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More on How Inflation Turns Us Into Con Artists

by John Rubino on March 29, 2011 · 50 comments

John Maynard Keynes once said of inflation:

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Here’s one of the “hidden forces of economic law” to which Keynes referred, courtesy of yesterday’s New York Times:


Food Inflation Kept Hidden in Smaller Bags

Chips are disappearing from bags, candy from boxes and vegetables from cans.

As an expected increase in the cost of raw materials looms for late summer, consumers are beginning to encounter shrinking food packages.

With unemployment still high, companies in recent months have tried to camouflage price increases by selling their products in tiny and tinier packages. So far, the changes are most visible at the grocery store, where shoppers are paying the same amount, but getting less.

For Lisa Stauber, stretching her budget to feed her nine children in Houston often requires careful monitoring at the store. Recently, when she cooked her usual three boxes of pasta for a big family dinner, she was surprised by a smaller yield, and she began to suspect something was up.

“Whole wheat pasta had gone from 16 ounces to 13.25 ounces,” she said. “I bought three boxes and it wasn’t enough — that was a little embarrassing. I bought the same amount I always buy, I just didn’t realize it, because who reads the sizes all the time?”

Ms. Stauber, 33, said she began inspecting her other purchases, aisle by aisle. Many canned vegetables dropped to 13 or 14 ounces from 16; boxes of baby wipes went to 72 from 80; and sugar was stacked in 4-pound, not 5-pound, bags, she said.

Five or so years ago, Ms. Stauber bought 16-ounce cans of corn. Then they were 15.5 ounces, then 14.5 ounces, and the size is still dropping. “The first time I’ve ever seen an 11-ounce can of corn at the store was about three weeks ago, and I was just floored,” she said. “It’s sneaky, because they figure people won’t know.”

In every economic downturn in the last few decades, companies have reduced the size of some products, disguising price increases and avoiding comparisons on same-size packages, before and after an increase. Each time, the marketing campaigns are coy; this time, the smaller versions are “greener” (packages good for the environment) or more “portable” (little carry bags for the takeout lifestyle) or “healthier” (fewer calories).

Where companies cannot change sizes — as in clothing or appliances — they have warned that prices will be going up, as the costs of cotton, energy, grain and other raw materials are rising.

“Consumers are generally more sensitive to changes in prices than to changes in quantity,” John T. Gourville, a marketing professor at Harvard Business School, said. “And companies try to do it in such a way that you don’t notice, maybe keeping the height and width the same, but changing the depth so the silhouette of the package on the shelf looks the same. Or sometimes they add more air to the chips bag or a scoop in the bottom of the peanut butter jar so it looks the same size.”Thomas J. Alexander, a finance professor at Northwood University, said that businesses had little choice these days when faced with increases in the costs of their raw goods. “Companies only have pricing power when wages are also increasing, and we’re not seeing that right now because of the high unemployment,” he said.

Most companies reduce products quietly, hoping consumers are not reading labels too closely.

But the downsizing keeps occurring. A can of Chicken of the Sea albacore tuna is now packed at 5 ounces, instead of the 6-ounce version still on some shelves, and in some cases, the 5-ounce can costs more than the larger one. Bags of Doritos, Tostitos and Fritos now hold 20 percent fewer chips than in 2009, though a spokesman said those extra chips were just a “limited time” offer.

Trying to keep customers from feeling cheated, some companies are introducing new containers that, they say, have terrific advantages — and just happen to contain less product.

Kraft is introducing “Fresh Stacks” packages for its Nabisco Premium saltines and Honey Maid graham crackers. Each has about 15 percent fewer crackers than the standard boxes, but the price has not changed. Kraft says that because the Fresh Stacks include more sleeves of crackers, they are more portable and “the packaging format offers the benefit of added freshness,” said Basil T. Maglaris, a Kraft spokesman, in an e-mail.

And Procter & Gamble is expanding its “Future Friendly” products, which it promotes as using at least 15 percent less energy, water or packaging than the standard ones.“They are more environmentally friendly, that’s true — but they’re also smaller,” said Paula Rosenblum, managing partner for retail systems research at Focus.com, an online specialist network. “They announce it as great new packaging, and in fact what it is is smaller packaging, smaller amounts of the product,” she said.

