When 2+2 Doesn’t Equal 4

February 27th, 2009

Imagine, dear reader, that you live in a country whose entire economy has exactly $100 in circulation. Let us further suppose that you buy a widget for $1.00. That widget represents 1% of the entire value of the economy. Since we are in a suppositional mode here, we might as well continue on with it: also suppose that next year, the people that control the printing presses decided that we “need” an additional $10 inserted into the economy. If your widget retains its value (it probably will – people tend to value things rather consistently), its price tag will now be $1.10. In short, the price of your widget has been inflated because the supply of the commodity we know as “money” has been inflated as well, even though its value relative to the economy has not changed. Please observe that there is a difference between price and value (and cost as well, even though we aren’t really discussing that at the moment).

Next, let us suppose all of the forgoing except for the inflation of the supply of money. Your widget is valued at $1.10, even with only $100 dollars in circulation. This represents an increase in what economists call the Consumer Price Index (CPI).

Every time I hear one of the $50 hair cuts/$5 brains bloviating on inflation/CPI changes, it makes me want to wretch. Why all of the confusion and obfuscation over such uncomplicated things? Maybe it gives them something to do. Maybe it makes them feel important and superior.

I’d like to try to explain to you the manner in which our “leaders” calculate inflation and CPI changes. I really would. I cannot because I do not entirely understand it myself. Understand that I’ve written some rather complex software for the insurance industry (probably obsolete software by now, but I digress), full of mind-numbingly complex formulae. I am up to the math of it, but my constitution is weak and cannot tolerate the magnitude of lies to which I am exposed when I try to figure it out. Complicating matters even more, the formula seems to undergo odd changes to the point that it seems that there is a forgone conclusion regarding these changes just begging for a justification, however irrational that justification is upon scrutiny. In formal logic, this is known as “affirming the consequent” and is strictly out of bounds. Would it were so for our so-called leaders.

Going back to our original supposition, let us continue assumptions. Suppose that you sell, under the inflated supply of money, your widget for $1.10. The government taxes that “capital gain” of 10 cents. Hopefully, you’re telling yourself that there was no capital gain because the value of your widget relative to the economy has not changed one iota. Let’s assume a capital gains tax of 25%, so you pay 2.5 cents tax on your 10 cent “profit,” leaving you with $1.075. Converting to last year’s dollar value, that $1.075 is actually just short of 98 cents, which is 2 cents less than you started with a year ago when you bought your widget. You have lost wealth even though you have not profited by any of your transactions. Back when I was a police officer in Houston (before the programming jobs), we called that theft.

How is this possible? It is possible because we now have what is known as fiat currency (“fiat” being Latin for “let it be done”), a type of currency which has value because a government has ordered that it can be used to pay debts or taxes or buy goods and services, and people trust that its value will remain stable. The problem is that the value of fiat currency rarely remains stable for more than a few decades. Inevitably, fiat currency undergoes long-term hyperinflation. Sometimes, the volume of money explodes practically overnight, as was the case of the Deutsch Mark of the Weimar Republic (Germany) of the 1920s trying to repay the debt it was saddled with following WWI, and the Hungarian Pengoe of the post-WWII 1940s (also trying to handle war debt). At one point, the Hungarian government actually minted a 100 quintillion Pengoe note. In case your math is rusty, that would be represented as 100,000,000,000,000,000,000.

How might we avoid a similar fate? At this point, I do not believe that we can. The men that founded our country knew the dangers of fiat currency, and for that reason wrote explicitly in Article 1 Sec 8 Clause 5 of the constitution that “Congress shall have the power …To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.” And the congress, acting in accordance with that mandate in 1792, established 471.25 grains of fine silver as $1, and $10 was established as 275.5 grains of gold.

Having lawful money (gold and silver) doesn’t preclude governmental malfeasance, nor does it particularly inhibit the avarice of some unscrupulous bankers (they’re not all unscrupulous), but it would certainly make what they do far more transparent than it currently is.

The federal government itself is not doing this to our currency, but it is allowing it to happen by refusing its oversight obligation of the Federal Reserve System. Established in 1913, the Federal Reserve (a private bank, by the way, whose federal charter can be revoked at any time) has never been audited. You’ve got to love the way the IRS will levy our accounts or put tax liens on our property for a couple thousand dollars of taxes that they claim we owe. But not once in its now 96-year history has the Federal Reserve ever been audited by anyone – not the IRS, nor by any of the dozens of committees within the House and Senate.

Don’t simply take my word for any of this. Do your homework and figure this out for yourself. A good place to start is www.freedomabovefortune.com, a website founded by a former IRS Criminal Investigations Division agent named Joseph Banister.

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3 Responses to “When 2+2 Doesn’t Equal 4”

  1. doris |

    wo to the w!! That’s complex and frightening…looks bad for us. What kind of idea is this fiat money, I want to be the one who decides the price of my own dollars? naaaaaaa

  2. Brian |

    The idea of fiat money is nearly as old as civilization itself. Unfortunately, hyperinflation, even spread out over decades, has always and ultimately destroyed the civilization where it was practiced. It happened to the ancient Greeks, Rome, China… It is a difficult proposition to determine if the fiat money was causative or corollary to the demise of the civilization, but at the very least, we should consider it a harbinger of a dim future.

    I used this example on another article here, but in case you missed it, I’ll repeat it. In 1920, you could buy a Colt .45 with a couple boxes of ammo for a $20 gold double eagle. Today, you could walk into a gun show anywhere in the country with the same coin and buy the same gun. But, if you were going to pay with cash, it would cost about $900. Tom pointed out that with the exchange rate for gold, it works out to about the same thing, which is true. But in 1920, that $20 gold double eagle exchanged exactly for a $20 gold certificate (20 dollar bill).

    By my calculation, that’s an inflation rate over 90 years of about 4500%. If memory serves, the average wage in 1920 was somewhere around 50 cents an hour. Today, the average wage is around $17/hr. In 1920, it cost the average worker about 40 hours to earn the money for that pistol. Today, it costs the average worker about 52 hours (ignoring taxes withheld, of course) to earn the money for the same pistol.

    While wealth has certainly expanded enormously in the last 90 years, it is pretty clear that the average worker’s wage has not kept pace with inflation, and that is most assuredly not the fault of business owners/corporations.

    Fiat money impoverishes more people than benefit by it (otherwise, wages would keep pace with or exceed inflation). It is a cure for a disease that does not exist. The ultimate benefit is derived by those that own and run the centralized bank(s) who promulgate that currency. In our case, it is the federal reserve.

    Getting rid of the federal reserve is, in every sense I can imagine, like treating cancer (by any and all means – surgery, chemotherapy, and radiation). At some point, the cancer is too advanced to be treated by any means at all. When the dollar collapses, as it inevitably will, the world will be thrown into chaos. The Euro and the Yuan (China’s currency) are as valueless as the dollar is.

  3. Tom |

    Brian, I take it you would have stood in opposition to Mr. Bryan’s speech:

    Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.

    Can you really support the statement that fiat currencies inevitably suffer long-term hyperinflation? Without getting all Keynesian about it, isn’t it true that some degree of inflation, some level of deficit, some kinds of stimulative government spending, and a structural level of unemployment are all essential to sustained economic growth? Wouldn’t being on a gold standard, which I think you advocate, limit growth and economic flexibility? Or maybe not. I’m at a disadvantage here because I don’t know what the heck I’m talking about….

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