How inflation works 1

Some notions of inflation, money and finance… (1/3)

Keywords: money, cost, Friedman, Keynes, chicago boys, monetary, Central Bank, ECB interest rates

It is because money governs the world that it is important to know who governs money ...


Inflation, money, these are terms that sound familiar to all of us, and yet, what do we really know? Of the first, we often hear about it in the media (without necessarily understanding exactly what it corresponds to), as for the second, its daily use makes us ignore the essential: who creates it, and according to what principles and what rules?

Current monetary systems operate on very different principles from our representations from the past. Who knows that henceforth, money is created from nothing (specialists say ex nihilo), and without metallic counterpart? Yes, modern “money” (currency) has not been convertible into gold for over thirty years!

We still believe that money must be "earned" and saved before it is spent or lent! However, who knows that most of this new money, this new currency is created by the loans granted by the banks (at their whim) which themselves are supplied "at wholesale price" from central banks (European , the ECB, for euros, or American, the FED, for dollars)?

Who knows that by acting on the so-called “refinancing” interest rates, a group of unelected men (the “governors”), not having to justify themselves vis-à-vis anyone in the case of ECB (since the latter is declared totally independent in its monetary policy choices) and deciding behind closed doors and without any written record of internal debates and positions, influence the wholesale price of this new money?

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They are thus able to "steer the economy from the top", true modern conductors of the economic activity of peoples ...

Very few people know what link the modern economy establishes between unemployment and inflation. (…) But one thing is certain, inflation has been the absolute obsession of modern economists for more than thirty years… Long before unemployment!

So how does inflation work?

In reality this obsession with the fight against inflation was driven at the end of the Sixties by a current of liberal economists, the monetarists, and in particular Milton Friedman and his “Chicago Boys” as one called them.

For Friedman, inflation, that is to say the rise in the general level of prices in an economy (essential definition, we will come back to it) is, to use his famous formulation,  "At all times and in all places of monetary nature and due to an excess of money" . Too much money chasing too few goods to be exchanged inevitably leads to a general rise in prices. To use one of his famous images, if a helicopter spills 50% more money on society (a shower of banknotes), people will not be richer for all that and economic activity will not be. necessarily stimulated (if not temporarily and in general euphoria, by a psychological effect of wealth). However, in the more or less long term, the general price level will have risen by 50% (there will have been 50% inflation). In other words, if everyone earned the salary of a CAC 40 boss, the baguette would cost 1000 euros! Apparent wealth would be very relative. Because this is an absolute fact to meditate on to fully understand the meaning of the thesis developed on this site: wealth is only relative ...

Friedman attributes to states and governments (resulting from the democratic vote ...) the historical responsibility for inflation: as long as they have the power to control the currency (the famous privilege of "coin money"), they will do so to finance their "deficit", that is to say to pay the costs of their policies. Whether this deficit comes from sumptuary state spending (luxury of power, waste) or useful spending for society (social infrastructure or equipment, fight against unemployment or its social effects), all of this is put in the same bag: this will generate inflation!

However, it is a certain fact: inflation is more of a problem for those who have a lot of money (the holders of capital) than for those who have little or none. And it is also more of a problem for those who lend than for those who borrow ...
"Inflation is the euthanasia of annuitants" as Keynes had said. By eating away at the value of money, inflation is seen by rentiers as a tax on wealth. It is as if they had then a melting currency, melting all the more as inflation is high ...

The new monetary and financial order put in place in recent decades at the international level is designed precisely to no longer be the euthanasia of rentiers. Quite the contrary ... The minimum unemployment rate necessary to stabilize inflation at a low level, euthanasia has changed sides: it now concerns those who have only their job to obtain an income, and the unemployed and precarious are the means of pressure and fear to achieve it.

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This new monetary and financial order was established following the precepts of Friedman and his acolytes. No doubt I should say that these precepts served as a pseudo-scientific guarantee for what is akin to a silent coup d'état on the Mint ...

The principle of “total independence” of the Central Bank, absolute and all-powerful guardian of the Money, was thus retained. In Europe, we currently have the most independent Central Bank in the world, since it is accountable to no one as specified above. This principle has made it possible to withdraw from the hands of our rulers all the power (immense in societies dominated by "the economic") associated with the control of money. In this way, any possibility of giving in to popular pressure is removed when it is expressed in the ballot box or in the street, because working conditions would deteriorate or unemployment would increase, for example. The control of power has surreptitiously changed hands, our rulers are only there to do “pedagogy” for the voting crowd. (…)

Of course, if we entrust the control of the currency to an Independent Central Bank, it is by displaying loudly two Friedmanian principles, presented as founders and legitimators of this decision:

  • The absolute priority to "fight against inflation" and "price stability"
  • Strict control of the “money supply”, that is to say of the quantity of money that this Central Bank will put into circulation in the economy.

It is a question of doing much better than these damn rulers so sensitive to the grunts of their peoples at each re-election ...

Read part 2

Extracts from the Nairu website

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