Or marketers design a new shape and size altogether, complicating any effort to comparison shop. The unwrapped Reese’s Minis, which were introduced in February, are smaller than the foil-wrapped Miniatures. They are also more expensive — $0.57 an ounce at FreshDirect, versus $0.37 an ounce for the individually wrapped.

At H. J. Heinz, prices on ketchup, condiments, sauces and Ore-Ida products have already gone up, and the company is selling smaller-than-usual versions of condiments, like 5-ounce bottles of items like Heinz 57 Sauce sold at places like Dollar General.

Some thoughts:

  • When Fed officials claim that inflation is “well contained” are they measuring per ounce or per package? It wouldn’t be a surprise, given how disconnected from reality they frequently sound, if they’re being fooled by manufacturers’ packaging scams.
  • If manufacturers are playing games with package sizes you can bet they’re also using cheaper ingredients, so not only are we getting less of our favorite things, they’re probably not as good as they were when we first developed an attachment to them.
  • It’s an article of faith among modern economists that a little inflation is a good thing because it lets companies raise prices and workers get raises, so everyone feels richer. But that ignores the other side of the equation, which is, as we’re now seeing, a decline in product quality and producer credibility. In the end we don’t feel richer because we got a raise; we feel ripped off by companies we used to respect.
  • Those same economists see deflation as a bad thing because it makes debt harder to carry. But this also overlooks the impact of incentives on behavior and character. Consider: if you make, say, candy bars and the prices of sugar and chocolate are going down, you want to avoid having to cut your selling price because holding the line on price produces a wider profit margin. So you start using higher-grade chocolate or increasing your candy bars’ size — and you let your customers know that you’re improving your products. Your credibility goes up because you’re offering a better deal, and doing so very publicly. As this practice spreads through the larger economy, the result is a culture of quality and integrity and customer service. Where inflation turns merchants into secretive con artists, deflation produces transparent purveyors of ever-better deals. In a deflationary world, our paychecks don’t rise as much, but everyone seems to be working for us rather than trying to rip us off.
  • Viewed this way, only an idiot (or a Keynesian economist) would choose inflation over deflation.
  • Ken

    Con artists? really…
    I look at stuff before I buy and doesn’t the federal reserve corner the market on shrinking stuff?

    • upayu

      You really enjoy the word “stuff” don’t you? The dictionary carries some other “stuff” you may be interested in—–such as WORDS & other stuff. Oh, and I apologize if your name is H.R. Puffin–STUFF> Yeh I know. I can STUFF it.

  • Henry Coulter

    Funny thing is that it was Keynes who made the statement about debasing the currency, yet it’s Keynsian economists (Bernanke) who are responsible for the inflation we have today.

    • paper is poverty

      I sometimes see it claimed that Keynes’ name is being unfairly dragged through the mud, because he advocated that governments save up surplus funds during boom times and spend those savings to soften the bad times. As this argument goes, Keynes never thought anyone should print like von Havenstein or Bernanke. Nor did he think stimulus funds should go to the black hole of banking, instead of toward real-world projects that would boost future productivity, and thus have some chance of paying off as investments.

      That being said, anyone who thinks politicians are capable of saving up surplus funds during boom times is deluded.

  • Superkalafradgelisticixpyaladocious

    When hyper-inflation hits we are going to have to buy beer in 1oz. cans.

  • http://www.monetarychoice.org Dave Doctor

    If there are any “dollar” stores still left, now I know they reduce sizes every year, or the quality, to maintain the dollar price. Soon, the products will be miniatures, as will be items on the McDonald’s dollar menu.

    If “one gold ounce” stores existed, items would remain the same in size and quality (or even get bigger). As is often said, one gold ounce used to buy a Roman robe, belt, and sandals. One gold ounce buys a very nice suit today as well.

  • Smack MacDougal

    Inflation does not mean “rising prices.” Those that conflate inflation with rising prices do not get at all money, credit, commercial banking, central banking and thus the whole of economics.

    Inflation is a purposefully undertaken process by central bankers (Fed Res Bankers in the U.S.A.) in an attempt to increase the sales of the members (commercial bankers), that is, to increase the number of new opened credit contracts.

    Typically, to engage in inflation, Fed Res bankers can reduce interbank lending rates (Fed Funds Rate) and reserve requirement ratios.

    When doing so does not lead to more sales of opened credit contracts (loans), Fed Res bankers can induce Federal and State governments to issue more bonds, which these bankers buy with checking account bank credits. Fed Res bankers do this when they try to spur on “price inflation.”

