Global inflation recently reached historic highs. As a result, central banks have moved to increase interest rates to tackle inflation. Will central banks be able to follow through with their intention to slow the rate of inflation or will they be forced to further destroy the value of currencies by currency creation to avoid an even more harmful outcome? Global demographic changes may hold the key to answering this question.
A working paper by the Bank for International Settlements (aka ‘The Central Bank of Central Banks’) found that countries with lower “Work Force Participation Rate” – more non-working citizens (Baby Boomers) have higher inflationary pressure. Countries with a large wave of Boomers are currently facing a completely unprecedented expense for entitlements, having major implications on their economy and monetary policy.
But why does an older population lead to more inflation? Well, remember that market value is a function of supply and demand. Central Banks can increase the supply of currency without it losing too much value as long as the demand for that currency increases. We know Central Banks have been increasing the supply of currency, but where is the demand?
Government currencies today derive their demand from several sources; one of the most important is the need to pay taxes. Most governments only accept payment for taxes in the form of their national currencies. However, the biggest demand for currency is its use as a monetary unit of measurement.
When a currency is widely accepted, it’s accepted as a form of exchange in daily life. The more people buy and sell, the more demand there is for the currency. Thus, there is a direct link between overall productivity and demand for a currency.
The US Bureau of Labor Statistics found that as Baby Boomers retire, they spend 25% less than an average working person. As these Boomers leave the workforce, the “Work Force Participation Rate” decreases. Thus, if the population consumes less, there will be less demand for currency and less freedom for Central Banks to easily create more currency. If currency creation outpaces the growth of economic activity, the purchasing power of that currency will always decline to create inflation.
To battle inflation, Central Banks can raise interest rates to force lower economic activity, but raising interest rates also reduces the amount of currency circulating in the economy. Consequently, the demand for the currency decreases compounding the problem by less tax collection and increasing debt from entitlements. With the swell of people retiring and leaving the workforce, tax collection has decreased and entitlements have increased.
This is how the business cycle has played out since the Great Depression and World War II. The need for continual balancing of inflation and deflationary pressures with the only tools Central Bankers have, increasing currency supply, and interest rate adjustments, to achieve monetary stability. This begs the question, can this go on forever? And, perhaps more importantly, should it?
Let’s first consider who this system benefits. Central Banks would argue that it benefits the citizens by generating jobs and maintaining currency stability. However, it also causes a constant decline in the value of the currency which is a hidden tax that transfers wealth.
As the currency is created, the value stored in the existing currency in circulation is debased, meaning the Total Value of the Existing Currency is distributed to both the existing currency and the new currency.
So, who gets the new currency now diluting the value of the existing currency? In most cases, the answer is the “Banks” which play an important role in regulating economic activity. The Banks then pass this new currency on to governments, consumers, and businesses in the form of loans, or the Bankers add it to their balance sheet to invest in markets in the name of “Stability”. Keep in mind that all Banks are privately owned, and many banks are also known for engaging in risky and dishonest behavior which can help their members but harm the economy. Attempts to regulate banks are difficult, considering they have unlimited currency to hire the best lobbyists for the financial sector.
We could argue about the advantages and disadvantages of this system all day, but is it even sustainable?
As the Baby Boomers age, the economic output and tax revenue decline. At the same time, the government needs to cover rising costs associated with entitlements, pensions, and end-of-life health care for retirees. This is not possible unless the government borrows going deeper and deeper into debt to the Central Bankers having them create more currency to further debase the value of the existing currency.
One of the effects of fighting inflation by raising interest rates is that all debt gets more expensive to service, with the government being the largest debtor. By contrast, inflation means that debts are devalued so that debtors win and creditors lose… Unless you are the Central Banker that created currency from nothing.
Taking on more debt in a high-interest environment means that costs for the government to cover entitlements increase. This means they accelerate toward a “point of no return,” where the cost of just servicing the debt payments increases more.
Unfortunately, throughout history this story only has one end:
So much currency is created to pay for entitlements that people lose confidence in the value of the currency.
These demographic changes are causing governments not to honor their commitments. Accepting this means political suicide for any politician, so the likely option is to continue with the devaluation of the currency.
This isn’t something that might happen in the future. It’s already happening.
Governments and Central Banks handled the 2008 financial crisis not by fixing structural problems, but by creating huge amounts of currency out of nothing. This only became more noticeable with the unprecedented COVID stimulus measures.
Increasing interest rates will only provide some temporary relief from inflation. In the long run, the increased debt load associated with higher interest rates will force higher amounts of currency creation. This currency won’t necessarily go directly into the hands of the government to spend for entitlements, but into other forms of currency creation like yield curve control, quantitative easing, and paying the interest on the existing debt.
However, we will continue to see currency devaluation caused by direct government policies and spending. As the recession caused by counter-inflationary measures gets worse, we see the “New Deal” type of program funded by even more currency creation.
There are only 2 options for politicians to pay for their campaign promises – Raise Taxes or Debase the Currency (The Hidden Tax).
Politicians have less tax revenue as a large demographic change is occurring globally. To account for the overwhelming burden of entitlements they are forced to raise taxes regardless of promises or debase the currency. Politicians will never willingly raise taxes since doing so would not get them reelected.
Debase the Currency
Politicians would rather create out-of-control currency, thus leading to inflation (The Hidden Tax). Central Banks’ response to inflation is to raise interest rates in the short term, thus diluting the currency.
Either option is detrimental.
Central Banks and Politicians are not going to take the difficult steps necessary to solve underlying problems with the banking system unless they are forced.
The solution is clear. Money needs to represent a physical asset. So, the money we work so hard to earn can not be debased.
Market forces have naturally achieved a high degree of stability in silver and gold markets for thousands of years. Some have argued that physical gold and silver are not appropriate for a modern, digital economy. But now with SilverToken, all of the benefits of Silver ownership, and the high-speed transfer of that ownership create sound digital money with the monetary properties of silver.
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