07.01.2008 0

The Cruelest Tax of All

  • On: 07/20/2008 12:59:12
  • In: Monetary Policy

  • “At a time when global inflation is raging, you might expect that the central bank’s first priority would be to dampen inflationary expectations in the United States. But because of its worries about a financial meltdown, the Fed has been doing the opposite — drastically cutting interest rates in an effort to unclog the financial markets. The cheap money didn’t stop the Wall Street bank run — it was the Fed’s bold plan to absorb subprime debt which did that — but it may well add fuel to the inflation fire.” – David Ignatius, “Perils in the Price of Rice,” April 3rd, 2008


    It is called the cruelest tax, and like the grip of a merciless tyrant, today inflation threatens to strangle liberty – the economic liberty of purchasing power – not just here at home, but also abroad. The hour grows late, and the coming collapse may not be realized until we are all in a freefall.

    On March 29th, the New York Times reported of hyperinflation in the price of rice on international markets, and how this is fueling political and civil unrest worldwide:

    “The price of rice, a staple in the diets of nearly half the world’s population, has almost doubled [emphasis added] on international markets in the last three months. That has pinched the budgets of millions of poor Asians and raised fears of civil unrest.

    “Shortages and high prices for all kinds of food have caused tensions and even violence around the world in recent months. Since January, thousands of troops have been deployed in Pakistan to guard trucks carrying wheat and flour. Protests have erupted in Indonesia over soybean shortages, and China has put price controls on cooking oil, grain, meat, milk and eggs.

    “Food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen. But the moves by rice-exporting nations over the last two days — meant to ensure scarce supplies will meet domestic needs — drove prices on the world market even higher this week.

    “This has fed the insecurity of rice-importing nations, already increasingly desperate to secure supplies.”

    While some financial analysts are apparently breathing sighs of relief that the dollar is on a slight rebound and that the price of gold is dropping, those developments appear to only be a sell-off from record-high prices in the commodities market which in turn has bolstered the dollar. The general trend of inflation is still upward, unfortunately, and it is now being reflected in the prices of food, as well.

    David Ignatius, writing in his piece, “Perils in The Price of Rice”, interviewed the President of the Dallas Federal Reserve Bank, Richard Fisher, who has gained national attention for his votes against recent interest rate cuts by the Fed for inflation fears:

    “Fisher sees the booming Asian economies creating a classic ‘demand-pull’ inflation that is propelled by 3 billion new participants in the global economy who, he says, ‘want to eat like you, dress like you, live like you.’

    “’We cannot accommodate inflation,’ [emphasis added] argues Fisher. ‘Once it takes a grip, it changes people’s behavior. It’s bad for investors, for workers, for savers, for people on fixed incomes.’”

    “Yet this global inflation is already beginning to feed into the U.S. economy. Including food and energy, Fisher warns, the Fed’s measure of consumer prices was up a ‘worrisome’ 3.7 percent for the 12 months ending in January. And the latest figures from the European Union show that inflation there rose to a 3.5 percent annual rate in March, the highest level since the index was created in 1997.

    “’You cannot think in a purely domestic context about the pricing of oil or steel or pulp or shoes or clothing,’ Fisher said in a speech last month in London. For that reason, he continued, ‘We cannot, in my opinion, confidently assume that slower U.S. economic growth will quell U.S. inflation and, more important, keep inflationary expectations anchored.’”

    It was hyperinflation in the interwar period that sparked the Great Depression, and if this calamity spreads again, the impact – especially the toll on a human scale – would be unprecedented.

    In 1930, the world’s population was 2.07 billion, but today it stands at 6.6 billion. Uncontrolled prices coupled with shortages, especially in the food markets, could throw the global economy into a seemingly bottomless pit, shake the very foundations of the international system of nation-states, and cause human calamity on a scale never seen.

    The grip of this cruel tyrant is tightening, its reach is spreading worldwide, and the U.S. will not be spared from its onslaught. Monetary policies worldwide must be reevaluated and corrective actions taken – before it is too late.

    ALG Perspective:
    Supporters of free markets and individual freedom must lift their gaze from this presidential election year to see the precipice ahead. It is lamentable to say that we have been here before; this is not the first time that global inflation has threatened to scourge the world’s economy. Beyond the economic sphere, global economic collapse has profound implications in the political sphere, especially with regards to individual liberty. World War I and its post-war depression – which grew into the Great Depression – proved to be super-fertilizer for totalitarianism in Europe, Asia, and elsewhere as centrally-dominated regimes rose from the ashes of the collapse. As before, collectivists will seek to take advantage of the impending economic peril, declare capitalism a failure, claim new powers for the state, and reassert their grip upon individual liberty. It happened before and it must not come to pass again.

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