The World Bank has estimated that money transactions on a world wide scale are from 15 to 20 times greater than necessary for financing world trade.
What does it mean?
It means that consumers pay15 to 20 times greater than the real value of the products they acquire in return for the amount they pay. The difference between the amount paid by consumers and the real value of the products is Inflation. The real inflation rate is 1500% to 2000%. It reflects the accumulation of the inflation growth rate through many years.
In other words, the statement of the World Bank estimates that the global income, which is received by all members of all societies, is 15 to 20 times greater than the global productive income which is received by business owners and labors as return to the real factors of production. The difference between the global income from all economic transactions and the global productive income from productive activities represents an inflationary income.
What is inflationary income?
Inflationary income refers to all types of incomes that are not related to productive activities. It includes:
· Taxes received by a government: Taxes are paid twice. Firstly, taxes reduce income of taxpayers in return for government services and for settlement of public debts. Secondly, taxes are charged to consumers in form price increase. Sellers care about their net after-tax profit. On calculating market prices, they, directly or indirectly, take account of all types of taxes paid by them including business income tax and payroll taxes. After-sale taxes are charged directly to consumers. · Interests or financing charges received by lenders: Interest is the return to lending money. Sellers benefit from borrowing. They expand their business making more profits. Instead of sharing their profits with lenders, they consider financing charges as an element of the cost of products.
Interests earned by lenders on debts to finance financial activities are charged to public in form of hidden inflation tax. The excess of money supply used to pay the interest is translated into reduction in the value of the currency unit.
Taxes are levied to settle public debts. In his article “The biggest financial crime in the history of the United States” addressed to the US citizen via Internet, Dr. Don J. Grundmann, D.C., M.H. says: “Since in 1996 approximately 40% of the United States budget went to the payment of interest on the national debt”.
· Speculative gains received by speculators: On one hand, a speculator makes profit on account of another speculator, but on the other hand, speculative gains, as a component of national income, are charged to consumers in form of hidden inflation tax. · Illegal earnings received by corruptors: Earnings from corruption such as bribery, theft and embezzlement are charged to consumers in form of hidden inflation tax. · Excess profits received by suppliers as a result of speculative activities: Speculative activities on real estate and strategic goods such as oil, gold, and wheat create an artificial demand. Transactions in International Markets of Commodities are based on buying and selling contracts rather than buying and selling real goods. Giant speculators dominate the markets. · Excess profits received by suppliers as a result of monopoly. Monopoly encourages greed. · Excess profits received by suppliers as a result of the increase in cost of production. For the seller, inflationary incomes are translated into inflationary charges to be added to the cost of production.
What is inflation?
National accounts translate an equilibrium situation which is based on the balance between national output, national expenditure and national Income. Income forms the link between output and expenditures and explains the equilibrium situation. The sale of output is paid out as incomes used to buy the output. Members of the equation are expressed in term of currency units. The excess of national income over productive income represents inflationary income. National output is overvalued by the inflationary income. If national income equals $15 billion while productive income equals $1 billion, the value of national output will be $15 billion instead of $1 billion.
Inflation is an intentional man- made phenomenon. From the monetary aspect it represents an excessive expansion of money supply over quantity of money needed for exchange of products. From the pricing aspect, it represents a reduction in the value of the currency unit which is translated into an increase in the general level of price.
Viewing scarcity of goods relative to the community’s desire for them as the main cause of inflation is not a valid issue;
· The excess of the growth rate of world production over the growth rate of world population provides evidence that scarcity of resources is not exist on the global level. The World Bank, World Development Indicators updated Jul 28,2011shows that the world production growth rate was 3.6% in 2005 while the world population growth rate was 1.2% in the same year. · The huge variety of products makes the fall in prices of some products offsets the increase in prices of some other products. · Continuous discoveries and technological developments provide cheaper substitutes, and economical methods of production.
Is inflation bad?
