Government Intervention and Central Banks Do Not Favor Lower Prices

The Hidden Tax of Inflation

Many people believe that increased government control of the economy is the solution to rising prices. However, this is far from the truth. Governments that intervene in the economy rarely reduce consumer prices as they benefit from inflation. Inflation acts as a hidden tax, allowing the government to dissolve its political spending commitments through a constantly depreciating currency. Governments can then present themselves as the solution to rising prices by offering subsidies in an increasingly worthless currency. This is why socialism and hyperinflation often go hand in hand.

Socialism and Inflation

Socialism overlooks human action and economic calculation, promoting a false image of a government that can generate wealth simply by issuing more units of fiat currency. When inflation hits, socialist governments typically resort to propaganda and repression. Propaganda is used to accuse stores and businesses of driving up prices, while repression is employed when social unrest intensifies and citizens rightfully hold governments accountable for scarcity and high prices.

The Need for Free Markets

To achieve lower prices, it is crucial to limit the economic power of the government. Free markets, competition, and open economies are the key to reducing consumer prices. While it may seem that we currently operate within a free market with competitive and open economies, the truth is that we live in nations that are increasingly intervened and overregulated. Central banks and governments perpetuate unsustainable public deficits and debt by continually printing more money. This raises questions about why it is becoming increasingly difficult for families to make ends meet, buy a home, or for small businesses to thrive.

The "Social Use of Money"

The concept of the “social use of money” involves abandoning the primary purpose of money as a reserve of value, allowing the government preferential access to credit to finance its commitments. This enables the state to announce larger entitlement programs and increase the size of the public sector relative to the economy, creating a self-fulfilling prophecy. The state issues more currency, which devalues people’s money. Citizens become more reliant on the state, demanding more subsidies paid in the depreciating currency. This is essentially a process of control through debt and currency depreciation.

The Illusion of Price Stability

When governments and central banks discuss price stability, they are referring to a two percent annual depreciation of the currency. This is far from price stability, as it is measured by the consumer price index (CPI), a carefully crafted basket of goods and services weighted by the same people who print the money. The CPI fails to fully reflect the erosion of the currency’s purchasing power, which is why governments favor it as a measure of inflation. This is why the calculation of the CPI’s basket fluctuates so frequently.

Government's Role in Inflation

Government and central banks are not advocates for price stability. Their roles would become obsolete if aggregate prices fell, competition increased, and citizens saw their real wages rise and their deposit savings increase in real value. When a central bank like the Fed cuts rates and increases the money supply after an accumulated 20.4% inflation in four years, it is not defending price stability; it is defending price increases. This strategy serves to conceal the government’s financial insolvency.

Inflation as a Hidden Tax

Inflation is a hidden tax, a slow process of nationalizing the economy, and the perfect way to increase taxes without angering voters and blaming private businesses. The consumer is likely to blame the store or business for higher prices, not the issuer of a currency that loses purchasing power. Governments want higher prices because it gives them more power. Destroying the currency they issue is a perfect form of control.

Fiscal Limitations

Despite what you may have heard, the government does not have unlimited borrowing power and cannot manage inflation to allow you to live comfortably. The government cannot issue all the debt it wants. It has an inflationary, economic, and fiscal limit. Inflation is a warning sign of declining currency confidence and a loss of purchasing power. The economic limit is evidenced by lower growth, lower employment, weaker real wages, secular stagnation, and declining foreign demand for public debt.

Less Economic Power to Governments

If you want lower prices, you should give less economic power to governments, not more. A government that tells you it will borrow $2 trillion per annum in a growth and record receipt economy and will continue to increase debt and borrow well into 2033 with the most optimistic assumptions of GDP and receipt is telling you it will make you poorer.

Bottom Line

When a politician promises that he or she will cut prices, they are always lying. A weaker currency is a tool to increase government power in the economy. By the time you find out, it may be too late. Money is credit, and government debt is fiat currency. Currency depreciation is inflation, and inflation is equivalent to an implicit default. No interventionist government or central bank wants lower prices because inflation allows the government to increase its power while slowly breaching its monetary commitments. What are your thoughts on this matter? Share this with your friends and sign up for the Daily Briefing at 6pm every day.