Thursday, 4 March 2010

Inflation Silently Works to Destroy Your Wealth

While John Boy wants to use inflation to get an $11.5 billion off his government’s books, Australian money market writer Kris Sayce explains (once again) how inflation silently works to destroy your wealth.

_Kris_Sayce_headshot One of the worst aspects to inflation is that it silently works to destroy your wealth.

The creation of new money from thin air by banks and central banks ensures that the most you earn and the money you save is constantly being devalued.

What that means to you is that you have to work harder and longer, plus you have to take more risks with your investments in order to just maintain your standard of living.

Most of the time, mainstream economists won’t admit to that. They’ll tell you that inflation is vital because it keeps the economy growing and because it prevents the economy from falling into the death trap of deflation.

As we’ve pointed out before on many occasions, deflation is not bad for an economy. It helps to counter periods of inflation. And furthermore it is beneficial to savers and also means you don’t have to work as hard as the cost of living falls.

In other words, you can work just as hard tomorrow as you did today and your cost of living is actually less. Or, you could work less tomorrow but still maintain the same standard of living.

The mainstream lies about deflation are nothing short of criminal.

But as we read the online version of The Age last night, we noticed that one of the mainstream economists has let the cat out of the bag on inflation.

I’m referring to former ANZ Bank chief economist, Saul Eslake’s article in The Age.

It was this quote from Eslake that blows the lid on what every mainstream economist thinks about inflation, and how they are quite happy to sacrifice the individual at the alter of inflation if it means letting the banks get away with fraud:

“These inflation targets were chosen because, when inflation is about ”2-point something”, people tend not to notice it. And when they don’t notice it, they tend not to do things to protect themselves against it that are likely to lead eventually to prices rising at a faster rate.”

I can barely believe anyone with a brain would write such a thing. It’s a clear admission that inflation is a tool used to impoverish the population.

Because as long as the banks don’t conspire to make the inflation rate too high, they can get away with creating more and more money from thin air, lending it out to sucker home buyers and therefore increasing bank profits, because, “people tend not to notice it.”

But worse, he’s happy they don’t notice it because if they did, people would do something to “protect themselves.”

Has there ever been a more vile comment from a mainstream economist? We don’t think so. Eslake and the rest of the mainstream economists should hang their heads in shame.

In effect what Eslake is saying is that it’s better for the banks and central banks to be petty thieves than it is for them to be armed robbers.

In our books, a crook is a crook, and Eslake has shown his cards as a supporter of thievery.

Even more than that, it’s an extraordinary admission from a man who is on the board of the National Housing Supply Council, and who helped to write the report – the one that we scoffed at – on housing that suggested the housing shortage was evidenced by homelessness.

On the one hand he’s putting himself forward as some sort of economic social campaigner, working for an organisation that claims to help form public policy, while at the same time he privately – and now publicly – advocates an inflationary policy which he knows destroys wealth.

But perhaps the saddest aspect of Eslake’s comments is that it’s exactly the same thought process that 100% of mainstream economists go through. It’s the same thought process that drives all the economists at every bank. And it’s most certainly the same thought process driving the inflationary policies of the Reserve Bank of Australia (RBA).

And that is to keep inflation just low enough so that the masses don’t realise they’re being robbed blind.

What a disgraceful advertisement that is for economics, or his brand of economics anyway. We’ve got no idea what school of economic thought Eslake follows, we won’t even try and pin this one on Keynes.

Our guess is that Eslake is perhaps a follower of the Artful Dodger School of Economics – encouraging the pick-pocketing of your wallet.

My suggestion is that Eslake needs to go back to school and re-educate himself on economics. A good place for him to start would be with the more enlightened thinking of the Austrian School.

Of course, for someone like Eslake who believes that inflation is good and that central banks know what they’re doing, he could find the Austrian School to be something of a shock – it could only do him good…

It certainly wouldn’t do him any harm.



  1. It's not your wealth Peter, it's everyone's wealth.


  2. So a question to the clever people:

    How do I beat it? What would one do to "protect oneself" as the economist clearly does not want us to do.

    Previous posts prove that property is not a viable hedge. Shares are flat in the last decade (and inflation destroyed whatever return you got) Gold holds it's value but provides little to no return. And starting a business is not currently an option.

    So what do I do if I have a couple of grand to invest?

  3. @Dolf: "[Inflation.] How do I beat it."

    Shoot the Reserve Bank governor.

  4. @ Gooner. You're right. I need to keep reminding myself of that.

    [Starts mantra and heads off into sunset] "It's not my wealth, it's everyone's wealth. It's not my wealth, it's everyone's wealth. It's not my wealth, it's ... "

  5. PC,

    Shy of getting myself locked up for an invariably futile attempt at "monetary policy intervention" such as you've suggested, what could one do practically?

    I was schooled in the "spend your way out of a hole" and "inflation is you friend" economics, and to my regret my first exposure to austrian economics were on blogs like these.

    So what does the classical school offer in terms of a personal "how to"?

    Any good personal finance books that uses this philosophy as a guide?

  6. @dolf

    There was a thread on the forums about investment and the Austrian school of economics.

    I can't recall much about it, but it may be worth looking out (just don't feed the anarchists). Peter Schiff is one name that comes to mind (look up 'peter schiff was right' on youtube).

    Also, though I don't know how it may perform relative to the NZ dollar in the future, gold has generally been good in times of inflation (those that invested in gold have done rather well lately). Find some graphs of fiat money vs. gold (these have often been posted on notPC). Though there can be problems with gold, like having the Government steal it all (see FDR).

  7. @ Dolf

    I assume you're referring to Kris's previous article "Why Property is not a Hedge Against Inflation".

    On a political level, I agree that government induced inflaction is bad for *all* productive people,whatever they invest in. But on a personal level, I remain firmly convinced that property is one of the best hedges against it - provided the property is well geared (either positive or close to it) and in a good area that's likely to increase in popularity over time.

    Two things that Kris failed to account for in his previous article:

    1. The growth in M3 money is not the same as inflation. Increased money supply is only inflationary to the extent it is not matched by increased goods and services. The inflation figures Kris used in his calcs are therefore over-stated, and his calculation comparisons flawed. This is high school economic stuff, so I'm very surprised he made this mistake.

    2. Whilst inflation does erode the value of any equity you may have in property, it also erodes the value of the *debt* too.

    A simple example: You buy a $500k property at 20% deposit, with $400k being funded. Rental income more or less pays off the interest, but no principal. In 10-15 years time, your debt remains at $400k, but the property price has doubled to $1M. Your equity is therefore $600k - a 500% return on your invesment. More than enough to cover inflation, I would have thought?

    Is this state of affairs desirabe on a political level? No. Is it one of the best ways to protect yourself personally from inflation? Yes.

  8. Try looking at the Reserve Bank of Australia's rationale for targetting 2-3%. The page on it ( plainly states that an intended aim is to devalue worker incomes as a means to bringing flexibility back to labour market prices. That info has been up there for years now, and I still can't believe they're THIS brazen about it.


  9. JJM

    They're confident that people won't understand the significance of that statement or, if they do, they won't be in the position to do anything about it. It's also possible that the Oz Reserve Bank considers itself a counter-balance to union labour price fixing and the like.


  10. @John: That was one of Keynes's prime arguments for inflating the currency during time of recession: that it engendered wage cuts without the wage-earners noticing.

    Turned out wage-earners and their unions weren't so dumb as he thought, but the bankers trained in his methods still keep on trying.


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