This post is an experiment.  Don’t hold me to high standards here.  I want to explore the area where governments extract value out of their citizens via inflation. With stagflation, we have high inflation and high unemployment.  Financial Repression has inflation higher than safe interest rates.

In the current situation, we have a lot of discouraged workers.  We also have a government sucking value out of savers because short interest rates are so low.

Inflation Stagflation

The main thing to understand here is that the government is not here to help you, but to milk you.  The government does not care about you.  It cares about its survival.  If it can’t get sufficient taxes out of the populace, it will use its financing arm, the central bank, to lend to it at preferential rates, while passing on losses to the populace via inflation.  Also note that inflation tends to hit the poor more than the rich.  Food and energy, two things that can’t be printed, have prices that rise more rapidly.  Food and energy price rises affect the poor more than the rich.  As such, the current Fed policy that tends to raise commodity and asset prices discriminates against the poor and in favor of the rich.  From unelected bureaucrats, it’s hard to think of a more unaccountable policy.

Both policies, stagflation and financial repression, come about because the government and central bank are trying to force the economy to do more than it can do, leading to greater poverty on the low end of society, leaving aside the fine-sounding words of the liberals.  You have to get this: there is no constituency for small business and poor people in Washington, DC.  The policies align with big business and rich individuals.  The purple party reigns, sucking in donations from both sides.  Significant donations only come from big business and rich individuals.  (Purple is significant of Monarchy, aside from being the mix of red and blue.)

My main point is this: it will be difficult for most developed country governments to fulfill all the promises they have made.  The results of this may involve stagflation, financial repression, and/or defaults.

What a world we bequeath to our children and grandchildren.

By David Merkel, CFA of Aleph Blog