What is the best inflation rate?
First, let’s define inflation…
(Non-monetary inflation (supply-chain issues) + Monetary inflation (increase in money supply)) - GDP Growth = Price inflation (increase in overall prices)
The Left tends to focus on non-monetary inflation because it’s easier to increase government spending when you can blame rising prices on “profiteering” and Putin.
The Right tends to focus on monetary inflation, i.e. how inflation was defined pre-fiat, because we understand that although supply-chain issues can cause a temporary increase in prices it’s growing the money supply more than economic growth that has reduced the dollar’s purchasing power.
But the Left and the Right have the luxury of talking past each other so long as the international community believes in our currency’s value relative to other currencies therefore an even more accurate inflation formula might go as follows: ((Non-monetary inflation + Monetary inflation) - GDP Growth) / Monetary Trust = Price inflation
What is the best price inflation rate?
The Fed and virtually every major central bank in the world ostensibly try to keep price inflation at 2% per year.
The Fed gauges price inflation via the PCE and the CPI, which are subjective measures of an “average price level of a basket of selected goods,” but since monetary trust is a key component of suppressing price inflation bureaucratic statisticians are incentivized to underestimate the average.
It was a number plucked out of the foggy bottom of New Zealand.
During a TV interview in 1988, their finance minister made an offhand comment about how 1% inflation was their target. “The figure was plucked out of the air to influence the public’s expectations,” said their Reserve Bank governor who then settled on 2% to give himself more wiggle room.
To the inflationist, 2% sounds stable, but does losing 20% of your savings over a decade sound stable to you, especially when in reality the fiat dollar has averaged 3.88%?
The Fed uses a variety of tools to aim at their target. Most controversially they use QE, but more commonly they adjust their Fed Fund Rate:
In other words, the Fed uses a subjective measure to lackadaisically target a subjective measure.
This is dangerous to the whole idea of a republic because power is supposed to be clearly defined, therefore, to reduce flexibility monetary policy should be focused on monetary inflation.
What is the best monetary inflation rate?
As I argued a few months ago, we should end the Fed and turn the dollar into a rules-based currency.
The Ron Paul approach is to then leave the money supply as it is, i.e. 0% monetary inflation.
The Milton Friedman approach (known as the K-percent rule) is to automatically increase the money supply by GDP growth, i.e. roughly 0% price inflation.
My approach is to automatically increase the money supply by 3% per year.
Why 3% > 0%?
It’d reduce the value of our unprecedented national debt. If we don’t inflate away some of it then we’d have no choice, but to default. Pick your poison, Karl.
It’d reduce rent-seeking because if GDP growth is 3% and the money supply increases 0% then roughly speaking this means the value of one’s money would increase 3% just by sitting in a vault, i.e. deflation. You’d also be less likely to put your money in a bank because the bank would’ve made the same calculation as you and therefore lent out much less money too whereby banks would have to charge their customers fees rather than paying them interest. Some hoarding is pro-liberty; too much is anti-growth.
Taxes are a necessary evil in a republic. Inflation is a form of taxation that is less heavy-handed and arguably more progressive than most other forms of taxation since those who have more dollars pay more. Every year the 3% new dollars, which we can call a “monetary tax,” should go straight into our treasury like any other tax revenue.
And since about 40% of dollars are overseas this means we’d be outsourcing some of our tax burden. It seems foolish not to effectively charge a fee for the monetary stability we provide to so many parts of the world.
Why 3% > K%?
It’s more predictable, stable, and countercyclical.
If GDP growth drops to 1% then under the K-percent rule we’d only print 1% more dollars whereas with my rule we’d still print 3% more dollars, therefore, incentivizing investing a bit more at a time when it's wisest to do so.
Why 3% > 6%?
I believe in free-market money where people are allowed to use multiple currencies as tax-free legal tender so that the dollar wouldn’t have a money monopoly anymore because monopolies are bad, especially one that lies at the heart of our financial system.
This means people would be wise to store a lot of their wealth in currencies that have 0% — 1% monetary inflation like crypto or gold, but due to the fact that our government would still be paying its workers and welfare in dollars then the dollar can afford to be a bit more inflationary.
It shouldn’t be too inflationary though because people would abandon it altogether. Every fiat currency has eventually lost all its value so if we look toward the centuries then we’d see that history teaches us to err on the side of caution. Metaphorically, just as animals that grow faster tend to die faster the same can be said about currency.
A lot of our current economic woes are because since 1971 the dollar has lost 86% of its value relative to CPI or 98% of its value relative to gold, therefore, incentivizing people to speculate and commoditize. This is what creates bubbles or what the economically illiterate call, “capitalism,” but really this is just our government using its money monopoly to force rational actors into debt in order to get ahead. Inflating away the dollar’s purchasing power to incentivize speculation has been a win-win for the big banks and big government who are now bigger than ever before.
Ultimately, Keynesians want a monetary monopoly + monetary flexibility + loaning it to the big banks. This is monetary socialism. There’s a case to be made for abolishing the dollar altogether, but I’m taking the more moderate approach of keeping it as a monetary public option + monetary inflexibility (3% rule) + putting it in the treasury.
If you’re a Leftist who wants to see a bigger state then a stable monetary policy doesn’t prohibit your naughty agenda because you can still use fiscal policy to enact it.
What’s your fetish? You want to diminish savings? You can outlaw storing currency over a certain amount. After all, FDR banned gold ownership. You like stealth taxation? You can pass a VAT tax. You desire more countercyclical spending? I recommend passing a Balanced Budget Amendment with a robust Rainy Day Fund. You want to reduce unemployment by corroding the value of wages? You can abolish minimum wage laws. You want to increase the money supply above the base? You can increase deposit insurance and bank bailouts.
In other words, we should keep monetary policy simple because there’s an infinite amount of fiscal policies that can manipulate the market, which would still largely be bad, but at least it’d be more transparent and democratic so that we can have a better sense of when we’re being screwed.
In the end, if we don’t take power away from the Fed then I believe it’ll continue to destroy America until one day all we're left with is trust in God.
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