“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” – John Maynard Keynes
Yes, that quote is by John Maynard Keynes the hero and savior of the likes of Ben Bernanke, Janet Yellen and Paul Krugman… all of whom are proud Keynesians.
And while there is some awakening to the evils of the Federal Reserve and central banking as a whole, notably with the “End the Fed” protests and rallies, for the most part the “not one man in a million is able to diagnose” part is true. It may be closer to one man in a hundred now, though, so there is some hope.
Let’s look at the two most evil facets of communist-style, centrally planned, central banking.
IT DESTROYS LIVING STANDARDS
“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” – Henry Ford
The people in the US are starting to wake up to the fact that there are massive problems… resulting in things like Occupy Wall Street and fast-food workers going on strike for a higher minimum wage. What most of them don’t get is what the real problem is… the Federal Reserve and money printing… AKA. Quantitative Easing.
The real problem is that the standard of living of your average household in the US has been massively decreased since 1971 when the last vestige of gold backing was taken away from the US dollar.
The US Census Bureau releases stats on the “Median Household Income” and it adjusts it to “inflation”. But, by inflation, they mean the Consumer Price Index (CPI) which is a government statistic that all but takes most of the real inflation out of the CPI as we’ll show below.
Here is a chart of the Median Household Income in the US since 1971.
In 1971, the median household income, in CPI-adjusted dollars, was $45,641. In 2013 it was $52,100.
Even when adjusted to the CPI this sticks out as being a 42 year period of stagnation. Why? Because of productivity increases. Remember, in 1971, your average office worker had access to a rotary telephone and a calculator. To do so much as book a flight, or calculate some accounting numbers would have taken all day. In today’s world, with the internet and all manner of other technological advances, what could have been done in a day forty years ago can now be done in about five minutes or less.
Aside from the internet, nearly every sector of the economy has seen massive technological improvements. Even in terms of agriculture, according to the USDA, total output has nearly doubled since 1971. Nearly every industry is similar. There have been massive productivity increases… but where is the increase in household income?
The fact is, it is far worse than it looks. Since 1971, the average annual CPI increase, has been 2.69% per annum. In other words, according to the government’s calculations, there has been price inflation, each year of 2.69%.
However, the true money supply, as calculated by TDV Senior Analyst, Ed Bugos, has increased by approximately 7% per annum since 1971.
Which number seems most correct? Well, let’s look at a few main indicators in terms of price.
In 1971, the Median Sales Price for new homes sold in the US was $24,500. As of August of this year, the Median Sales Price was $275,600. That is an annualized increase of 5.93% per year since 1971.
Much closer to the true money supply gauge of monetary inflation of 7% than to the government’s gauge of price inflation, the CPI, of 2.69%.
How about the stock market? The Dow Jones Industrial Average was at 830.57 on the first trading day of 1971. Today, it is at roughly 17,000… for an annual average increase of 7.45%. Again, nearly the same as the increase in the true money supply and far removed from the government’s inflation index of 2.69%.
How about “education”? Forget for the moment that most college educations are a complete waste of time and money, particularly in today’s digital information where all information is freely accessible. According to Bloomberg, from 1978 to 2012, the cost of attaining a college degree rose 1,120%.
That is an annualized increase of… you guessed it, 7.5% per annum.
Adjusting Median Household Income to True Inflation
Assuming that 7% annual inflation is much more of a better gauge of inflation over the last four decades let’s re-adjust the Median Household Income to 7% instead of the government’s 2.69%.
In 1971, the Median Household Income in the US was $7,805. If the median income kept up with the true money supply, housing or the stock market, at roughly 7% per annum then the Median Household Income today would be $125,000.
It currently stands at $52,100 as of June, 2013.
That is how central banking and its money printing rob the average person.
Of course, for society’s most wealthy who have most of their wealth in hard assets like real estate and the stock market, they are the main benefactors of inflation as most of the new money flows to these assets.
This graph from Doug Short of dshort.com from this article at Advisor Perspectives, shows the glaring difference between Mean Household Income between the top 5% and the lower quartiles.