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Pile of MoneySure enough, we are willing to bet that you have heard this expression before, although not in this format. The "modern" format is this: "there is not enough inflation" followed by a considerable amount of exclamation marks.

When asked why? The invariable answer is either:

a) To prevent deflation

b) To stimulate the economy


We have explained at length in other articles why this is plain and simple Bull Manure (see for example Real Money For A Real Economy , Fake Money For A Fake Economy and Inflation Inflation Inflation among many others). However, many people remain unconvinced. Fair enough, let's go to the numbers.

If we are going to take a look at the relationship between inflation and economic growth (which is what the fuzz is all about) we would like to have a large statistical sample. As world-wide GDP and CPI data are not available dating back 200+ years, we will have to select a representative country. We choose the United Kingdom or Great Britain (as it was called then). For this country, we have accurate data going back to 1800. That should be a sufficiently large statistical sample to satisfy even the most austere critics.

In order to study the assertion that inflation creates wealth (which in ultimate analysis is what it is all about), we will deal with the percentage change CPI from year to year and with percentage change Real GDP. We define % RealGDP as % GDP change from year to year minus the % CPI change from year to year (this is the same parameter we used in our Default Index or DI). We are forced to do so because the standard GDP includes what the government has printed as "wealth". This is, of course, cheating. The RealGDP better represents true wealth.

First, we plot the % RealGDP and the %CPI for over 200+ years. What we get is this:


Humm…. Something is most definitively wrong here. Up to 1920's the picture is not very clear, but after 1920's (about the time when the gold standard began to be abandoned and fiat money began to reign supreme), the picture is quite clear. Every time the %CPI spikes up, the %RealGDP spikes down! What this mean is that every time the British Central Bank decided to "stimulate the economy" and "prevent deflation", wealth dropped like a stone!!!

Strange, this should not be the case, but we can do one more plot to satisfy ourselves. This time we plot %CPI versus %RealGDP and obtain:


In this plot we see the same!!! The more negative the %CPI (i.e. the less printing of fiat money), the higher the %RealGDP (i.e. the more wealth was produced). We can go so far as to draw a linear trend line (minimum squares for those adepts to statistics) and we can get the exact equation of said trend line. It so happens that this equation tells us that for every 1% of CPI that was printed, the RealGDP dropped by 0.8%!! There is relationship of almost 1:1 between the increase of printing and the decrease of real wealth! And this data is valid over 200+ years! This is no statistical glitch; this is purposely executed wealth transfer from poor people to rich people, the Hood Robin effect.


OK, so inflation is counterproductive. The more we have the less wealthy we are. But we still need money to operate. Money is the lubricant that makes markets efficient and so a question appears: What is the optimum amount of money?

The answer is simple: whatever is in the market today, regardless of what it is.

We explained the effect of increasing fiat money in our article Fake Money For A Fake Economy as a simple wealth transfer with no impact on the total amount of wealth, simply on its price. But our example assumed we already had a working market. What happens if we don't? What happens at the beginning?

Simple. At the onset of any market there simply is no money and barter reigns supreme. Over time, as money becomes more available it simply takes over bartering. Once it has taken over the entire market, that's it! We can confidently stop getting more money because all the money we will ever need is already present.

When gold took over bartering its total amount kept growing and this did produced inflation. However, since extracting gold is a slow and expensive process and gold is very scarce indeed, the economy grew much faster than the increase in gold supplies and hence gold inflation was simply reflected as a slightly (almost imperceptible) decrease in economic growth. For any intent and purpose the amount of gold money remained more or less the same throughout the markets and it worked! It is for this reason that gold kept its value for over 2000+ years.

The truth is that if Central Bankers would stop printing right this moment, there would be more than enough money to serve its purpose for as long as markets exist. The chaos that this would produce, on the other hand, it is an entirely different story. Depraving a junkie of a highly addictive drug overnight is a sure way to send this person to the hospital and possibly to an early grave. The same is true for countries. Yet, the day when this will happen is approaching inexorably.


Yet again, inflation creates poverty and we don't need more money. We already have all the money we will ever need. If you hear otherwise, you will understand immediately that a different agenda is at play. Eventually the choice will be yours: Fiat Money or Gold. Choose wisely.

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

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