Inflationary Policy: Who Benefits?

Paper money system default appears at first glance to be an unhappy accident of progressive governments biting off more debt than they can chew.
And while there’s certainly plenty of blame to go around for progressives, conservatives, RINOs, DINOs and moderates alike – if you take notice of who benefits from the devaluation of paper currencies, you arrive at a different conclusion.
You’d think that progressive candidates would spend money in an effort to end poverty. That would get them elected for life by the formerly impoverished.
Similarly, you’d expect the end-goal for hawkish conservative legislators would be world peace. Nothing would be a bigger victory for the world’s greatest military.
But despite decades of entitlement programs at home and billions of dollars spent annually on intermittently bombing and paying our enemies into submission abroad – we still have more poor people in this country than we know what to do with, and our list of enemies only grows longer every year, not shorter.
So if these programs have failed, then who or what is the real beneficiary of inflationary policy-cum-deficit spending?
Well, if you remember when Keynesian doctrine got its start, it was during the Great Depression. In the world’s shortest description of what caused the Great Depression: a run on under-capitalized, overleveraged banks crashed the economy. Millions went broke.
Keynesian doctrine was the answer to the question, “how do we make sure the banking system does not fail?”
The question of course, is a ridiculous one. The government is no more capable of stopping bankers from taking on too much risk than they are in preventing teenagers from driving too fast.
Risk-prone banks not only can fail – they should! By creating a massive bureaucratic infrastructure to “guarantee” all banks (the FDIC), the government has in effect only incentivized banks to take on more risk than they otherwise would.
For the Federal Government, bank crisis must be stopped by all costs – more so now than in 1930s because today the banking system and the Federal Government are all the more entangled.
So when you look at excessive spending programs that serve primarily to undermine the dollar, you also have banks first in line for bailouts when the system begins to unravel.
Take a look at what’s going on in Europe right now. For the record, Europe is even more Keynesian than the United States. Possibly more Keynesian than Keynes himself.
Today in Europe, the European Central Bank (ECB) is backstopping every failing financial institution and government with inflationary policy.
And it’s having the exact effect I describe above. Banks are MORE likely to take on risky assets than they otherwise would be. Read this quote from a recent report by the independent think tank Open Europe:
“The ECB’s cheap credit has served as a disincentive to struggling banks to recapitalise and limit their exposure to toxic assets in weak eurozone economies. This creates moral hazard for banks and governments alike, at times even fuelling the sovereign debt crisis, while transferring more of the ultimate risk to taxpayers across Europe.”
Bankers benefit from inflationary policy because they are given a tacit guarantee of solvency. They pursue the riskiest behavior that’s likely to return a profit, and they pass on bad investments to the public via inflation.
That’s exactly what’s happened in the United States as well, and it’s going to continue to happen.
It’s also something that I’ve been discussing for months now. My colleague Tom Cullis wrote a series of essays about a concept known as “free-gold” which you can read by clicking here.
Tom posited an interesting question in these essays:
“Free-Gold is in essence a solution to the major problem in the financial world and the one question that needs to be answered before real economic growth can resume.
How are all the losses that are built into the current system going to be distributed?
Well, we have our answer. They’re being passed onto taxpayers and regular citizens unlucky enough to have to pay taxes and hold paper currency.
The only logical solution is to hold physical gold and silver.
And, dear reader, I hope you do – because everything that the Federal Government has done is going to pale in comparison to what it will do to keep itself and its banking system solvent.