As inflation grows, so does a government’s domestic influence. Why?


  1. According to legal tender laws, people are required to accept the domestic currency for all debts public and private. Refusal to do so requires “enforcement” by government, thus involving government in all monetary affairs and everyday life.
  2. Paper currency is created by government and initially spent by government. Thus, governments’ priorities rise to paramount importance.
  3. Businesses tend to invest where the money is—they cater to government whimsy. Their spending is also swayed by government regulations and tax laws.
  4. Most people look to governments to protect them from evil—not create it. And governments are happy to assume this role as protector—see FDIC, SPIC, FNMA, GNMA, Social Security, FTC, SEC, CFTC, etc. When inflation grows (and people start feeling its mal-effects) they expect government to protect them from its mal-effects; therefore, they prefer to believe that inflation is caused by something other than government money and credit expansion. Many people believe the solution to government-caused problems is more government, i.e., more government spending/bailouts.
  5. As government spending increases, so does government size. As government grows, so does the number of rules it needs to operate (governments are run by rules). As the number of rules grows, so does the number of rule violations. As the number of rule violations grows, so does the population of criminals and the need for more rule enforcers (police, military, and prison personnel) and prisons. As the number of government employees grows, so does government’s influence and people’s faith in government.
  6. As the world’s expectations for inflation and government bailouts grow, people assume riskier financial positions. This can be seen when we look at the expanding credit crisis, credit default swap failures, increased futures market volumes, ever larger business mergers and acquisitions (capital consolidation), and most recently, government bailouts and purchases (nationalization).
  7. As the world's fear of deflation grows, governments step in with more money (inflation) to "save" the world from deflation's "terrible" effects.
  8. Because the world is on a U.S. dollar standard (the U.S. dollar is the world’s reserve currency), the U.S. government’s influence is felt worldwide, not just domestically. At some point, the U.S. government might act as if it owns the world and try to bring “miscreants” into line! Consider Saddam Hussein.
  9. As U.S. inflation is exported to all corners of the world, many other central banks become dependent upon or react to the U.S. central bank’s actions.
  10. As the Fed expands the number of organizations that qualify to borrow money from it, it makes more entities dependent upon its largesse. At the same time, these qualifying entities become more willing to assume risks that they wouldn’t assume without the Fed’s safety net. Eventually, more bailouts will be needed.
  11. When people lose faith in a currency, its use must be forced upon the people. See Zimbabwe.
  12. When a choice must be made between individual’s rights and the government’s safety/security, the government will always choose its own safety.
  13. Like inflation, governments’ ever increasing influence generally becomes a "self-necessitating" cycle.

In the long run, when inflation is out of control, government will be in complete control. See Zimbabwe for proof. In the meantime, government grows with inflation and when there's the threat of deflation (all the time).

Robert Jackson Smith

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