    By swapping bank credits for government debt, Fed Res bankers enable government agencies to pay higher wages to unionized workers and to buy more stuff from contractors. Eventually, through the process of money accretion, those checking account credits turn into actual Fed Res banknotes and U.S. Treasury token coins, i.e., cash (true money).

    In short order, prices rise quickly for products that get sold primarily through cash transaction, e.g., food, gasoline. With an upshot of prices beyond the flow of income to businesses (sales) and to workers (wages), businesses and workers get forced to turn to bankers for loans and revolving credit (credit cards) to maintain their production, in the case of businesses, and living “standard”, in the case of workers. And there you have it, that is the real meaning of “price inflation.”

    • Chris

      It would be those cash transactions that would induce any normal thinking human being to agree that the “price inflation” is no different from “rising prices.” Unlike the intellectual bean counter that has been locked away in some government vault, we all live in the real world. When $500.00 buys only half the amount of groceries it once did, I am sure that my children could care less about the federal funds rate. I would also like to know how you consider any bank note “true money”, since it has no real value and is backed by nothing but the “full faith and credit” of the federal government. To call any paper “currency” a “note” is laughable. It can not be exchanged for its face value for a solid asset, based upon the face value alone. A fact you solidly admit to in your statement since you cover how the Federal Reserve can in a round about way deflate the “currencies” value through “price inflation”. When our paper “currency” stopped being backed by gold and silver, it no longer could be called a “note” and therefore is no more “true money” than a Wiemar Republic reserve “note”. That is if we are going to stick with what are exact definitions of such things. See I can do it too.

      • Smack MacDougal

        You amuse, Chris.

        Apparently you don’t get what value means. Nothing itself has value. It takes two things in exchange to make value.

        Value results from the expression of a ratio of importance between two commodities and arises from exchange with a winning bidder.

        If you doubt that Federal Reserve banknotes can’t make value, come over and give me $100 and I can give you a fart in exchange.

        Apparently, you don’t get what currency means as well. Currency means the circulating medium; the economic quantities of purchasing; money (notes and coins) and all credit that has bearer negotiability.

        Those who get money, credit, commercial banking and central banking gain pecuniary advantage over the simple-minded who falsely believe that inflation means rising prices and this lets them profit from the ignorance of the simple-minded.

        As they age, yours kids shall be sweeping floors owned by my kids because your kids shall have your false beliefs about all things money, credit, commercial banking, central banking and thus the whole of economics and economy while my kids shall continue to learn how the real world is as it is.

        Lastly Chris, hire someone to teach you reading comprehension skills. I wrote and to quote myself “Fed Res banknotes”. No where in my writing did I write the word “note” by itself. Merely, you have hallucinated.

    • Paul

      Fabulous explanation Smack.

  • http://theintrinsicvalue.com Intrinsic

    I agree, Inflation will chip away and before you know it will be a catastrophy.

  • Pingback: Investment Strategy Tips- More on How Inflation Turns Us Into Con Artists - Investment Strategy()

  • Waldo

    On the plus side, It would be nice if a lot of Americans end up with slimmer waistlines as a consequence of rising food costs. I for one seriously need to trim down myself. :)

    • Smack MacDougal

      That’s unlikely to happen, Waldo.

      When food prices rise relative to income, persons typically switch to carbs so they can maintain their caloric intake. So they choose junk foods like pasta and pizza.

      The end result is that they get fatter.

      • t

        So you think the dollar wont collapae under this ponzy scheme the u.s. is running? Do you know what has happened to every other country in history that prints and prints and prints…..lets just hope your kids have a floor for someone tovsweep

  • john

    The point John and others are trying to make is that inflation WILL manifest itself in a diversity of ways, whether it is less “stuff” in the same sized container, or reduced quality (copper plumbing fittings), or out and out price increases (micro brews). And it will be serious!

    Folks at work are well aware that their dollar does not go very far at the grocery store. Some say they can’t afford to shop anywhere but Slave-Mart. I purchased some copper plumbing fittings last month to repair frozen pipes. The cost for one 3/4 copper 90′ elbow….$2.95…smaller in total size and much thinner in wall thickness. Anything made of steel is through the roof as well!

