Typically, the general public confuses any economic phenomenon with its manifestation. Both are thought of as the same thing. For example, the phenomenon “inflation” is assumed to mean the same thing as its manifestation, which is rising prices.

The true meaning of “inflation” is “inflation of the amount on money in circulation”. In other words, what “inflates” is not prices, but the money supply. Cause and effect are, however, inseparable: there is obviously a relationship between (i) the amount of money available and (ii) the volume of goods and services for sale. If the money supply goes up while the volume of items for sale remains relatively static, a rise in prices is an inevitable consequence.

The equally valid way of expressing the last phrase would be: “a fall in the purchasing power of money is an inevitable consequence”.

So what we are really talking about is inflating the money supply. This has been going on for a very long time, and it’s worth pausing for a moment to consider how this is done. Here are two of governments’ and bankers’ favourite methods:

(i) Fractional reserve banking

In accordance with the age-old malpractice of fractional reserve banking (FRB) commercial banks “borrow” your deposited cash, without your knowledge or permission, and re-lend it at profitable (to them) rates to other customers.


A run on the bank


They attempt to justify this de facto theft by assuming that the probability of all depositors demanding to withdraw their funds at the same time is remote, and they therefore retain no more than a small “safety margin” to meet ad hoc withdrawals. However we know that there have been countless “runs on banks” when people, fearing that their banks have got themselves into trouble by lending your money to bad borrowers, will even riot in order to get their money out. This practice of fractional reserve banking clearly has the effect of exponentially increasing the amount of credit that is not backed by any real assets.

(ii) Money printing.

Readers of my “Going Postal” essays will know that after the 2008 crisis the Treasury and Bank of England were complicit in one of the most blatant exercises in money-printing ever conducted, known as “Quantitative Easing” (QE), and its inflationary consequences should therefore be obvious. Central bankers all over the world have followed it in various guises, and it is estimated that the total amount printed so far is well over $20 trillion (yes, trillion), and counting!

Even though the above explanation of how the money supply is expanded is incontrovertible, government statisticians and their economist acolytes often defend these blatantly inflationary policies with comments such as this: “If quantitative easing (QE) and its terrible twin, fractional reserve banking, are so awful, why is it that we have no more than a negligible rate of inflation?”

 Well, that indeed is the question, so let’s address the conundrum systematically.

 First, we need to be clear about the terms we are using. Instead of talking about “inflation” as shorthand to cover all its effects, it is more accurate to speak of “currency debasement”, which is the real impact of “fiat money” creation, by any means – and the rate of currency debasement has certainly NOT been negligible!

[“Fiat”: Latin for “it may be” or “let there be”, as in “Fiat lux”: “let there be light”. Hence “fiat money”: “let there be money” – that is money conjured out of thin air by pressing an electronic key.]

We experience currency debasement as declining purchasing power. Two sides of the same coin: one reflects the other, as my opening definitions make clear.


Objective measure of inflation


Secondly, it is essential to recognize that the above question (on the apparently low rate of inflation) overlooks the fact that the measures used as inflation indices in this process are inherently unreliable. The decline in purchasing power is most evident when objectively measured by reference to the price of an essential commodity such as oil, or against a stable commodity such as gold – rather than against the so-called Consumer Prices Index (CPI).

The CPI purports to reflect the prices of ingredients selected by government statisticians in what they choose to be a typical, but notional, “basket of consumer goods and services”. This basket, whose contents are varied periodically, results in an index that cannot be trusted as an objective barometer. It supports the wizardry of non-independent Treasury statisticians, and relates to goods that scarcely feature in your shopping basket or mine. These statistical whizz kids are not independent, and are paid out of taxes. It is in their interests to produce figures that don’t upset their paymasters too much! Government (and its reporting outlets) regularly report low inflation as evidence that their harmful policies are working.

The true measure of inflation is the loss of purchasing power

Fifty years ago, in 1968, the price of a barrel of oil was 3.2 dollars. It is today just over 70 dollars – so instinctively everyone says “the price of oil has gone up”. But that apparent increase is rather the measure of the decline in the dollar’s purchasing power over the same period – a decline of almost 96 per cent! What’s more, the apparent increase in the price of a barrel of oil is much reduced when measured against a more stable commodity, such as gold, rather than against a volatile unit of fiat currency, such as the dollar. You will find that the purchasing power of gold has more than doubled over the same period if measured in barrels of oil.

Another way of looking at the consequences of all this is to compare the dollar price of gold in 1971, when the USA abandoned the gold standard, with the “gold coverage price” as it stands today, expressed in dollars.

