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Why the Sun Rises

Sam Mathid
Jun 17, 2008

I am driven to distraction by the constant reference to inflation by people who are talking about an increase in prices. How is it possible that the implausible falsehood that inflation is caused by rising prices has gained such traction?

This is by no means just a minor semantic point. The idea that inflation is caused by rising prices is a disinformation deliberately put out by governments around the world. It is disseminated for a very good reason. If it can be made to be accepted as a truth then nothing about inflation can thereafter make any sense. If people really understood what caused the rising prices that cause recessions and worse, then politicians and bankers would be swinging from lamp-posts. When people refer to inflation as meaning rising prices, then they are either ignorant or they are attempting disinformation. Either way they are not worth listening to or reading.

The current truck blockades in Latin America and Europe over the rising price of food and gas are too late. When we see truck blockades because the government has started to inflate the currency, then it will make a difference. Governments are powerless now. The rising food and gas prices were set in stone the moment that governments started inflating their currencies. The truckers should have been venting their spleen decades ago. They could have been effective then.

Inflation is, and can only ever be, too much money and credit chasing too few goods and services. It can either be caused by the extension of too much money or credit, or it can be caused by goods and services disappearing. As the latter can only be accomplished by government degradation of the currency, then it is really the same thing. Inflation is government creating money and credit over and above the supply of goods and services. That is it; it really is that simple.

In a free market some goods will increase in price naturally as a result of increased demand, or as a result of stable or increased demand with decreased supply.  In a situation where the money supply is not being inflated that means that there will be less money to chase other goods which will cause their price to drop. Overall prices (cost of living) must remain exactly the same. 

If the price of one good rises then the price of another good or range of goods must fall. Rising demand does not lead to a general rise in prices... not unless governments inflate the money/credit supply. Rising demand in one area can only be accomplished by falling demand in another area. Rising prices here equals falling prices there.

Neither speculators, profiteers, gougers, hoarders, greater demand or falling supply can cause a rising cost of living. Only the government can cause a rising cost of living by the process of inflating the currency.

Population increases cannot cause inflation, though it can so appear to those students of history who fail to appreciate that inflation does not move evenly and simultaneously across the range of 'things'. Always it starts in the asset class and then eventually, sometimes decades down the line, it moves into food and energy. Alternatively an inflation has often caused a population increase as people are fooled by the first stages of monetary inflation into believing that a new era of prosperity has arrived and consequently start marrying younger and having children... just in time to experience the explosively destructive last stage of inflation which is the rise in food and energy.

The interest rate rises currently being pushed through in Asia will not stop rising prices. They will though likely ensure that inflation (increase in money and credit) does not get any worse. But the inflation that has already happened still has to course through the system. That is a slow and painful process which has only just started, and not just in Asia. The world has never before witnessed an inflation on this scale. It can, and usually does, take many years to mop up the excess liquidity of inflation. How long it will take this time is anyone's guess.

The chimera of success brought about by the initial inflation of currencies as it feeds into the asset classes always leads to even more inflating of the currencies. It is self-reinforcing; it seems to naive politicians to be the answer to everything, and so it appears for a while. The more the currency is inflated the more that asset prices rise and the richer everyone feels, until at some completely unpredictable moment asset prices stop rising. Then all that cash floods out of the asset classes and sloshes into food and energy (in fact all commodities including precious metals of course). There is an awful lot of cash around in our world today.

That is the point where we find ourselves in 2008. Raising interest rates now is very much akin to bolting the stable door after the horse has departed. Inflation has galloped off into the dark night of dire consequences. No fancy talk by Bernanke or Paulson as they stand in the dung by the stable door can stop the headlong flight.

