Human Blindness and Inflation

People make things very complicated, so they don't see the obvious.
The cause of inflation in the US is the Fed's inflation targeting policy,
not coronacrisis or disruptions in global supply chains.

Photo by Mikhail Nilov/

It is amazing how people manage not to see what is right in front of them. And normal people and even experts or leaders of countries do that, not only fanatics like, for example, the Russians do not see the war with thousands of victims in Ukraine right now. They call that war a “special military operation" and all the photo and video evidences of atrocities done by Russian troops in Ukraine are called «staged».

Americans similarly fail to see the very obvious truth that inflation in the US is created by the Federal Reserve and that the Fed is doing a poor job of “maintaining the stability of the financial system”. I came across several recent articles about inflation, which has already risen to 8.5% from March 2021. Prices of everything are going up and these articles are meant to explain something. They show some graphs, quote statements of famous economists on the subject, but completely divert the reader from understanding of what the inflation really is.

Journalists (and often economists) say the cause of inflation in the US is coronavirus, disruptions in global supply chains (which are the consequence of coronacrisis), limited oil production due to warfare and sanctions onto Russia, etc. This is the true nature of a human - the ability to find a thousand effects without seeing the main cause.

The real reason is that the US (as well as many other countries) chose to follow the economic inflationary model of British economist J. Keynes. It is based on the idea of artificial stimulation of demand and therefore has the goal of increasing the money supply (in the US by 2% per year) by issuing backed by nothing money (or unsecured housing loans, which led to Global Financial Crisis in 2007-2008). The extra money being put into circulation stimulates people to buy something with it, the extra demand emerges, thus the prices of goods and services go up due to Mr. Keynes theory, and this happens all the time.

Naturally, if the central bank targets 2% inflation per year, then 1) it (and you) get it and 2) at some point the inflation gets out of control and becomes more than 2% per year (as it is now). The consequence of the inflation is the depreciation of money.

I have already written a couple of times about inflation. For those who are interested in a detailed (but still small) analysis, please read here. For those who don't have time to read 3 pages (i.e., most of Americans) I’m giving a short summary here:

- Almost all governments in almost all countries are constantly borrowing money because they usually spend more than their countries earn. Also they always want to create some more money to pay off less.

- Inflation is created by releasing superfluous money into circulation. The central bank of nearly every country (Federal Reserve in the US) is responsible for that. Then the amount of money which is already in circulation is depreciated for the amount of additionally created money and the prices of goods and services grow, thereby the residents have to pay more.

- The Fed's usual inflation "target" is 2% per year, i.e. the usual rate of debasing the US dollar and impoverishment of Americans is at least 2% per year. It is geometric progression with a common ratio of 1.02 and compounding effect over time. If you earned $100K in 2016, you needed to make $102K in 2017, $104.4K in 2018, $106.12K in 2019, $108.24K in 2020, etc. just to keep your living standards of 2016. Wages do not grow so fast.

- There is a very simple explanation why most central banks have been unwinding the inflation for a long while from great American economist Milton Friedman:
"Inflation is the one form of taxation that can be imposed without legislation." Thus Americans are burdened with one more tax they are not aware of.

- Creation of the inflation is a very profitable business for the US elites. $100 in February 1971 had the same buying power as $659.18 in February 2021 according to CPI inflation calculator. This means that current retirees can buy 6.59 times less of goods and services with their pensions than they would do in 1971 when they started remitting their money to Social Security Administration 50 years ago. And the government gets $100 and pays back $100: 6.59=$15.17 fifty years later...

- FRS fights any economic crises (which it creates time after time by its inflation targeting policy) only by "quantitative easing", and if that does not help - by "dropping money from a helicopter". This is exactly what has been actively done from the summer of 2020 almost to the present, which is why inflation is now on the rise.

- "Quantitative easing" means the Fed purchases the government bonds for a newly emitted electronic money (i.e. creating money out of a thin air) and in such way injects this money into the economy. Wall Street Journal states that “… Between December 2019 and August 2021, the U.S. money supply, measured by M2, grew by $5.5 trillion, a stunning 35.7% increase in only a year and a half, driven primarily by the Fed's purchases of Treasurys and mortgage-backed securities.“

“Dropping money from a helicopter” is the recent applying of stimulus checks by the government. This is also the distribution of electronic money created out of nothing. It doesn't even need to be printed.