Inflation is the legal magic used by rich to steal incomes of other members of the society;
· Business owners make excess profit. In inflation-free economy, if the real cost of material and labor of a product equals $4 and the profit margin is 25%, then the seller will offer the product for sale at $5 making a profit of $1. In inflationary economy, if the inflationary charges equal $12, the total cost of the product will be $16 and the seller will offer the product for sale at $20 making a profit of $4. The seller will make an excess profit of $3. The rate of excess profit, normally, exceeds the inflation growth rate. · Speculators and corruptors make their profit on the account of consumers. · Rich become wealthier. Due to inflation, value of their assets increases by lapse of time. The assets appreciation rate, normally, exceeds the inflation growth rate. This explains their high share in global wealth. A study by the World Institute for Development Economics Research at United Nations University reports that the richest 1% of adults alone owned 40% of global assets in the year 2000, and that the richest 10% of adults accounted for 85% of the world total assets. · Labors and those living on fixed incomes suffer a severe decline in their living standard. They pay taxes. They spend more for living. Their savings shrink. The inflation growth rate, normally, exceeds the rate of the increase in wages. · Poor become poorer. As consumers, they cannot afford to pay for living expenses. This explains their lower share in global wealth. In the year 2000, the bottom half of the world adults owned 1% of global wealth. · Concentration of wealthhas social costs like alcoholism, families breaking up and increased criminal rate. The state of harmony and cooperation between peoples is replaced by a state of hate, hostility, and envy. Inequality is a main cause of public demonstrations, political instability and revolutions.
Inflation is the legal destructive tool which causes economic instability;
· Inflation wreaks havoc in society: Prices soar, workers have less money to consume, exports become more expensive to sell, imports increase because they are relatively cheaper than locally produced products, and pressure for increased wages mounts to keep up with consumer prices. · As an excessive expansion of money supply, inflation is responsible for the progressive shift from production to financial and speculative activities; § Reliance on public debts helps excessive expansion of government spending and growing financial corruption. World Bank report “The Many Faces of Corruption” underlines, “the nature and quality of a country’s PFM (Public Financial Management) system to a large extent determine the ease with which public corruption can occur”. § Speculative investments are very unstable. The sudden removal of capital from a country can result in a severe economic crisis and hardship for the people. Inflationary process is potentially unstable, and can accelerate into hyperinflation. Soviet economy had a period of hyperinflation from 1921 to 1924. § A historical review of financial crises explains the destructive role of lending and speculative activities on societies and the failure of monetary remedies to prevent the ghastly impacts on economic growth. The excessive expansion of credit is responsible for the Wall Street Crash of 1929, the 2008 US Mortgage Crisis, the 1997 Asian Financial Crisis, 1998 Russian Financial crisis, and the Latin American Debt crisis. § Inflation rate may rise at very high levels destroying the confidence in the currency and leading to currency devaluation. Currency speculation is considered a highly suspect activity. In 1992, currency speculation forced the central bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the Swedish krona. § Reliance on foreign public debts for development involves an oppressive operation by which rich countries and giant lenders make profit in form of interests on account of poor countries. Over and above a poor country has to respect the terms and conditions of granted loans which may have severe impacts on its sovereignty. Natural resources of poor countries are used to pay foreign public debts and interests. § Money of innocent people is at risk. Most of money invested in financial markets is borrowed money. Banks and financial institutions lend investors and speculators money borrowed from depositors. Most of premiums paid by people to social security, retirement entities, and insurance companies are deposited in banks or invested in speculative activities and financial markets. Protection of deposits is introduced to justify the use of money owned by public to support financial system in case of breakdown. Supporting financial institutions and speculators in case of crisis is a sort of social oppression because people have to settle the public debts via increased taxes.
Do we have to live with inflation?
