The role of inflation in causing the economic collapse cannot be overstated. In fact, it is the principle cause of the boom-bust business cycle – periods of rapid growth followed by recession or depression. It is important to understand this phenomenon and its causes, for it is not natural to a free market economy. The coming economic collapse is directly related to inflation and the fact that America does not have a truly free market economy.
To understand the relation between inflation and the economic collapse it is important to first define what we mean by inflation. Most people use the term in the context of “price-inflation.” They use the term to describe rising prices across the board. However, rising prices are actually just a consequence of “monetary inflation,” which is the expansion of the money supply at a rate faster than the growth of productive output. In a free economy, generally there is little or no inflation and there could be some degree of deflation, which generally is a good thing. Deflation is the shrinkage of the money supply relative to production. It means that the purchasing power of your money goes up instead of being eroded by inflation. You get more goods and services for the same amount of money.
So how is inflation causing the economic collapse in the United States? And what or who is causing the inflation in the first place? A lot of people who do not understand economics blame rising prices on “greedy” businesses or speculators. But what’s really happening is that the value of the monetary unit is going down and businesses are simply passing on the higher costs to customers. If they didn’t then they would simply go out of business. And the reason the value of the dollar is going down is because of the monetary policy of the Federal Reserve, America’s central bank. A central bank is a cartel of private banks, sanctioned by law. In the United States this law is the Federal Reserve Act, which was passed by Congress in 1913. The law is unconstitutional but that is a whole other topic.
Since the last of the gold standard was abandoned in 1971, the Federal Reserve is able to print money with nothing backing it up. And so there is no limit to how much money can be created. This is convenient for the Congress who then does not have to tax or borrow to finance their largess. They can just rely on the Fed to print the money. But that has serious consequences. The low interest rates generated by the monetary expansion causes booms or bubbles in certain areas of the economy. The unnaturally low interest rates produced by inflationary monetary policy send false signals to investors. Normally low interest rates are a signal that there are a lot of accumulated savings in the economy which can be devoted to long term projects. But because those savings do not really exist projects which were planned with faulty information cannot be completed because the resources are not there, nor is the demand for the products or services. Then you have the bust and, if it is severe enough, an economic collapse.
But the damage was really done during the boom, when resources were miss-allocated to untenable projects. During the bust the mistakes made during the boom are corrected. We call that correction process a “recession.” But there is a problem. The Federal Reserve won’t let the correction occur. Instead, to avoid the painful but necessary recession, the Fed attempts to re-inflate the bubble, setting up the economy for an even bigger economic collapse in the future. That’s what we saw happen after the NASDAQ bubble. Under Alan Greenspan, the Federal Reserve re-inflated that bubble which turned into the housing bubble. Then, when that bubble burst we had the housing market crash. In their attempt to re-inflate that bubble the Fed has more than doubled the money supply in the past three years. This will eventually lead to the creation of another bubble and a total economic collapse.