Economics, Math & Politics

Imagine Jane goes shopping for jewelry and finds a nice gold chain necklace. The jeweler informs Jane the chain is a beautiful piece and worth $1,000. Jane has only $50 in cash. The jeweler arranges financing for the remaining $950. Jane leaves the store proudly wearing her new necklace.

Four months later, Jane unfortunately loses her job and can no longer afford the $100 monthly payment on the gold necklace. She visits her neighborhood pawn shop to sell the necklace. The proprietor appraises the necklace and informs her that it is worth $2 as it is made of cheap lead covered by gold paint. Flabbergasted, she watches as he uses a knife to scrape away some of the gold paint to reveal the lead. Jane leaves the pawn shop dejected and confused as to how she could have possibly overpaid for the necklace and wondering how she can ever pay back the loan.

Some time after arriving home, Jane is struck by an epiphany. If she can manufacture $600, she can pay off the loan including the interest. Taking the last $20 bill from her purse, she makes enough copies to create $600 in counterfeit 20s. She sends the money to the loan company.

Does any of this sound familiar? Well, it should. This is exactly what the U.S. government is doing, By inflating the supply of dollars, the Federal Reserve is attempting to replace the wealth that was destroyed by the bursting of the housing bubble. That wealth was destroyed because people paid more for homes than what those homes were worth just as Jane's wealth was ruined because she overpaid for a piece of jewelry. There is a key difference. Poor, desperate Jane was arrested for counterfeiting currency (a form of fraud). Ben Bernanke's actions and those of the U.S. government are not punished for inflating the dollar. Every person that has dollar denominated savings is a victim of the inflation. A value destroyed cannot be restored by substituting something that has no value backing it. Dollars that are created out of thin air, not due to the production of anything of value, serve a single purpose: reducing the value of all dollars that were earned through the production of value. A fiat currency depends on the trust of people using it as the medium of trade that it can be traded for something of tangible value. When the fiat currency is inflated, that trust is undermined as there is no certainty of value from which it was created.