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Why 95% of Traders Fail

ECB Educational Inflation Video is Propaganda with a Capital ‘P'

InvestorEducation / Inflation Jul 02, 2007 - 05:55 PM GMT

By: Mike_Hewitt

InvestorEducation The European Central Bank (ECB) has a “educational” video on Price Stability. The video is intended to be a teachers' aid. It, and associated teacher aid materials, can be downloaded from the ECB website here . For quicker viewing, the video can also be seen on YouTube.


Price Stability: Why It Is Importatant To You
ECB Video served by Youtube

The purpose of this essay is to comment on the misleading portrayal of the ECB that this video presents.

The Inflation Monster

One of the most disturbing things about the video is that inflation (as defined as an increase in the price of goods) is depicted as a grotesque monster that somehow needs to be contained by the gallant forces of the Central Bank.

This is completely absurd.

If I lit your house on fire and showed up with the fire brigade, am I a “fire-fighter”? The answer is obviously not. I am an arsonist and should be prosecuted for my criminal activity. In a similar manner, in no imaginable way can the Central Bank ever be considered as an “inflation-fighter”. They are the very source of inflation when they create it out of thin air!

The entire fiat monetary system is immoral and should be illegal . The Central Banks counterfeit money. They then loan this newly created money into various accounts of private banks. These private banks, through fractional reserve banking laws, then commit fraud by lending out more money than they have. These activities amount to no less than a hidden form of theft on the citizens. Every unit of currency created by the Central Bank dilutes the value of the currency already in circulation.

Anybody who believes that his or her 4% savings account is staying ahead of inflation is ill-informed. Central Banks of the world's major industrialized western nations have been increasing the amount of money in circulation by 8% or more every year. Thus in this example, the holder of the savings account is losing at least 4% of their purchasing power every year.

Calculation of Price Stability

The calculation for price stability (otherwise known as Consumer Price Index or CPI inflation under 2%) is not the straightforward year-on-year price comparison of the prices for a “basket-of-goods” as depicted in the video. The following is a list of various calculations that central banks use to “massage” the CPI inflation numbers:

  • Substitution : Replaces items within the basket to alternatives should the original item increase in price. Chicken could be substituted for beef should the latter increase faster in price. This manipulation alone brings into question the validity of the calculation. The very purpose at the onset was to measure the price increase of the original “basket-of-items”!
  • Rent vs. Housing Costs: Another form of substitution. Due to the rapid increase in housing prices, slower rising rent prices have been substituted.
  • Seasonal Adjustments : Removal of prices increases during peak consumption times of the year, such as gasoline prices during the summer or heating oil during the winter.
  • Hedonics : Price adjustments for quality. For instance, consider computers that are steadily improving. Even if the sticker price remains constant, for the purposes of the CPI inflation calculation, the price has diminished because you are now getting “more” computer for your money than before.
  • Geometric Weighting : Instead of using simple arithmetic addition, the use of geometric (logarithmic) addition greatly smoothes out fluctuations, as anyone who works with statistics is fully aware of.
  • Core Rate : There is increasingly more attention being given to the “core” CPI inflation rate that strips away volatile food and energy prices which are often the first consumer goods to respond to changes in the money supply.

After these adjustments, the official CPI numbers no longer represent the reality of the true price increases facing consumers. Anybody who has bought groceries or filled up their vehicle with gasoline can tell you that prices have been increasing significantly more than two percent per annum. Trying to contain this fictitious number under two percent is nearly meaningless in terms of maintaining true price stability. One could also ask - why two percent? Why not zero percent on an unchanging “basket-of-goods”? If the Central Banks didn't create money in the first place, they wouldn't need to measure CPI inflation in order to manipulate interest rates.

The Deflation Monster

The banker in the video explains that deflation is another evil that needs to be contained. He explains that in the event of deflation, people will refrain from purchasing goods because their money will buy them more in the future. Perhaps the banker can explain why nobody owns a computer or any other electronic device or subscribes to any telecommunication service because they are waiting for them to fall in price even further. The justification is clearly fallacious. A fall in prices increases demand.

Decreasing prices are beneficial to consumers - period. The simple reason why deflation is so terrible is that the burden of debt increases as money appreciates in value. It is a dire threat to those who owe money - and the government owes a lot of money!

Technological advances and distribution innovations have reduced the amount of resources required to produce and deliver goods to consumers. Only in our modern-day fiat monetary system of ever-depreciating currencies will the prices of these goods increase.

Conclusion

The purpose of this light-hearted video is to educate the viewer with a brief overview of the functions of the ECB. In actuality, it provides little fact and completely avoids addressing important issues. It depicts the ECB as an institution serving the public good by keeping prices stable and completely avoids discussing the fact that the ECB is the one responsible for the ever-decreasing purchasing power of the Euro by continually creating more of it.

By Mike Hewitt
http://www.dollardaze.org

Mike Hewitt is the editor of http://dollardaze.org a site about the current fiat monetary system and how to best position oneself using hard assets such as gold and silver along with shares of resource companies.

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

Mike Hewitt Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

matthew
19 Jul 07, 02:10
ECB Educational Inflation Video

I am a mortgage broker for the past 12 years. Facinated with how the money is created. If you ever have a seminar I can go to please put me on that list.

It would be incredible to meet a person like you in person.

Very few think about, care about or try to understand how all this works.

Thank you so much for sharing all this good data. I would pay for more as well. So if there is something I could join please contact me. Matthew R. Marshall.


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