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Today we are going to take a look at what Central Banks do that it is so damaging. We already hinted at some of these facts in our previous lesson Central Banks Engines Of The Evil Empire where we laid out their motives and some of their technicalities. In this lesson we are going to delve into the ugly details of their damage they are producing.. Once we are through, the only possible conclusion left will be that Central Banks must go!

Now! Now! Now! (as they say in the military)

We also explained in the lesson above mentioned, that Central Banks’ main weapon of mass economic destruction is the printing of money. We are going to see now the many ways in which printing produces misery... yours and ours

DEFLATION IS DEAD BUT IT CAN”T REST IN PEACE

In the past

In out lesson Deflation Is A Good Thing we pointed out that if the amount of money is constant then the market will do what it does best: to provide more and more goods and services. This means that we will have the same amount of money chasing those very goods and services, which means that money actually increases in value. Think about it. You stash money under the mattress and year after year it is worth more! No bank required. No interest bearing account required. This is good deflation.

This is not Theory. This happened between the begging of the Industrial Revolution and up to about 1940 (excluding war periods). Why? Because the amount of money was more or less constant. Why? Because the world was primarily on the Gold standard and as you may have already grasped, gold is rather difficult to counterfeit.

Although it is true that the amount of Gold increases over time, this increase is tiny and very slow. This is so because Gold is very scarce and difficult to mine. It can be pulled out of the ground at great expense. As a matter of fact, in the 1990’s Gold price was so artificially depressed that gold mines closed! It was more costly to extract gold from the ground that the price it commanded!

This small increment in the amount of Gold was more than overrun by the astonishing productivity of the markets. Deflation was a common thing and it was good indeed!

Today

Enter now Central Banks. As we mentioned before, they print. The new money they print is indistinguishable from the old money in the sense that it is all so-called “legal tender”. You can buy stuff with it and you are paid with it. Nobody cares if it is “newly printed” or “old print”. This is the dream goal of a counterfeiter. To print as much as money as possible of such a quality that it is indistinguishable from the real thing and, to add a cherry on top, the entire legal system is on your side!

This is exactly what Central Banks do. They counterfeit money. To add insult to injury, they do it electronically so they won’t even have to bother printing or coining anything!

If this is not the ultimate racket, we don’t know what it may be.

Let’s now take a look at what happens when this new counterfeit money goes into circulation.

Prices go up

As the relationship between the amount of money and the amount of goods is what keeps prices more or less constant, if the amount of money increases, then prices will increase. A rise in prices is simply more money chasing the same amount of goods. It is also called inflation.

As we have seen in the lesson Real Money For A Real Economy, if the amount of money is kept constant, its quantity is irrelevant. The market adjusts prices accordingly but the value of goods and services do not change. The opposite is also true. If the amount of money is not kept constant, its quantity matters. The net effect is that prices go up. You are losing purchasing power.

However, a question worth asking is this: do we all know that the amount of money is about to increase and by how much? The answer is clearly no. Central Banks are by definition (and most of them by law) secret organizations. This is so because otherwise we could find out how much money Central Banks are printing and know in advance, what the inflation will be. We could, therefore, increase our prices and demand salary increases for the same amount. Nothing would change. The money Central Banks would print would have no effect whatsoever on the economy. We would sterilize money printing.

Central Banks can’t allow this. They need to impact the economy to favor their masters since no impact means no profits. And so, Central Banks keep quiet and let the prices go up. Who loses? You and us. The suckers in the game. Now let’s take a look at who wins.

Wealth Shifts

The next question that we need to ask is this: why is it important that Central Banks keep quiet about how much money they are printing in order for this to have an effect on the economy?

The answer is that the information about how much new money is being pumped in the market is spread out throughout market participants very slowly. If market participants do not know that the quantity of money has been increased, they won’t adjust prices accordingly. Hence, for any intent and purpose, if I counterfeit I can buy goods and services to the prices dictated by the original amount of money that existed before I counterfeited. So I win twice. I get something for nothing (my counterfeit money is essentially free to me since it is electronically generated) and, I am paying discounted prices!

The first person I am buying from will rise prices since sales are picking-up, but won’t tell that to their supplier. And so he will benefit from counterfeiting. Once he purchases from his supplier (at the old price), the supplier will rise prices because sales are picking-up but he won’t tell that to his supplier. And so on and on until eventually, everybody in the market knows that prices are going up because the amount of money was artificially increased.

However, the person who is closest to the origin of the money benefits the most. This would be Central Banks and their friend who first receive this “new” money without any of us knowing it.

On the opposite extreme are those who are the last to receive this information. They keep paying rising prices without their incomes being raised. They are paying a premium over what they were paying before, simply because this new money has not yet reached their pocket.

And so, there is a wealth shift (economists call it a redistribution effect) that moves wealth from the poorest people to the richest people. The reverse Robin Hood effect: steal from the poor and give to the rich.

If we apply the same statistical tools we used in the lesson Austrian Economics In Pictures, we obtain:

Wealth Shift After Money Printing

In the top graph, the blue arrows indicate the wealth shift; as the Middle Class become poorer, the Rich Class or the Central Banks and its “Friends” become richer.

In the bottom graph we can see the wealth transfer from Poor and Middle Class people to Rich people.

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to Central Banks must go - Part 2

 

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