If you look at the effect (rising prices) of inflation and come to believe that it is the cause then nothing makes any sense at all and no solutions can be discovered. It is akin to stating that wet sidewalks cause rain, or that crowing cocks cause the sun to rise. If one tried to form a science of the movement of the sun by starting from the premise that it arose because cocks crowed then a deeply flawed theory would emerge, to put it mildly. Only the appallingly ignorant would believe such arrant nonsense. Yet authors, journalists, economists and even the head of the Federal Reserve claim to believe that rising prices cause inflation and that rising prices need to be 'fought'. What utter nonsense.

Nonsense it certainly is, but it has nevertheless spawned incoherent theories of economics that have now led to very serious problems for the world's economies. It is all a part and parcel of the eternal effort to separate the creation of wealth from the bother of savings and production. In the history of the world this fairy tale pursuit has led to nothing but disaster. This time will be no different.

But it does not just stop there. Civilisations themselves arise from a base of economic soundness. There can be no other source. From stable and sound economics all else springs. When the soundness of money is gone then so, either gradually or in a precipitous collapse, are the benefits. The UN reports that more than 10% of the planet's population will be hungry before the end of 2008 because of rising food prices. Remember, this has only just started.

The inflation of the Roman coin eventually caused the collapse of the Roman Empire. The inflation of the currency of Florence in the latter part of the Middle Ages lead to the collapse of the second Italian centre of the world. It could be argued that Italy has never recovered from those two disasters of the same making.

In more recent times Napoleon came to power in 1804 and plunged Europe into endless war after the economic catastrophe subsequent to the hyper-inflationary policies of the victorious French Revolutionaries.

In 1917, after rampant inflation used to fund three years of war the Russian economy collapsed. The subsequent turmoil saw Lenin come to power. Russian communism destroyed the lives of three generations of Russians and caused immense suffering and deaths to their subjugated near neighbours.

In 1933 Hitler came to power in Germany after the economic devastation caused by World War 1 (think Weimar Republic inflation).

In 1949 Mao Tse Tung came to power in China. By that point one US$ would buy over 23 million Chinese Yuan. Mao's psychotic rule, which led to the deaths of more Chinese than there were Yuan to the dollar, was coincident with one of the worst inflations in modern history.

The English inflated the pound to finance the 1914-1918 war. It resulted in the loss of empire which they could thereafter no longer afford to maintain. The financial deprivations of that inflation lead to malnourishment and consequent poor health across the spectrum of those nations involved in the war. The flu which hit these nations just after the war caused more deaths than the war itself. The death toll from that flu (named Spanish flu) was as much caused by inflation as the war deaths. Most of the victims were in the age group of the soldiers who endured the deprivations of war, the 18 to 35 year age group who most suffered the malnutrition and unsanitary conditions of war. Normally flu primarily affects the very young and very old.

Spanish flu killed between 20 and 50 million people. The lowest figure is more deaths than the black plague, and more than the combined wars of the whole twentieth century. The destructive effects of inflation are not restricted to the field of economics. Nothing in this world is restricted, neither can it be compartmentalised in splendid isolation from all else.

When currencies are inflated the resultant malinvestments eventually cause a haemorrhage of not only wealth and savings, but morality, health, life and even spirituality. Inflation is the stone that drops in the middle of the pond and ripples outwards over all of society's shores.

What is in store for the U.S. of A. is unknown to anyone. That it is not good is a foregone conclusion. The one great lie that gives ground to most other lies on this planet, is the lie that rising prices cause inflation. From that one source, most other economic falsehoods arise. The one prerequisite for peace and sanity in this world is that free people are allowed to fairly exchange with each other for goods and services. When degradation of the currency makes that impossible, then watch out.


The brilliant Professor Emeritus Antal Fekete is conducting a seminar in Canberra, Australia from the 11th to the 14th November this year. Meet and hear one of the giants of our age. Bookings for the seminar can be made through:

I attended Professor Fekete's seminar in Hungary in August of last year and to say that it was memorable is an understatement.

Jun 17, 2008
Sam Mathid

© Sam Mathid 2006-2008

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