    Only someone who doesn’t go to the grocery store or fuel his own car or live paycheck to paycheck (if they are lucky to be working), or build “stuff” would suggest inflation is not affecting “us.”

    • Smack MacDougal

      Actually, john, if inflation (Fed Res banker action intended to spur an increase in opened contracts of commercial bankers) works, inflation leads to either increased production or increased prices, or some combination of the two.

      The three broad classes of economic quantities of purchasing are these: cash, non-revolving credit, revolving credit.

      Thus, there are products bought with cash primarily, e.g., gasoline, groceries, cigarettes, booze, beer, wine, condoms, movie tickets. There are products bought with revolving credit primarily, e.g., upscale clothing, meals eaten out at sit down restaurants, tickets to attend sporting events, airline tickets. There are products bought with non-revolving credit primarily, e.g., houses, college tuition.

      One, true, great, invariant law that governs the whole of economics exists — the Law of Prices. The Law of Prices holds that the winning bids of demand in the face of supply sets the price.

      In short, economic quantities of purchasing rise faster than supply of products, prices rise.

      To see the heading of things, one must look at the changes in economic quantities of purchasing according to the groups — cash, rev credit, non-rev credit — and then look at production, sales and profits of various products to know if prices shall rise or shall fall.

      It’s not mysterious and claiming that inflation manifests in unknown or unknowable “diversity of ways” is a cop out.

      • Smack MacDougal

        There should be the word ‘if’ in the above:

        In short, if economic quantities of purchasing rise faster than supply of products, prices rise.

  • Tampabob

    9 kids!! Really? I think her problem is too many anklebiters, not smaller packages.

  • Nobody

    The comments on this article are priceless!
    Best laugh I’ve had in weeks!

    None-the -less it’s pinch time for the US (and world).
    Better get used to growing your own food, walking, biking,
    homeschooling and suffering more when you are sick instead of running to the Doc for a script of whatever (try alternative and see if it works for you-I have migraines and a big dose of magnesium works-no more Imotrex).

  • Brad Thrasher

    LOL, let me get this straight. Private industry engages in deceptive trade practices and it’s all the fault of John Maynard Keynes and government.

    Just curious, do Austrian School paper money apologists ever accept responsibility?

    • paper is poverty

      Which Austrian School paper money apologists are you talking about? I can only think of two people who could possibly be described as such and they’d be Ellen Brown and the guy who did The Money Masters, but what they’re advocating doesn’t exist anywhere.

      • Brad Thrasher

        Our host and everyone else who advocates for a “free and unfettered market” as there is no such animal.

        • paper is poverty

          Using the term “paper money” as it’s generally used, to mean unbacked fiat currency, in what way is Mr. Rubino a paper money apologist? Wouldn’t he seem to be the exact opposite?

          • Brad Thrasher

            You find my metaphor off point? Big whoop.

            I take issue with the narrative blaming government policy or some long dead gay fellow for the general lack of integrity within the contemporary business community. It is at best, a gratuitous assumption.

          • John Rubino

            Hey Thrash,

            I can see how blaming the government for bad commercial behavior sounds like a cop-out. Here’s why it’s not:

            The libertarian/Austrian view of human nature is that we’re adaptable and capable of a wide range of behaviors depending on the environment. And government policy, especially monetary policy, creates the environment in which we operate. When government systematically lowers the value of a country’s money it creates an environment in which borrowing is rewarded because loans can be paid back with cheaper currency in the future and saving is punished because depreciating currency is worth less the longer it’s saved. And where merchants are encouraged to play games with packaging and quality.

            So an inflationary monetary policy produces a society where otherwise good, rational people behave in ways that we see as bad; they borrow like crazy, don’t save and cut corners to avoid having to raise prices. Because that behavior is rewarded, it produces a competitive advantage. Trying to be a “good” banker or cookie maker just gets you run out of business by competitors who are better adapted to an inflationary environment.

            Keynes, for what it’s worth, would probably be appalled by our perpetual deficits. As paper is poverty noted earlier in this thread, Keynes’ advice was to run surpluses in good times and deficits in recessions, not to borrow more every year forever. It’s not his fault that today’s pro-inflation economists call themselves Keynesian.

          • Brad Thrasher

            I understand your point of view and respectfully disagree John. Circumstance, environment, conditions is not a justification for stealing or deceptively repackaging. We make these choices consciously.

            Hershey’s announced today that they are raising prices. No deception.

