system. In the US, our central banking system is that of the Federal Reserve, a private bank. Money can be created by the Federal Reserve depositing newly created money into its member banks in exchange for US bonds. This increases the amount of money in existence. Additionally, every bank in the US has the ability to lend out 7 to 11 times as many dollars as it has in deposits. This also increases the amount of money in existence. With an increased money supply, prices rise. A continually increasing money supply, aka monetary debasement, causes inflation.
What is the current rate of inflation?
This is where there is a difference of opinion. For decades, inflation has been estimated using a “basket of goods” approach. In this method the price of each of a variety of goods is tracked, a logical weighting is applied, and the output is the rate of inflation, usually annualized. Under this method we can see inflation swinging up and down through economic cycles. In the early 1980′s, this data shows inflation at nearly 15% per annum. This is based on the published figures of the US Bureau of Labor Statistics.
In the early 1990′s the methodology of inflation reporting changed drastically, thus rendering the BLS “official” figures virtually useless. Unfortunately, these BLS figures continue to be used as if they were accurate.
A change in calculation method
Around 1993, Alan Greenspan argued that there was a flaw [Read more...]