Most economists recommend living with moderate inflation. They claim that:
· While the primary aim of macroeconomic policy is stated to be realization of full employment and optimal growth without inflation, this objective is not yet a feasible target. The real choice is different combinations of growth and employment from one side and inflation on the other side. · Moderate inflation helps realization of full employment and optimal growth because it provides an incentive for investment as long as prices are rising and are expected to continue rising. By moving to full employment, a country could have more output and more income for everyone. · There is no way to cure inflation without moving the economy into recession. It may be better to live with moderate inflation than to pay the costs of its cure.
No doubt that inflation provides an incentive for investment because of the increased profits generated by investors, and that the direct result is an increase in supply and a decline in unemployment rate, but this is just a temporary reaction. It will not last too long; unemployment rate will rise as supply will be reduced to balance with the fall in demandwhich is the result of inflation.
The simple relationship between growth and employment is quite clear. The higher growth rate is the lower unemployment rate. The conflicted relationship between these two variables (growth and employment) and inflation is a false statement made to present inflation as unavoidable phenomenon;
· Production has relation with productive money. An increase in productive money is translated into growth of output and decline in unemployment rate by creating employment opportunities in productive sector. · Inflation represents inflation money. An increase in inflation money is translated into growth of financial and speculative activities and decline in unemployment rate by creating employment opportunities in non-productive sector. If equal amount of inflation money is used in productive activities, equal or more employment opportunities shall be created. · Moderate steady inflation is a hypothetical target. Present economic policies failed to introduce an example of a society living permanent moderate inflation. Economic instability is a common feature of present economies. · Control of inflation is one of the most intractable economic problems facing a government. In its effort to control inflation, monetary authorities apply monetary controls over interest rate, bank discount rate, money supply, and currency exchange. Also governments employ fiscal controls over prices, wages, government expenditure, and taxes. In general, the common effect of all these remedies is that they control, directly or indirectly, the expansion of credit. Credit squeezes may discourage investment in financial economy, but it causes economic slump, reduces national product, and raises unemployment rate. Expansion of credit may stimulate investment in financial economy, but it has bad impact on productive economy because it raises the inflation rate and develops destructive inflation’s consequences. A monetary authority tries to balance between positive and negative results of the controlling process, but in all cases they cannot prevent economic instability. Markets may not respond in the way expected by the authority. A failed monetary policy can have significant detrimental effects on the society. These include hyperinflation, stagflation, recession, high unemployment, inability to export goods, and even total monetary collapse.
Should the inflationary charges (taxes, interests, speculative profits, and illegal earnings) are discarded; the economic targets of higher rate of growth, lower unemployment rate and fair redistribution of wealth can be realized without inflation.
Is it possible to get rid of inflation?
Present economic systems utilize inflation to play important roles that may be considered as obstacles for transformation into an inflation-free economic system.
· Money, as the inflationary tool, restricts economic growth through monetary and fiscal policies. · Taxes, normally, represent a main source of revenue to finance public spending. · Part of lending transactions is directed to finance development and productive activities.
Presentation of inflation-free economic system is based on following ideas:
· Transformation of present monetary system into a closed cashless monetary system.
All money will circulate within the governmental central bank in form of current accounts, and will be used in productive activities. Economic growth will automatically restrict expansion of money without human intervention. National output will be the real currency backing. Each account will provide a complete record of receipts and payments of the account holder. The records help creditability studies and provide an effective tool to combat financial corruption.
· Transformation of present financial system into a productive financial system.
Instead of lending money, financial institutions will provide funds to productive sectors based on profit/loss sharing companionship agreements.
· Transformation of present welfare systems into a financial security system.
The shortage in an individual’s income to meet cost of acceptable living standard will be recovered. Recovery will be made through imposing wealth duty to be paid by those individuals whose income is greater than the standard cost of living. In return, every person will be liable to pay for all his needs in addition to a share in cost of social and public services (nothing for free).
· Avoidance of speculative activities.
Viewing inflation as an unavoidable phenomenon is one of the main pitfalls in economic thinking