          • John Rubino

            Thrash, you’re absolutely right that it’s not a justification. But it is what happens. And as long as the environment favors debt and dishonesty the people who behave that way will tend to win. Staying with the Hershey’s example, a marginal candy buyer might notice that a Hershey’s bar is now 10 cents more and that the Snickers bar beside it hasn’t gone up (though they don’t notice that it’s 0.5 ounces smaller). So they buy the Snickers, and Hershey’s loses the sale. If enough people are fooled, Hershey’s reports bad numbers, its stock goes down and the managers who chose to raise prices instead of shrinking their candy bars get fired.

            Inflation presents good people with a tough choice: behave badly and thrive or behave ethically and suffer.

          • Bruce C.

            Hi Thrash,

            I agree with you that “circumstance, environment, conditions” is no justification for stealing or deceptive repackaging, but that’s not JR’s claim. He is simply saying that the way some people/businesses respond to the business problem of inflation is to avoid having to change the “headline” or posted prices of familiar and regularly purchased products. Personally, I don’t think of it so much as deceptive because all the info is there, my grip is the inflation itself which I blame not so much on the manufacturer but “government”, if you know what I mean.

            But that’s just me (and maybe you too). I don’t think most consumers are so introspective. As you may know, the retail business is very competitive and brand loyalty is considered a premium. If a harried customer were to suddenly see his regular brand suddenly costing more than a competing brand, he may very well buy the lower priced item not knowing that that brand may have been (“deceptively”) repackaged. In fact, he may never really notice, at least not right away. He may then permanently switch brands. I know that’s a contrived example, but that is how retailers think (for better or worse).

            Nobody is saying that inflation makes people do anything (it can’t), but it creates problems and challenges in many areas and many ways that frankly are a waste of time and energy to say the least, and I would even argue that it eats away at people’s sense of life which is spiritually criminal.

          • Bruce C.

            P.S. Sorry for the redundancy. I hadn’t refreshed my screen recently so I didn’t know JR already made my point.

          • John Rubino

            Hey Bruce, as usual you said it better!

  • Fabian

    Don’t worry this shrinking in size will not appear in the inflation number produced by the government. It’s going to be considered hedonic adjustment; your grocery bag is lighter to carry, hence you need less calories to do the task. Problem solved.

  • Bruce C.

    I agree with Smack that “inflation” is a confused and conflated concept, like so many others. Nevertheless, it is generally understood (by me at least) that when most people say “inflation” they mean price inflation as opposed to monetary inflation. Not so with the Fed, however, because it/he knows better. However, the Fed uses that confusion strategically in its public communications to further its agendas and to signal its true intentions to those who understand what’s really going on (i.e., not the Congress and most everyone else). When Bernanke says he wants to create some inflation he does not necessarily care about price increases. What he means is that he wants to increase the money supply at a certain rate (to counter the “deflationary” effects of debt destruction that is ongoing.)

    Consider this example: During the “famous” 60-minutes interview Bernanke said (I’m paraphrasing), ‘We feel that the economy is still not strong enough to recover on its own so we think more stimulus is necessary. The inflation rate is at dangerously low levels. Based upon certain studies we’ve determined that the optimal level of inflation is between 1 and 2 % so that is what we are targeting. Right now it is very low, perhaps 0.3% or so.’ Now, he did not say explicitly “price” inflation but that is what most people heard (even Nancy Pelosi). What he meant was monetary inflation. To confuse the confused, he referenced the core-CPI number as the measure of the monetary inflation rate that he intended, so most people thought he meant price inflation. He didn’t, and he even said so in Fed speak.

    I’ll explain. In the same interview the interviewer asked Bernanke, ‘Some people are saying that QE 2 will cause inflation. What do you say to that?’ Bernanke: ‘That’s simply not true. We discussed the issue at length and viewed it from every which way and in no scenario did we see that threat occurring.’ Now Bernanke knew that the interviewer meant “price inflation”, and that he most probably meant in the USA, so he answered him in those terms. Bernanke has been right about that so far. The price inflation that everybody is talking about is mostly overseas and is just beginning to spill over to here, but that is not because of QE 2, those forces were set in motion a few years ago. More to my point, however, Bernanke was contradicting his own words by conflating both meanings of the word “inflation”, but the interviewer didn’t catch it. First Bernanke announces that the economy needs more inflation (read “monetary inflation”), thus the reason for QE 2, and not five minutes later says that QE 2 won’t cause inflation (read “price inflation”). It makes no sense unless you consider both meanings of the word.

