Frederick Douglass

"Power concedes nothing without a demand. It never did, and it never will. Find out just what people will submit to, and you have found out the exact amount of injustice and wrong which will be imposed upon them..." Frederick Douglass

Tuesday, October 19, 2010

What Everybody Should Understand About Inflation.

Why is the International Monetary Fund, the World Bank, the Federal Reserve, the U.S. Treasurer, and the rest of the international banking establishment so keen to have workers, particularly public sector employees, give up their cost-of-living allowance? From Dublin to Seoul, from Berlin to Johannesburg, from Athens to Seattle, the gauntlet has been thrown down -- they want your COLA. Nothing less will do.

On September 29th, millions of working people worldwide took to the streets in protest of the austerity measures imposed by their governments. Enormous sums were lent to these nations by the respective national banks, each a private institution owned by the bankers. In exchange for their assistance, the banks insisted upon certain economic policy reforms: raising retirement ages; privatizing public pensions, utilities, and infrastructure; pay cuts and the elimination of COLA for public employees, just to name a few. Tragically, this resulted in violent clashes between protesters and civil authorities in Greece, South Korea, France, and, most lethally, South Africa.

The long gone apartheid regime knew it was through when one by one white labor unions, disgusted by the government's oppressive tactics, began to join in solidarity with black unions in demanding an end to white rule. It is the ugliest of ironies that once again black and white workers are linking hands but this time in protest of the black government and the ruling party, the once great African National Congress.

Inflation is running at about eight percent in S.A. and is threatening to go higher. Mining and auto workers demanded a COLA, public sector employees did the same. When their employers balked, millions went on strike.

Public and private employers asked that workers halt their strikes until after the World Cup when, with all the extra revenue that would provide, perhaps the strikes would not be necessary. The workers agreed.

After the Cup, negotiations recommenced with employers refusing to grant a COLA. Eventually, after months of on-again off-again mining, auto worker, and public employee strikes, private employees gave in and accepted an eight percent raise each year for the duration of their respective contracts. However, public employees, led by the teacher's unions, held out for a COLA and not raises based on the current rate of inflation. The government issued an ultimatum but the unions didn't break. As the deadline approached and the workers were still holding their ground, the government acted. Union leaders were targeted for violence or arrested, strikers were rounded up by the police, demonstrators were dispersed with tear gas and, in a few disastrous cases, with bullets. The unions were broken, and dozens were dead or missing. If inflation continues there at eight percent, teachers will be starving in a few years.

So why is it that the governments of South Africa, Greece, or France are willing to kill their own citizens rather than maintain their employees at rate of pay equal to inflation? Banks need to inflate currency in order to survive and prosper, and governments are the largest borrowers.

Over the centuries bankers have gained control of national currencies. Inevitably some catastrophe -- losing a war, a natural disaster, famine, etc -- would bankrupt a country's treasury and it would be forced to borrow. Bankers' demands grew in proportion to the desperation of borrowers until, finally, they enticed national leaders to surrender control of monetary policy in exchange for a guarantee of future loans. Eventually, governments were told by their bankers, truthfully or not, that their loan requests exceeded what could be supplied. However, the bankers insisted, that the funds could be provided if the banks were allowed to inflate the money supply. As it stands today, just about every country has a national bank which determines who gets credit and how much, and what that money will cost. The practice of creating money as debt and thus perpetually inflating the currency has made bankers rich beyond their wildest dreams.

In order to avert disputes about the specific history of any one particular country, allow me to use a hypothetical to demonstrate exactly how inflation is created and what effect it has on all of us.

Let's say we lived on an island on another planet, call it Tin Island [ TI ] as we have large deposits of that mineral. Say there's only one other land mass, another island, on our wet planet. We engage in trade with the people of tropical Copper Island, we send them tin, apples and wheat and they provide us with copper, coconuts, and rice in agreed quantities. No money is exchanged and each civilization lives contentedly in the iron age.

Let's also say that on our island each citizen has precisely 100,000 bits of gold to use as currency, but TI's gold mines are exhausted. There's not another gram of the stuff on the island. No matter though, there's plenty for everybody. Nobody is rich or poor on our island, but everybody has enough to use as a medium of exchange and nobody goes without.

Now let's say a tsunami strikes the west coast of TI. Fishermen's boats are damaged, roads and power lines need to be rebuilt etc. Both the government and private citizens need money. Now let's say that some people on the other side of the island, unaffected by the tragedy, decide to form a bank and lend their savings to the fishermen and the government. They charge a small interest rate to cover their expenses and against the possibility that another calamity might befall the island and the borrowers might not be able to pay.

