Everyone in the world with a bank account broke into a cold sweat when they learned about the EU and the Cypriot government raiding private bank accounts to bailout the banks. That could never happen here, right? Well, what's happening in the United States is much more subtle and also much more sinister. Thomas Sowell describes how inflation is worse than stealing bank deposits.
Does that mean that Americans' money is safe in banks? Yes and no. The U.S. government is very unlikely to just seize money wholesale from people's bank accounts, as is being done in Cyprus. But does that mean that your life savings are safe? No. There are more sophisticated ways for governments to take what you have put aside for yourself and use it for whatever politicians feel like using it for. If they do it slowly but steadily, they can take a big chunk of what you have sacrificed for years to save before you are even aware, much less alarmed.
That is in fact already happening. When officials of the Federal Reserve System speak in vague and lofty terms about "quantitative easing," what they are talking about is creating more money out of thin air, as the Federal Reserve is authorized to do -- and has been doing in recent years, to the tune of tens of billions of dollars a month.
When the federal government spends far beyond the tax revenues it has, it gets the extra money by selling bonds. The Federal Reserve has become the biggest buyer of these bonds, since it costs them nothing to create more money.
This new money buys just as much as the money you sacrificed to save for years. More money in circulation, without a corresponding increase in output, means rising prices. Although the numbers in your bank book may remain the same, part of the purchasing power of your money is transferred to the government. Is that really different from what Cyprus has done?
The Fed has been printing money at a breakneck pace for five years now and we haven't seen a lot of inflation, right? Well, except for food and energy, which are conveniently excluded from "core inflation". Health care, ammunition and guns have gone up a lot, too. What's more, prices for goods that should be declining due to information technology improvements may instead be staying level, but that's a net level of inflation that's hard to measure.
Inflation has numerous advantages over stealing bank deposits:
1. Inflation lets the government tax everyone in the world who uses dollars. All dollars everywhere are devalued, which basically let's us "tax" all the countries and organizations who hold trillions of dollars in their foreign reserves. The Chinese can't just divest themselves of all those dollars, but they do complain a lot.
2. Inflation reduces the value of our national debt and deficit. This is the reason that I'm convinced that inflation is a goal for our government. There's simply no other way to pay off the debt we're accumulating. This is a good reason to be a borrower right now, as long as you can borrow at a fixed interest rate.
3. Equities and capital assets can float with (moderate) levels of inflation.
4. A weaker dollar enables greater US exports of all kinds.
5. Inflation helps moderate sticky economic factors, like wages and house prices. Unemployed people are very hesitant to accept jobs with a lower salary than their previous job. Homeowners are very reluctant to sell their house for less than they paid. Inflation allows salary and house price numbers to go up even though the value is going down.
So what's my advice?
1. Borrow at low fixed interest rates. Pay off your loans as slowly as possible, because future dollars will be worth much less than current dollars.
2. Don't sit on a lot of cash. Be fully invested in equities and hope they float with inflation.
3. Don't lose your job.