    Just for laughs I’ll mention another example of Fed doublespeak from the same interview. Bernanke wanted to assuage the fears and misconceptions people had about the Fed “printing money” . He said, ‘I want to be clear that the Fed is not printing money, that’s not what this is about.’ Again, gentle Ben was technically telling the truth, but his intention was not to educate but to medicate (you can quote me). He wanted people to think that everything was under control and nothing unusual was being done. After all, the purchase of Treasuries from the primary dealers on the open market is literally the transmission of electronic data. There is no cash exchanged, no need to print anything. Furthermore, it is the Mint that does any money printing that does occur (usually to replace worn out bills and coins), and only by permission from the Treasury. I trust the Treasury, don’t you?

    Anyway, here are a few more convoluted examples of economic perversion associated with price inflation:

    – The constant inane and never explained propaganda that “some inflation” is both necessary and desirable leads to consumer complacency that is then exploited. The public acceptance of inflation as some kind of inevitable economic fact of life has enabled all businesses to raise prices regularly simply because they can. It’s expected.

    – So why is “some inflation” deemed a good and necessary thing? (Monetary) inflation is a requirement for the growth and survival of the fractional reserve banking system (fiat money = credit = debt). The banks and their tag team partners, the sovereign governments of the world, are the only beneficiaries of inflation (of both kinds), though that’s also why mercantilism is so popular amongst large corporations. It is a stealth tax to everyone else, a slow transmission mechanism of wealth by attrition. That’s why it’s not properly explained. Instead we hear ridiculous nonsense like “inflation is caused by higher wages which is a good thing because it makes everybody feel richer.” It’s really insulting, but it seems to work though.

    – The Fed and the Treasury have every reason to understate the official inflation rate and no reason to reduce it to zero or less (deflation). The unofficial (and only true) purpose of the Fed is to help the large banks (globally) and one way to do that is to discourage the liquidity trap that can result from conservative savings vehicles. By creating inflation idle cash earning little or no interest loses value over time. The official reason given for the lowering of interest rates is to lower borrowing costs to help the consumer but it is also to purge idle money from savings accounts lest they lose value due to inflation. “Cash” has lost value at essentially the rate of inflation for most of the last decade. That is the price one has to pay to fight the Fed and avoid the financial markets.

    – Inflation-Protected Treasury Bonds are now cited as “proof” that inflation expectations are low. The argument is that low demand for them indicates little fear of inflation amongst investors. The truth is that they’re a lousy deal so nobody wants them, largely because the official inflation rate to which they’re linked is purposely underestimated.

    – Another proxy that everything is hunky-dory are the long term Treasury bond rates. If the bond market expected inflation then long term interest rates would be a lot higher, right? (That’s what Fed member Dullard(sp?) asks) Well, they will be when the Fed stops buying $100 billion or so every month (that’s was another purpose of QE 2 remember, to keeps rates down to support real estate values – oops…I mean real estate SALES.) They already have gone up since last summer, but that’s because of quickening global growth, which is a good thing, sort of, except for that commodity price inflation due to increased demand (or has supply diminished because of weather?). In any case it’s not because of inflation, not monetary inflation. It’s just price inflation that will be short lived because of speculation and unfounded fears of inflation. Got it?

    • Smack MacDougal

      You seem to have a fairly good grasp of what is going on, Bruce C.

      When Bernanke says that he wants to cause inflation, he is saying that he wants to make circumstances in the economy such that commercial bankers open more credit contracts. After all, the Federal Reserve exists at the behest of commercial bankers. The Federal Reserve is the centralized banknote maker for commercial bankers.

      Commercial bankers are in business to sell loans. That’s what they do. Commercial bankers are merchants who buy money and debt and sell bank credits. Conversely, bank customers sell cash — known as deposits — and buy bank credits.

      Federal Reserve bankers work for Commercial Bankers and not the other way around. Fed Res bankers do not work for Americans or the U.S. Congress, the U.S. President or any high level agency bureaucrat.

      Price inflation is what I said it is. It’s not as simple as saying “rising prices.” It’s Fed Res bankers buying government debt with bank credits so that government workers and contractors introduce those bank credits into the wider economy. Eventually, many of those bank credits get converted into cash as the demand for holding and spending cash rises.

