The cost of a McDonald’s hamburger in the United States has inflated 3.75 percent yearly over the last seventy years. McDonald’s has grown from a tiny hamburger stand in Des Plaines, Illinois, to the second biggest fast-food chain on earth. Scale economies alone (never mind process and performance enhancements) ought to’ve allowed the rate of a hamburger to decrease materially over this period.
Why didn’t it? What forces and organizations have conspired to inflate the expense of a simple meal by more than thirteen times over two generations? Lots Of Mises Wire readers know the answer, but few Americans are economically astute adequate to understand or explain what Vladimir Lenin called the “surest methods of reversing the existing basis of society.”
Simply put, inflation is a huge “skim”– committed in a symbiosis of money creation by bankers and government-affiliated central bank bureaucrats, the two organizations with the power to produce money from absolutely nothing. Inflation creates a great, cushy presence for each group. And the bankers and bureaucrats always get their money.
If steady rate deflation were personnel– as is the case in an appropriately operating consumer economy, where productivity improvements stream into lower consumer costs– the world would be quite various today and much more hard for bankers and bureaucrats.
With progressively falling rates, lenders need to do correct credit analysis. They need to reserve adequate reserves and typically run their institutions more conservatively. Credit analysis is much more difficult in deflation as debtors must constantly sell more products to service their loans instead of counting on boosting prices. Protected loans become problematic as vowed assets decrease the value of. Banking typically ends up being a lot more work– and more dangerous. The duration of 1865 to 1910 in the United States was an ideal example of this sort of environment. Tape-record bank failures and huge monetary volatility accompanied stable deflation and one of the greatest periods of economic prosperity and development in our country’s history.
In short, deflation creates dangers for banks, so banks conspire with the federal government to create enough money so they don’t have to deal with it. The “balls to the wall” and “heads I win, tails you lose” practices we have actually become familiar with in banking today are both enabled and influenced by the irreversible inflationary routine.
The other significant inflation conspirator (and biggest beneficiary) is government. Think of inflation as oxygen for political leaders and carbon monoxide as a public vote cast to raise taxes. Stable (2 percent, say?) inflation produces a reliable ratcheting impact on every taxpayer in the land, and a nice, smooth, foamed runway for bureaucrats. And should our good-hearted leaders decide the inflation/tax runway isn’t large enough or smooth enough? They simply borrow the distinction (i.e., the deficit) and pump up that away too!
Inflation produced by central banks permits federal government to ALWAYS have the cash it wants– and be initially in line to get it. If deflation were operative– as would be the case in a correctly operating economy where productivity improvements stream into lower costs– federal government would need to clearly tax rather of counting on inflation to drive profits and devalue financial obligation. Political leaders’ careers would be much, much shorter.
In summary, there’s a reason deflation hardly ever (if ever) happens. Inflation makes lenders’ and bureaucrats’ lives simpler and keeps them in power. The expense of an easy hamburger would be far lower without ever extensive federal government and the willful destruction of our money. However it will never occur as long as lenders and bureaucrats operate in best symbiosis to execute a huge skim on the American people.