According to data provided by the Fed, our money supply increased steadily for the past 100 years. It is created at rates as high as 11 percent in the run up to bubbles and then drops to rates of negative one to negative 3 percent during the downsides of the money cycle, averaging 8 percent.48 This swing of 12 percentage points creates an unnecessarily unstable marketplace.
In review, in any money system the money supply must grow to accommodate increases in population and productivity, with a pinch for mistakes along the way to innovation, and a pinch to manage disasters (Chapter 3.23).
The money supply must accommodate increases in population, which in the US has been growing at an average 1.2 percent since 1910.49 This growth rate has been declining and since the 1960s the rate has been below 1.5 percent, and in 2016, the population growth rate was 0.7 percent.50 Let’s say our money supply grows one percent to accommodate population growth.
The money supply must accommodate increases in productivity. The US Bureau of Labor Statistics (BLS) measures productivity as the “output per hour of all persons.” It is the “ratio of the output of goods and services to the labor hours devoted to the production of that output.”51 According to the BLS, productivity has increased at an average rate of 2.1 percent since 1947–70 years, 1.8 percent since 1994–20 years, and 1.2 percent in the 10 years from 2007 to 2017.52 It is taking less and less labor to produce goods and services. Let’s say our money supply grows another one percent to accommodate productivity increases.
Overgrowth by choice
Interest on money creation
In our fractional reserve, private-for-profit money creation system, the money supply must grow beyond the above economic needs to accommodate interest payments to the money creators.
Inflation – devaluation
The Federal Reserve Act requires that the Board of Governors use what powers they have (which are minimal and ineffective) to maintain a steady 2 percent devaluation of our dollar.
In order for the dollar to lose value, more money than is necessary is created. The extra money inflates the supply so that there is more money in the system than is needed for all economic activity. Each dollar loses value and prices go up. This inflation is what the CPI is tracking.
This declining value is defined as stable. According to the average devaluation over time the Board has failed to keep inflation at a steady 2 percent. The Bureau of Labor Statistics’ (BLS) calculates our money has deteriorated in value by an average of 3 percent over the past 100 years.53 John Williams at ShadowStats.com retains consistent standard measures over this period of time and finds the deterioration closer to an annual average of 5 percent.54
To buy the value of $1 in 1913, you need $24.78 in 2017 according to the BLS – an annual average depreciation of about 3 percent. This is not too far over the Fed’s target of 2 percent. But according to ShadowStats’s less jiggered method, you would need $121.85 today — an annual average depreciation of about 5 percent and more than double the Fed’s target. For most of us, our daily experience supports the accuracy of ShadowStats; it seems a much truer reflection of the value of our money over time.
Why would we want a system designed to devalue our dollars? It adds a layer of gaming to our marketplace. You must evaluate not only the fair price of an item, but if you’re buying with a thought to reselling, you must consider the projected decrease in the value of the dollar over time.
The rationale is that when prices are steadily going up, people buy now instead of waiting until what might be a more prudent time to purchase. And in our system more borrowing and more spending equal a robust and healthy economy.
When money loses value from one year to the next, some people benefit and some people lose out. Who does it benefit? Who does it burden?
The benefits of inflation
Inflation benefits the private money creators and those who have the time and resources to game the financial system. These powerful interests wrote the law and it would be naive to think they wrote it altruistically.
Banks with the privilege of creating our new money benefit. A money that is losing its value encourages borrowing and spending, and our money-creator banks need lots of people willing to borrow to buy. Banks have the power to pick an interest rate that will accommodate the projected loss in dollar value.
A steady devaluation of our money benefits people of wealth, who are in a position of power in the marketplace. They can borrow at extremely low interest and use the money or invest it while it has its highest value, profiting as prices rise with the intended dollar devaluation.
Everyone who borrows benefits a bit because we pay loans back with money with a lesser value. However, we pay interest, and you can bet the advantage goes to the lending bank.
Individuals who save their money and become lenders personally have a harder time accommodating money devaluation. The money they save declines in value, and if they lend it out, the money will be returned when it has less value. People with lots of money can adjust for this decline in value by demanding an interest rate or investment return that will cover the difference and make them a profit. Ordinary savers have to take what interest they can get, which usually isn’t much – one reason we have so few savers.
The burden of inflation
People who are on fixed incomes or paychecks suffer under our system of declining value money. They receive the money after it has already been devalued, reducing their buying power. And for ordinary folks, pay raises follow well behind the rise in prices.
For example, the US Federal minimum wage has been at $7.25 since 2009, despite the predictable and steady devaluation of the dollar. According to the official measure of the cost of living, $8.14 would give equivalent buying power in 2016. But according to ShadowStats. com (which uses a less jiggered measure), it required $13.46.
The Federally mandated minimum wage has not been raised because it would cut into the profits of business owners. There seems to be a widespread belief that business owners can only prosper when they are allowed to exploit their employees. And yet successful businesses like Costco start their employees at $14/hour and pay their average employee a living wage of $21/hour. Obviously, Costco and a few other companies have disproved this belief, but it is tenacious.
And we go along thinking it’s perfectly normal and stable that our money decreases in value at 3 percent or more every year.