      The whole process of going from increased bank credits — because of increased loans owing to Fed Res bankers mechanization (FFR and RRR changes) or price inflation (buying government debt with bank credits) — to an increase in circulating cash (Fed Res banknotes and U.S.T. token coins) is money accretion.

      Money accretion is the cause of higher prices for things sold primarily for cash. That’s simple ratio mathematics. The numerator (products sold for cash) do not increase as fast as the denominator (cash money).

      So in the end, nearly everyone conflates rising prices with price inflation as well as with inflation. Hardly anyone knows about money accretion and how central banking with commercial banking works. Thus, hardly anyone gets the whole of economics and the economy.

      As an aside, the rate of inflation is easy to calculate, and no, CPI does not measure inflation; nor does PPI. To calculate the rate of inflation, one must go to http://research.stlouisfed.org and calculate the change total credit outstanding.

      • Bruce C.


        I’m not sure I agree with everything you’re saying here, but I don’t want to argue about it either. I think the important point is that the system is complex and rigged and immoral and undermines the integrity of the economy and the individuals who live under it. It’s similar to the way the present income tax system tends to make everyone dishonest. The central banking system and fiat currency are like cancer to a society that tries to be based upon the rule of law or free markets instead of the discretion of individual men.

        • Smack MacDougal

          You need not agree with what I have written, Bruce C. What I’ve written is right. What I’ve written has logical consistency — it is truthful, the full truth. Its basis is economics, commercial (mercantile) law and banking.

          Americans live with a legal tender money system that consists of fiduciary money (Fed Res banknotes) and token money (U.S. Treasury coins).

          U.S. money IS NOT “a fiat currency.” There is nothing “fiat” about it. Fiat means value by decree. The value of the U.S. money unit — the dollar — in exchange for something else is not set by law.

          Most people don’t get economics. They’ve been taught, wrongly, that it is the “science of scarcity” or some such b.s.

          Economics means all matters relevant to man regarding wealth. That’s all it means. It is not a science, although a science of economics exists. The word science labels the concept ‘knowing’, a ‘recorded knowing’. That’s all science means.

          That said, the many rules and players — aka the system — is complex. Some players have greater power than others and thus rig rules to their advantage.

          Income taxation is theft. It is the men of government — politicians, bureaucrats and those with power who control them — who are the biggest cause of pain, suffering and poverty.

          Government is the true mass murderer and not some wacko who kills 10 or 20 people over a span of time. Government kills 1,000s to hundreds of thousands at a shot.

          Welfare is the bribe — the means — by which the idiot citizenry keep acceding their power to the clever ones who have higher IQs and who are devoid of morals.

          At its core, there is nothing wrong with commercial banking and a banknote system. The problem is conferring legal tender status to banknotes.

          Banknotes are vehicles of credit. Credit is the great engine that induces men to see more, believe more and bring more into existence. Granting a monopoly on money-based credit to commercial bankers is the chief problem.

          • Bruce C.


            You seem like one who is passionately interested in this subject and I understand the essence of what you’re saying. However, if you really want to nail this then certain terms and concepts need to be delineated.

            First of all, I think you would enjoy this article by Gary North: “Why Economists Like the Federal Reserve” at


            That said, here are my critiques from your last comments:

            “Commercial law” is one thing but there is no such thing as “mercantile law”. Mercantilism is the marriage of both private interests and public (governmental) interests. Mercantilism is not the same thing as commercialism. Commercialism subsumes mercantilism because mercantilism implies government sanctioned protectionism whereas commercialism does not necessarily.

            Physical money (currency) in the US is produced by the Mint regardless of whether or not it is a coin or a bill (Federal Reserve Note). Yes, this currency is declared legal tender (along with US postage stamps) BY FIAT. That last point is crucial because it limits the kinds of payments that are legally binding.

