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Monday, November 15, 2021

OPINION:

The biggest financial fraud in history is now being inflicted on the American people and others in the form of inflation.

Do you find it odd that banks and other financial institutions provide mortgage loans to millions at an approximately 3% interest rate for 30 years, while the government reports that inflation is over 6% at an annual rate and rising? Are you frustrated that you are a responsible and prudent person who saves for a “rainy day” or retirement, and your savings account only pays 1% or so interest, while inflation is many times that? Do you find it odd that the government official most responsible for inflation – Treasury Secretary and former Fed Chairman Janet Yellen – several months ago told us that inflation would be mild and transitory, neither of which has turned out to be correct? Do you suspect that she may not know what she is doing, particularly when she says that more record government spending will bring down inflation?


Do you find it odd that Energy Secretary Jennifer Granholm only laughs when reporters ask how much the oil pipeline shutdowns and abandonments and the significant increases in regulations on oil producers have increased gas and oil prices? Do you think it is odd that Transportation Secretary Pete Buttigieg takes a two-month “paternity” leave during the country’s biggest supply chain crisis and offers no meaningful solutions, while many dozens of ships are waiting to be unloaded? Do you think it is odd President Joe Biden has nominated a woman to be Comptroller of the Currency, who is on record wanting to nationalize banks, and desiring to shut down the oil and gas industry before economic energy substitutes are developed?

When watching interviews with many government officials, one wonders if it is really possible they are that stupid. Or do they have a different agenda?

It is no secret that many of those in government like to spend other people’s money. Their ability to spend is limited by their inability to extract more tax revenue or by borrowing. At some point, people reduce the amount of labor and savings they are willing to have taxed – often by refusing to work (at least in the legal economy) or save more. Given that universal fact, governments resort to borrowing. As those who provide the loans to the government (most often by purchasing government bonds) become more concerned about any government’s (federal, state, or local, etc.) ability or willingness to pay back the debt and interest, they demand higher returns to compensate for the risk. This, again, puts a natural limit on the amount of borrowing a government can do.

But what happens if the people in government find a way to make the loans they obtain from private parties appear to be “risk-free” or, better yet find ways to subsidize them? This is now being done on a massive scale – the side effects are inflation – which reduces the real incomes of workers and savers. Inflation is an un-legislated tax, particularly on low-income people, resulting in a massive transfer of wealth from the poor to those who are rich or “well off.” The beneficiaries are frequently the politically well-connected, such as union and other interest group leaders, government bureaucrats, crony capitalists, etc.

To keep the government from just printing money to cover its expenses, which most everyone understands would create inflation, the Federal Reserve (the U.S. central bank) is subject to several restrictions. For instance, it is not allowed to buy government debt directly from the Treasury. So, it does an indirect workaround. Until 2010, the Fed banks never held more than one trillion in federal government debt – that number is now almost six trillion and is still growing. Several years ago, notable monetary experts, such as former Federal Reserve Cleveland Bank President Jerry Jordan and current World Bank President David Malpass, warned that the Fed was losing the traditional means to control inflation. They and knowledgeable others believe we are now close or even beyond that point.

Banks and others are willing to lend large amounts of money to politically preferred customers (home buyers and many large companies) because they are lending other people’s money, including the taxpayer, rather than their own. At the same time, many small businesses, and those in the oil and gas business, gun dealers, etc. are having a hard time obtaining loans because the Biden Administration has let it be known that institutions that make such loans will be critically looked at by the financial regulators.

We are rapidly moving to a system where the government allocates capital (as is done in socialist and communist states) rather than the market. The result will be misallocating money and theft from lending to friends and political allies, resulting in lower growth, lower incomes, and a significant loss in liberty.

As inflation accelerates and economic restrictions like “price controls” multiply, people increasingly will acquire and use hard-to-regulate private money – substitute alternatives, such as Bitcoin and other cryptocurrencies, including those with real backing. That future is upon us!

• Richard W. Rahn is chairman of the Institute for Global Economic Growth and MCon LLC.


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