- No claims can be made against the U.S. president or any official in the country on inflation due to the Fed is “an independent central bank because its monetary policy decisions do not have to be approved by the President or by anyone else in the executive or legislative branches of government…”.

People of the US did not care much about inflation maybe because of the fact they had no idea what it was and no time for such little things. However, the cost of gas, food and other everyday items is increasing at its fastest yearly rate since 1981 and reached 8.5% compared to March of last year. This means that Americans have become officially poorer by 8.5 percent over the past year. This is already hard to ignore, which is probably why inflation “has become central to the American zeitgeist in 2021 in a way that it hadn’t been for decades”. At last.

President Biden does not seem to understand either how inflation devalues the U.S. dollar and impoverishes the Americans. Otherwise, why has he reappointed J. Powell for a second term as Federal Reserve chair in November 2021? And yet, in making the move, Mr. Biden praised Mr. Powell for “decisive” leadership during the Covid crisis.

What can Americans do to avoid being impoverished by the Fed-created inflation? Almost nothing.

The 10th Amendment to the U.S. Constitution gives Congress the power to “print paper money and mint coinage”. The US Congress passed the "Federal Reserve Act" in December 1913, established the Fed and gave it the power to issue money. Money has since gone through several stages of transformation, from paper money and coins backed by gold to electronic records in citizens' bank accounts backed only by the decrees of the government (the so-called fiat money).

By 1970-s leading Western economies have begun widely adopting Keynes's economic policy, and in 1971 President Nixon disconnected the US dollar from gold.

Later Keynesian economics provided the theoretical underpinning for economic policies undertaken in response to the financial crisis of 2007–2008 by President Obama, and the Fed started issuing fiat money at full speed, creating more or less inflation, but officially targeting 2% per year. As a result, the Fed has debased the U.S. dollar nearly 28 times since its birth 108 years ago: $100 in December 1913 had the same buying power as $2788 in December 2021. You can check this data with the help of inflation calculator of U.S. Bureau of Labor Statistics.
Further calculation of inflation: (28 х 100% - 100%): 108 years= 25% in average per year.

The Fed could prevent neither the Great Depression of 1930-s, nor the Great Recession of late 2000-s, being formally independent financial institution from executive or legislative branches of government, although I personally do not believe in the "independence" of the Fed from the elites of the United States - the Democratic and Republican parties, it is simply impossible.

Milton Friedman, a great American economist, wrote a lot about the Great Depression and argued that “the Depression had been caused by an ordinary financial shock whose duration and seriousness were greatly increased by the subsequent contraction of the money supply caused by the misguided policies of the directors of the Federal Reserve.”

It is noteworthy, that Ben Bernanke, a chairman of the US Federal Reserve 2006-2014, told once at the University of Chicago event honoring Milton Friedman:
“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression, you're right. We did it. We're very sorry. But thanks to you, we won't do it again.”
As we can see, he was wrong.

Actually, the Americans can theoretically do something about inflation, since it began to bother them so much. They need to elect the representatives to the US Congress who are willing (and are able) to change the US Constitution and deprive the Fed of the right to put backed with nothing money into circulation in one way or another. Before that, a majority of US citizens needs to understand the nature of inflation, then somehow manage to convey that understanding to their representatives, and to monitor the implementation of the will of «We, the People of United States.”

However, the Americans are very busy with everyday making money and have no time and desire to examine the causes of inflation not to speak about any joint reasonable actions despite they clearly become poorer and poorer. Since people of the US don’t need all that, the American elites don’t either, so I can surely predict a deepening of the split of the nation into rich and poor and the breakup of the US into groups of states in a foreseeable future.

A creator of Bitcoin, Satoshi Nakamoto (whether he is a person or a group of people), correctly stated in the white paper: "The root problem with conventional currencies is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust."

P.S. Dear Reader! I am very much interested in your opinion on the subject of this article. Please, write a comment or ask a question if you want to clarify something.
Igor Chykalov
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