Inflation Is Public Enemy Number One

I just read your WSJ column "Our Great Economic U-Turn". Nice piece. Good to see an non-neoliberal point of view in the Journal.

However one thing really disappointed me: I don't see how you can provide an even basic understanding of the multi-decade decline of the middle class in the US without mentioning one word:

Inflation.

The common element of the squeezed working poor family, obscenely rich hedge fund mangers and investment bank CEOs, and a spendthrift government is inflation.

Obviously inflation is in the news now, chiefly because of sharp increases in key commodity prices, but it still is for the most part being considered a separate issue from the general "squeeze" on most Americans.

This is a flawed approach, since persistent inflation can only be brought about by monetary policy. A period of relative tranquility in terms of inflation only forestalls the inevitable pain.

If you don't believe that, you must at least admit that inflation is a structural part of our system. The Fed's desired "inflation range" is still a positive number. So the very foundation of our monetary system is inflationary. I would argue that this is deeply flawed and deeply anti-middle class (or pro-elites, if you prefer).

The folk rebuttal goes that "as long as inflation is low, this is no problem, and is actually beneficial".

But that line of reasoning is false. Allow me to illustrate with a rhetorical question.

Would you be content to simply put a small amount of "free cash" in the bank each month in order to save up for retirement, and/or have something to pass on to your children?

I bet you wouldn't. Because you know it will only be a relative few years before the value of that money wastes away to nearly nothing -- regardless of how low inflation gets for any particular stint. With inflation, you have the principle of compounding working against you, so you will always lose, and quicker than you might think.

People intrinsically recognize this. The shift has been very historically subtle yet rapid: only a fool would now save money this way. Instead, we slough off our precious free cash onto mutual funds and all manner of Wall Street vehicles in order to preserve them -- in a *desperate* attempt to do so, you might even say.

The high-net-worth version of this phenomenon leads to the proliferation of hedge funds (and their high-paid managers); however it is general version of the phenomenon which results in virtually *all* free income of the country ending up on Wall Street -- for better or worse.

I would argue that sending money to Wall Street out of desperation -- and because authorities recommend it -- is an extremely bad idea, and has been extremely bad for this country.

Inflation is also intimately tied to the expansion of debt and effective debt serfdom in the US, which I am glad to see you do mention. Not only does inflation perpetually keep consumers behind expenses and stimulate the over-use of credit that way, but our money (currency) is in fact debt (which is the next step after being backed by nothing), and the banking system and government will therefore tend to want to expand both money and debt as much as possible to continue creating the illusion of prosperity. The problem with this architecture is that it always reaches a point of capitulation where further increases in debt no longer create any additional prosperity. We are likely at or past that point now.

An additional insight can be derived from the above: since one of the key attributes of money is that it is a store of value (wealth), it appears that what we have today is not even money. It only succeeds in being currency -- useful for moment-in-time reconciliation.

And it is no surprise, really, that a lack of money results in the vast majority of people becoming poor. Even the wealthy don't really have money (they after all are in the same system), but what they do have is power, and it is from there at their effective wealth derives.

The scary thing about that, is that it is much harder to attain than money -- and by definition most cannot have it.