Success, the government and all the fishermen repay their loans without difficulty. However each fisherman was lent 1,000 bits but payed 1,050 to the money-lenders. As a result, the net worth of the fishermen decreased from 100,000 bits to 99,950, and the money-lenders increased proportionally. Fifty bits was removed from the economy. This is not a problem if the bankers return it by buying goods or services. However, if the bankers continue to lend, they drain money out of the economy thus creating a shortage of gold bits in circulation.

This is great for the bankers, they are becoming extremely wealthy, but there's a problem. They are killing the goose that lays the golden eggs. As they take more and more from the economy, the money supply dries up. Farmers wont bother to plant crops if he can't sell them. Fishermen wont fish. The government can't maintain roads and they become impassable. The economy comes to a grinding stop.

What's a poor rich banker to do? One solution is to introduce paper bills in lieu of gold bits and just keep printing more and more of them. Another solution is imperialism. Blame the people of CI for some offense and invade their island and take control of their resources. This will provide a flow of money which will keep enough money in circulation so that the banks can keep on raking it in.

Another potential solution is slavery. When there's no longer any financial incentive for farmers to sow their crops, force them to under the pain of death.

All of these have been done but they require the cooperation of a large segment of the population. The easiest solution for the banks is simply to perpetually inflate the currency.

Instead of using their own money to lend, they increase the amount of money in circulation by the amount being borrowed. Say there was a billion gold bits worth of paper bills in circulation ( 1,000,000,000 ) before the bank lends a thousand worth, as a result of the loan there would then be an additional 1,000 making a new total of 1,000,001,000. The bank makes the necessary clerical changes and that thousand enters circulation when you walk out the door with it.

The problem is that there is no corresponding increase in goods or services, no increase in the production of tin, wheat, or apples. Consequently, there is more currency chasing the same amount of product. This means that more money can be bid or paid and the result is that prices go up. Currency inflation causes price inflation.

Inflation has solved the bankers' money-supply problem. There's now enough circulating to keep him rich and powerful and to keep the farmer at his plow. But in doing so he has released the genie of inflation from his vaults. He too now has to pay more and more, so what benefit is it to him?

As long as the big bankers control interest rates, and hence the rate of inflation, they can regulate it in such a way as they stay ahead of the curve and the rest of us fall behind. The currency only gets inflated from loans and hence this money is debt owed to them. This "new" money is theirs, and it comes with interest to boot. The money-as-debt system enriches them directly. Even if the rate of price inflation comes to exceed the interest rates they charge, it wont matter as they collect the conjured principal as well. On paper they lend a thousand and collect about 1,050 for a profit of about fifty. But the original thousand wasn't theirs in the first place, they just made a few data changes. Whatever the bank collects on the loan is profit beyond the bank's operating costs. Money flies into the big banks.

Meanwhile, back on Main Street, inflation erodes the buying power of everybody's paychecks, it's a tax of the worst kind. You are earning the same amount but it buys less and less, you spend less. Eventually the restaurant you are no longer able to patronize needs money and has to turn to the banks. Maybe you will need a loan too. Inflation makes everybody poorer ( except the banks ) and creates demand for the loans which the banks need to keep raking huge sums from our economy without destroying it. If everyone had a COLA, and their incomes rose with the rate of inflation so that their buying power never declined, it would reduce demand for loans. You wouldn't need one nor would those businesses you patronize, nor their employees etc.

This is a disaster for the banks.

Governments are the bank's biggest customers. Keeping them big enough to need a lot of big loans, and small enough not to interfere with the bank's management of the economy, is the single most important operational task the banks have. Who needs officious regulators poking their noses in where they don't belong. It is ideal for banks if the working class stays short of cash. It creates demand for loans and keeps labor costs down which is beneficial for the banks' other businesses. Likewise, it is in the best interests of the banks to keep governments solvent, particularly those weak or corrupt enough to allow banks to control the national currency. This way they can continue to borrow and not meddle in bank affairs, and keep a new government, one that might be hostile to the banks, from coming to power. The banks don't want compliant governments to fail. In the process of keeping these afloat, the banks enrich themselves.

Thus banks insist governments privatize those institutions like utilities which might be a source of income. They insist governments keep their debt to a few percentage points of GDP, thus assuring that the government can't spend on its citizens. This explains the proscription against COLA and the raising of retirement ages etc.

Whatever vision of economic justice you might have, charity begins at home -- don't vote for a contract without a COLA provision. Call our leadership and let them know how you feel.