            US money, both its currency and the “dollar” (which is not defined), is absolutely fiat currency for the simple reason that it (along with postage stamps) is the only legally recognized and enforceable form of payment in the US. This seemingly subtle point was anything but in the 1870s after the US Supreme Court allowed “gold contracts”, which are contracts that specified payment in ounces of gold. This was the fortunate result of years of litigation between Civil War defense contractors and the US government. The contractors’ contracts specified payment in (Union) US dollars, which at that time was equivalent to a certain amount of gold, but Lincoln authorized so much counterfeiting of the currency to pay for the war that by the time the war ended the dollars received for payment were worth 75% less compared to gold. They felt pissed and sued, and vowed to insist upon payment in gold thereafter. All was well up until the turn of the century, but the banking interests rose from the dead again (Pres. Jackson killed the 2nd Bank of the United States). I’ll skip the details, but Roosevelt managed to outlaw gold contracts again so the Fed could debauch the currency (once gain) to pay for WW2 and to enrich the banks. This also gave birth to the (mercantilist) “industrial military complex” which has benefited from government largesse ever since.

            And, by the way, as long as the US monetary system was on a gold standard, the value of the dollar was defined by law to be equivalent to a certain amount of gold, BY FIAT. One ounce of gold in 1930 was worth about $20 (defined by law) and was suddenly changed (by law) to about $35 in 1933 and remained so (by law) until 1971. Have you ever read what’s on a 2011 one-ounce American Eagle gold coin? It’s denominated “Fifty Dollars”. Our money system is more convoluted than you think.

            I’m out.

          • Ian of the North

            You are starting to sound like a shill for the government and the central bank. Fiduciary Notes are a promise to convert to a specified quantity of gold or silver. That is not what Americans live with today. Legal Tender Laws mandate the use of paper currency by fiat of the sovereign government.

            Your claim that, “U.S. money IS NOT “a fiat currency.” There is nothing “fiat” about it. Fiat means value by decree.” is patently false and misleading.

  • http://dollarcollapse STAN

    Mr. Rubino,
    Thank you so much for the best of the web section. I am coming out of the dark ages economically because people like you care about educating people like me

  • http://www.stock-trading-pro-system-course.com/ Stock Options Trading Course Teacher

    Every time of great change (now!) is also a time of great opportunity.

    The pre-crash boom years were an easy ride on bull markets. Little thought required – pretty much everything was a good trade on a powerful bullish trend.

    Not so today. Great opportunities still exist, but you have to look harder to find them, and do your due diligence.

    We can complain all we want about the state of the economy, but in the end it is what it is. It is what we have to work with – for now – until conditions morph it into something different.

    Seek opportunities to succeed, not reasons to feel like a victim.

  • Mike Daily

    On your thoughts, the Feds found a way to contain the Consumer Price Index. Food and energy are not included in the CPI. Apparently the Fed decided these were no longer consumable. Therefore they don’t measure by ounce or package. The Fed “claimed” the CPI last year was 1.4% but when you include food and energy the true CPI was 8.6%. That is why Social Security recipients didn’t get a cost of living increase; but Congress gave themselves one.

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  • Don Levit

    Excellent comment.
    We are influenced to a great extent by our environment.
    And, as you said, that environment is encouraging borrowing and discouraging saving.
    Treat a man as he is, you’ll get a man as he is.
    Treat him as he should be, you get a remarkable human being.

  • http://www.youtube.com/user/MarcusCMarcellus?feature=mhum Marcus Marcellus

    Cash is Trash. Buy Art!

    Richard Prince’s “Nurse” paintings were selling for $50-60,000 in 2004. Today they sell for $5-6.6 MM. Don’t fight the fed; let monetary base inflation work for you.


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  • NWO

    I am the voice of the New World Order. You will consume less and pay more by way of deception.
    Do not try try to fight us. You will submit to our plan of world domination.
    You will be chipped and marketed as beasts of the land for the benefit of the New World Order elite.
    Learn now what you’re purpose is in life. To serve simply to serve.

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  • david

    As I was sitting in a McDonald’s eating a tiny (downsized) fish sandwich, an order of fries, and a coffee for which I paid $5.50, it occurred to me that gas at $3.79 a gallon isn’t so expensive, it’s cheap. Silver at $40 per ounce means you can buy nearly two gallons of gas for a silver quarter. What has really shrunk are the wages which we earn, even though the nominal amounts have stayed the same or even risen slightly. The transfer of wealth continues….BTW, I read the interchange between Bruce C. and Thrash MacDougal with interest, and though both gentlemen are knowledgeable on the topic, there’s no doubt which one I would choose as a teacher–Bruce clarifies, whereas Thrash obfuscates.

  • david

    Whoops–the name is Smack MacDougal, not Thrash. Sorry, Smack! :)

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