Cryptocurrency Is an Inevitable Step in the Evolution/Degradation of Money (part 2)

Inflation targeting is a tool of central banks to stimulate the outstripping growth of demand for goods and services compared to supply. The basis of inflation targeting policy is a theory of famous early 20th century British economist John Maynard Keynes.
His ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. When "Time" magazine included Keynes among its "Most Important People of the Century in 1999", it stated that "his radical idea that governments should spend money they don't have may have saved capitalism". Actually, I think the opposite since incurring debts usually ends badly.

John Keynes advocated for increased government expenditures and lower taxes to stimulate demand, that's why Keynesian economics is considered a "demand-side" theory that focuses on changes in the economy over the short run. However, economists still argue over the usefulness of coordinated economic stimulus, with some claiming that in the long run, it can do more harm than short-term good.

Anyway, almost all capitalist governments have adopted Keynes's recommendations by 1970s and agreed that targeted inflation (a planned rise in the price level) is better than deflation (a decrease in the price level). In other words, that inflationary spiral (a situation when prices increase, so people are paid more and purchase more which causes the price of goods and services to increase again, and so on) is better than deflationary spiral (a situation when decrease in price level leads to lower production, lower wages and demand which leads to further decrease in the price level, and so on).


The US Federal Reserve considers the optimal level of inflation should be about 2% a year. European Central Bank (ECB) keeps it a little below, but close to 2%.

In this way, central banks in many countries are trying to artificially keep demand of goods and services above supply and thus create an inflationary spiral instead of deflationary one which is an obvious disbalance. Demand and supply together make a single transaction happen and neither of them should be stimulated or both. They are the opposite sides of the same coin like accelerator and brake in a car. You either have to use both of them one after another while driving, or neither of them. Transactions are the building blocks of the economic machine. I think that balanced demand and supply make the economics work either with a state interference in the economy (socialism in theory and practice) or without any interference at all (capitalism in theory).

It turns out that central banks are so afraid of any manifestation of deflation that they deliberately boost the inflation based on the John Keynes theory. However, inflationary spiral cannot be better than deflationary spiral. Consciously devaluating the currencies at a rate of about 2% year after year, the US Federal Reserve, European Central Bank and many more national central banks impoverish their people and enrich their elites. That will eventually lead to the collapse of these countries due to accumulated internal conflicts (these ones are in the US), the main of which is the division of society into the poor and the rich. All other conflicts including the external ones (even military conflicts) are secondary.

Many leading countries pursue a policy of targeting inflation, and it seems that their central banks prefer not to notice the inflationary spiral they create and do not even mention such a name. I found in Wikipedia and Investopedia definition for "deflationary spiral", but there was no "inflationary spiral" definition there. These resources use "wage-price spiral" name instead, that's why I used the "Inflationary spiral" definition from Cambridge Dictionary above.


The inflationary spiral exists de-facto and more than that - the US has been living in it since the establishment of the Federal Reserve System in December 1913.

The Fed's responsibilities initially were "maximizing employment, stabilizing prices, and moderating long-term interest rates".
Later "supervising and regulating banks, maintaining the stability of the financial system, and providing financial services to depository institutions, the U.S. government, and foreign official institutions" were added.
Ok.

Consumer Price Index (CPI) inflation calculator of the US Bureau of Labor Statistics shows that $100 of February 1914 had the same purchasing power as $2656.71 in February 2021. That means that the US dollar has fallen in price 26.5 times for last 107 years and its devaluation was 2650%-100%=2550%;
2550% : 107 years = 23.8% in average a year for 107 years.

Is it "stabilizing prices" and "maintaining the stability of the financial system"?
No, this is impoverishment of the Americans at the speed of almost 24% yearly.


Constant devaluation of money is not obvious in short periods of time because different currencies keep retaining some purchasing power inside the countries. However, inflation and the accompanying devaluation of money can be clearly seen over long periods of time. Saving money now makes no sense at all, because it devalues faster than you are able to accumulate it.

For example, $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 with their pensions than they would do in 1971 when they started remitting their money to Social Security Administration 50 years ago.

Thus the government gets $100 and pays back $100:6.59=$15.17 fifty years later... It's a very profitable business for the elites. That's why I think the US is a "work, work, work" nation - most of the people work harder, but get poorer, having no chances to outstrip the well-targeted inflation.

From my subjective point of view the disadvantages of inflation targeting policy (impoverishment of people, division of the nation into the rich and the poor, devaluation of money) surpass its advantages (keeping the economic growth by artificially making the demand exceeding the supply). The net issue of the US economic "growth" is growing national debt which is over $28 trillion as of April 1, 2021.


It's interesting to notice that the government in "democratic" America impoverishes its citizens without asking their permission. This is not democratic. A great American economist and Nobel Prize winner Milton Friedman correctly wrote in 1974: "Inflation is the one form of taxation that can be imposed without legislation."

However, for the sake of justice I must say that citizens of the US and other countries are not very much interested in this issue, although all the information is available on-line (CPI Inflation Calculator, any statistics and reports of the Fed in the US), and do not ask questions to their governments. No questions - no answers, so the people serenely keep fueling their countries and their governments calmly keep ruling and fooling their people (and ultimately themselves because they lead their countries to collapse).

As opposed to John Keynes's theory, Milton Friedman "rejected the use of fiscal policy as a tool of demand management; and he held that the government's role in the guidance of the economy should be restricted severely." He argued for a negative (moderately deflationary) inflation target, but governments of many countries apparently better liked the idea of spending more money than they had and enacted John Keynes's inflation targeting theory.


Inflation targeting policy of the Federal Reserve fits very well into the concept of "guided" or "crony" capitalism which is implemented in the US, and which had to be reformed according to famous investing guru, billionaire and philanthropist Ray Dalio.

(to be continued)


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.
Yours,
Igor Chykalov