Inflation vs. Deflation: Cui Bono?

In the days of ancient Rome when the republic was still a republic, Lucius Cassius, one of the city’s most venerated consuls, famously coined the phrase cui bono.

It means As a benefit to whom?, and Lucius Cassius, inquisitive and analytical by nature, was always asking the question… whether he was investigating a crime or unraveling political corruption. Even as far back as the ancient Romans, someone always benefitted.

This simple dictum still applies today, especially when governments pass stupid laws and policies.

For example, the Department of Homeland Security decided that air passengers need to be bathed in radiation, so they went on a shopping spree buying $100,000 body scanners. Who benefits? Why, avid body scanner promoter and former Secretary of Homeland Security Michael Chertoff, reported as having had questionable ties to Rapiscan Systems. Three guesses as to what they make.

Sometimes the corruption is so obvious it’s just painful.

Cui bono also settles the argument of inflation vs. deflation, which seems to be one of the most divisive economic debates of our time.

There are some who believe that systemic overleveraging will eventually cause the money supply, and prices, to collapse. There are also some who believe that perpetual printing and easy money will lead to substantially higher prices.

Cui bono?

In a deflationary scenario where price levels fall, it is the savers… people who have been responsible with their money… who benefit. In an inflationary scenario, it is the debtors… people who have been irresponsible with their money… who benefit.

Which of these two groups is calling the shots? Why, the latter, of course.

Governments, and particularly those in the West, need inflation. It’s the only way they can keep the party going and pay down their debts.

In one extreme example, the Weimar Republic hyperinflation episode in the 1920s wiped out the country’s pre-inflation federal debt. To paint this picture even more clearly, the aggregate balance of all mortgages across Germany in 1913 totaled about 40 billion marks (about $221 billion in today’s dollars).

At the time, this amount constituted roughly 16% of all German wealth. Ten years later, in 1923, this amount was worth less than one American cent.

An economist at Yale University from the 1920s named Peter Reinhold estimated that the Weimar central bank had printed so much money that if you stacked all of it denominated in 1,000 mark notes, the pile would be 25 BILLION times taller than Mount Everest.

In printing such a vast sum, the Weimar government benefitted tremendously by getting rid of its debt… at the expense of everyone else who ended up using the currency as wall paper.

Governments also benefit from inflation in surreptitious ways. In inflationary environments, wages tend to increase rapidly… far more rapidly than tax laws can be updated. As a result, workers in progressive tax systems end up being pushed into higher tax brackets, even though their inflation-adjusted wages have actually decreased.

Suppose you make $50,000, and that your current tax bracket is 25%. At $75,000, a new tax bracket kicks in at 35%. Let’s assume that in three years, wages and prices double. Now you’re making $100,000 per year, but you’ve been bumped up to the 35% tax bracket. On an inflation-adjusted basis, you’re actually worse off.

This constitutes yet another form of theft, and it primarily affects skilled, middle class workers, as well as those living on fixed pensions… all for the benefit of a fiscally irresponsible political class.

And as we know, it is the political class that makes the rules, not us. They will do what is to their benefit, not ours. And it is to their benefit to inflate away their debt. The writing is on the wall, and the history is right there in front of us.

 (Photo courtesy of Moyan_Brenn)

About the Author

Simon Black is an international investor, entrepreneur, and founder of Sovereign Man. His free daily e-letter Notes from the Field is about using the experiences from his life and travels to help you achieve more freedom, make more money, keep more of it, and protect it all from bankrupt governments.