Authored by Daniel Lacalle via The Mises Institute,
Many individuals advocate for increased government control over the economy to combat the surge in prices. However, this approach is highly ineffective. Interventionist governments tend to perpetuate consumer price inflation as it serves their interests by eroding the value of the currency, thereby reducing the real value of their debt obligations and enabling them to collect more taxes. Inflation essentially operates as a hidden tax, allowing governments to devalue the currency through the issuance of additional fiat money, thus presenting themselves as the solution to rising prices by offering subsidies in a currency that is continuously losing value.
This symbiotic relationship between socialism and hyperinflation is evident.
Socialism disregards human initiative and economic rationale, promoting a fallacious notion that a government can generate wealth at will by issuing more fiat currency. When inflation sets in, socialist regimes typically resort to their favored tools: propaganda and repression. Propaganda is used to scapegoat stores and businesses for price hikes, while repression is employed to quell social unrest that arises when citizens rightfully hold their governments accountable for scarcity and inflated prices.
To achieve lower prices, it is imperative to limit the economic authority of the government rather than expand it. Only free markets, competition, and open economies have the potential to drive down consumer prices. Despite the perception of many that we currently operate in free markets with competitive and open economies, the truth is that we reside in increasingly intervened and overregulated nations where central banks and governments strive to sustain unsustainable public deficits and debts. Consequently, they continue to print more money, prompting questions as to why it is becoming increasingly challenging for families to meet their expenses, purchase homes, or for small businesses to thrive. The government is gradually eroding the value of the currency it issues, a phenomenon termed as the “social use of money.”
But what exactly is the “social use of money”? Fundamentally, it entails relinquishing one of the primary attributes of money, its store of value, to afford the government privileged access to credit for financing its commitments. Consequently, the state can announce expanded entitlement programs, enlarge the public sector relative to the economy, and create a self-fulfilling prophecy. By issuing more currency, the state diminishes the value of people’s money, rendering citizens increasingly reliant on the state and more inclined to demand subsidies denominated in the currency issued by the state. This process essentially amounts to control through debt and currency devaluation.
When governments and central banks emphasize price stability, they are essentially alluding to a two percent annual depreciation of the currency. An average rise of two percent in aggregate prices does not equate to price stability since it is gauged by the consumer price index, a meticulously curated basket of goods and services weighted by the very entities responsible for currency issuance. Governments favor the consumer price index as a measure of inflation because it fails to accurately capture the erosion of the currency’s purchasing power. This explains the frequent fluctuations in the CPI basket calculation. Even if the CPI accurately reflects inflation, it will underestimate the price escalations of essential goods and services by assimilating them into a basket of items that individuals only consume sporadically. The conglomeration of shelter, food, healthcare, energy, technology, and entertainment inevitably results in distortions.
Hence, governments and central banks have no genuine interest in safeguarding price stability. If aggregate prices were to decline, competition intensify, and citizens witness a surge in their real wages and the real value of their deposit savings, the need for their jobs would diminish.
When a central bank like the Fed reduces rates and augments the money supply following a cumulative inflation rate of 20.4% over four years, it is not advocating for price stability but endorsing price hikes to obscure the government’s financial insolvency. This approach effectively upholds a currency with a diminishing value.
Governments are the primary instigators of inflation through the profligate spending of a currency that is perpetually losing purchasing power due to the state issuing more money than what the private sector demands. No corporation or purportedly malevolent oil producer can perpetuate annual aggregate price hikes at a diminishing pace. Only the entity responsible for money printing can do so, and central banks do not increase the money supply out of volition; they do so to absorb the escalating deficit spending of the government.
Inflation serves as a covert tax, facilitating the gradual nationalization of the economy and providing an inconspicuous means of escalating taxes without incurring the ire of voters, all while attributing blame for elevated prices to private enterprises. The average consumer is likely to censure stores or businesses for heightened prices rather than hold the currency issuer accountable for the eroding purchasing power of the currency.
Why do governments aspire to elevate prices? Essentially, it furnishes them with augmented authority. Impairing the currency they issue represents an ideal mechanism for asserting control. Hence, they necessitate increased debt and elevated taxes. High taxes do not function as a mechanism for debt reduction; instead, they serve to justify the mounting public indebtedness.
It is a common refrain that the government possesses boundless borrowing capacity and can regulate inflation to ensure the populace’s comfort. However, this assertion is fallacious. The government is not at liberty to issue an unlimited quantum of debt. It encounters constraints in terms of inflation, economics, and fiscal implications.
Inflation functions as an indicator of deteriorating confidence in the currency and a decline in purchasing power. The economic threshold manifests in subdued growth, diminished employment opportunities, stagnating real wages, prolonged economic stagnation, and dwindling foreign demand for public debt. On the fiscal front, escalating interest expenses notwithstanding low rates, dwindling revenues with each tax hike, and the exodus of citizens and businesses to more tax-friendly jurisdictions all contribute to the feeble or negative multiplier effect of government expenditure.
If the objective is to curtail prices, curtailing the economic authority of governments is imperative.
A government proclaiming its intent to amass $2 trillion annually in a thriving economy with record revenues, and persisting in escalating debt and borrowing until 2033 under the most optimistic GDP and revenue assumptions, is essentially signaling an intent to impoverish its citizens.
Whenever a politician pledges to slash prices, it is invariably a fallacy. Currency devaluation serves as a tool to augment government control over the economy. By the time the populace comprehends this reality, it may be too late.
Money embodies credit, and government debt epitomizes fiat currency. Currency devaluation equates to inflation, which in turn signifies an implicit default. No interventionist government or central bank aspires to lower prices, as inflation facilitates the consolidation of government authority while gradually breaching its monetary obligations.
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