Inflation 101: How the rich get richer
December 2, 2013
Inflation is recognized to be a steady increase in the price of goods and services. Why it happens, how it is caused and who suffers or benefits from it is more of a mystery.
A limited supply of an item can cause its price to rise as can an increase in demand. However, these types of inflation are actually quite rare compared to what is known as “monetary inflation.”
Monetary inflation is by far the most common and most damaging, and it is not caused by a goods scarcity or an increase in demand but by the overissuance of the currency in which that good is traded.
When the controller of a currency (Federal Reserve) issues or “prints” more dollars, each existing dollar in your wallet becomes worth less when it comes to what it can buy.
This “printing” or issuance of the currency is accomplished through various means, but the most familiar type of money creation used today is the Federal Reserve’s “Quantitative Easing” program (also known as Asset Purchases).
The Feds carry out this program (and many like it) with the belief it will “stimulate” the economy and lower unemployment. The amount of currency being created today is massive and amounts to about $85 billion a month.
If pure inflation exhibited itself in all things it would cause no damage because wages and salaries would rise right along with the price of everything you buy. As goods cost more, your wage would rise in the same proportion, causing no effect on what you could buy with your dollars.
But inflation doesn’t work that way in the real world. As prices rise, wages also rise, but wages never rise quite as fast nor as much as the prices of goods and services.
It’s this lag in wages that does the damage to consumers. The more inflation there is and the longer it lasts, the further behind you fall.
Although the perception is that you keep up with inflation because your wages rise, in actuality your wages do not rise as fast. It’s the reason families now need two income-earners where years ago they needed only one.
Inflation does not harm all parties equally, however. Some people actually profit from it, and therein lies the dirty little secret.
Monetary inflation boosts asset prices first and foremost yet boosts wages the least.
The more assets one owns, the more the net worth of that individual rises, while the person subsisting on wages falls further and further behind.
The most common asset boosted by today’s inflation is stock portfolios, as is evident by the new highs in the stock market. Since only one in 10 people own stocks, 90 percent of Americans are getting poorer while the top 10 percent (since they own 80 percent of the assets) see their wealth actually increase.
You could say the rich actually benefit from inflation while the remaining 90 percent of the population becomes poorer.
And isn’t that what we are witnessing today.
Large corporations, the very wealthy, the banking and brokerage sectors of the world and the governments profit handsomely from monetary inflation while the rest of us grow poorer.
The Federal Reserve has now mandated a minimum inflation rate of 2 percent, claiming inflation is necessary to encourage economic growth.
But since massive monetary inflation only “grows” the wealth of those holding assets, and since only the top 10% of Americans hold assets, it begs the question: What and whom are they actually stimulating, and doesn’t that doom the rest of us to a slow but sure destruction of our wealth through ongoing inflation?
Perhaps we should put that question to outgoing Fed Chief Ben Bernanke or his soon-to- be replacement, Vice Chair Janet Yellen.
This article expresses the opinions of Marc Cuniberti. He hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM on Thursdays at noon His website is http://www.moneymanagementradio.com.