I’ll come to this, but first a tiny bit of background. Remember that, in 1945 at Bretton Woods, New Hampshire, it was agreed that dollars were henceforth to be redeemable for gold at the official rate of $35 per ounce. But an undisciplined Federal Reserve printed dollars in such profusion, mainly to pay for America’s foreign wars, that by 1971 the true relationship between the money supply and gold had been transformed: the gold coverage price (the true price per ounce of gold) was really $2,677, not the former official price of $35 per ounce. As my friend Patrick Barron puts it, “no wonder the Fed was running out of gold! Foreign central banks, especially the French, clearly saw and understood this” – and exploited it by exchanging their dollars for gold at the ludicrous rate of a mere $35 for one ounce! Until President Nixon quit the field, utterly defeated.

[What, you might ask, would the gold “coverage” price stand at today, 47 years later? Well, there has been relatively little change in America’s gold reserves (just over 260 million ounces) but the money supply? Wow! Had America retained its commitment to the gold standard at the true parity, the Fed would have been required to charge holders of dollars $44,742 in order to obtain an ounce of gold, for which there would have been no takers! A negligible rate of inflation? My thanks, again, to Patrick for the calculation data.]

The ability of gold to measure the ongoing debasement of virtually every fiat currency lies, of course, in its own relative stability in terms of quantity. Although there are new sources of supply – mainly mining – its extraction and production are costly and strictly controlled. But most importantly, its worth cannot be debased by a central government printing press.

Blowing asset bubbles

The third point to remember about QE is that the newly created fiat money MUST go somewhere. It could, of course, rest where it lands in the hands of its early receivers, the commercial banks, discount houses, hedge funds and other financial enterprises, but hoarding it merely adds to their reserves, which is unpopular while interest rates are suppressed. So what actually happens is that the new money is used by the already wealthy classes (who least need it) to spend on assets such as land, equities, prime property and luxury toys such as cars, yachts, planes etc, causing their prices to rocket and gratuitously widen the gap between rich and poor. So never believe the “official” statistics that report low price inflation – it’s just that those asset prices don’t figure in the official CPI statistics.

This statistical fiction is most harmful when, after an interval, the new money filters into asset prices closer to the High Street, where we instinctively know from direct experience at the chemist, greengrocer, cafe or letting agent, that the basic cost of living, in everyday terms, is much closer to 10 per cent than 2 or 3 as reported.


“QE for the people”


Fourth: In the same refrain, you have no doubt heard reference to “helicopter money”. This is a variant of QE favoured by certain politicians who talk blithely about the need for “QE for the people”! The idea is to by-pass the treasury mandarins by dropping newly printed money directly on the people (often referred to as “universal basic income”), so that they, rather than the already-rich classes, can benefit from the bonanza and aid the economy by spending their newfound wealth. It can never succeed. This notion commits the fundamental error of equating ‘money’ and ‘wealth’. If everyone suddenly finds that free handouts have swelled their bank accounts, how long will it be before prices follow? (And since even helicopter money originates at the central bank, you can be sure that the City will get its hands on it first anyway!)

Deliberate suppression of interest rates

The fifth and final point concerns the corrosive effect of the deliberate and utterly misguided suppression of interest rates which, if they were allowed to find their own market level, would represent the time-value of money, or what the private sector is prepared to pay for liquidity – either for spending now or saving for future spending.

The suppression of interest rates is yet another desperate attempt to (i) reduce the cost of servicing the government’s own borrowings (which QE has expanded immeasurably); and (ii) stimulate demand, hoping that it will lead to productive economic activity. But it flies in the face of Say’s Law, which holds, correctly, that we produce in order to consume. Reversing these leads to the idiocy of “demand management” – as if stimulating demand will magically generate the production needed to satisfy that demand! If that were true, Venezuela and Zimbabwe would be vying right now for the title of the world’s most prosperous economy.

Fiddling around with interest rates can never achieve the government’s objectives because the demand it is trying to stimulate will not prompt any entrepreneur to enter into commitments, knowing that the same government could just as easily decide to raise the rate of interest, and hence production costs! Suppressing interest rates destroys the market’s natural measure of the time preference of money (immediate or delayed). This unwarranted distortion leaves many long-term infrastructure investment plans on hold simply because no private sector producer of capital projects will commence a venture that cannot be reliably costed. Uncertainty stifles action.

The risk of misallocation of capital resources is simply too great for the private construction sector – just consider the catalogue of state-inspired cock-ups: Spanish airports at which no plane has landed; Portuguese motorways on which there are no cars. And in this country? Hinckley Point nuclear plant, already hit by £2 billion cost overruns and more than a year behind schedule; HS2; new airport runways; Crossrail cost overruns and more delays; and all the other mammoth ‘interest-free’ projects that get the go-ahead, but have never been subjected to any reliable economic calculation.

The uncertainty caused by the central bank’s licence to manipulate interest rates, now beginning their overdue upward climb, favours short-term production schedules with minimal capital requirements, resulting in low-risk lines of cheap goods. That’s why we have “pound- shops” and 99p shops and all the other shabby outlets that now litter every suburban high street – creating the illusion of zero inflation.

Which is where we came in.




EMILE WOOLF 15-10-2018