Why does inflation help bankers and big corporations?

Economics Economics Questions
1

This is from Ron Paul’s Gold, Peace and Prosperity;

In fact, the Fed was instituted at the behest of the American Bankers Association and the nation’s biggest bankers, such as J. P. Morgan and Paul Warburg, to protect their industry against bank failures and to provide a more “elastic” currency. That is, to promote inflation that benefits bankers and big corporations.

I’ve heard it argued that, on the contrary, banks lose by inflation, because they are repaid in money worth less than what they lent. That it is debtors that want inflation, to inflate away their debts, not creditors.

The only thing I can think of is that fractional reserve banking [an inflationary device] allows banks to lend ten times more than what they have, so that even if inflation later reduces what the get back to half it’s worth, they are still up 500% because of inflation.

As for big corporations, I imagine they are debtors, and so want inflation as well.

Glad to see any comments.

2

It is simply because those who receive the new money early benefit at the expense of those who receive it later. Bankers and big corporations are closer to the source of the new money.

This video explains nicely how this happens:

3

I picture that the big cats more or less receive newly created money just like that. Because that’s where newly created money goes first: to the big, politically connected banks. So they benefit from inflation in the most direct way possible. Also, we have to keep in mind that elites aren’t as such interested in profit like any other capitalist. They already control the Fed and own the money supply itself. To them money is a mere means to an end: power. They could care less about earning money via interest. The purpose of controlling the money supply is not to get rich, but to mess with the economy. Constant inflation impoverishes everyone else and thereby keeps the super rich on top relatively. They happily lose some wealth as long as everyone else loses more. And inflation stifles economic progress, which would have lifted the standard of living of the common people to the level of the elites, meaning they would lose their special position. Another benefit from inflation, if you control the money supply, is the creation of cyclical downturns. That way you can buy up assets cheaply as others go bust. And you always have a ready supply of distressed peasants who will stomp out any attempt of market liberalization in it’s root, which would threaten the very existence of the elites.

4

The government and other irresponsible borrowers want inflation in order to escape or reduce their obligations. However, fractional reserve banks earn interest on non-existent money, which is pure profit no matter if the repaid dollars are less valuable than when they were lent because they are being paid interest for loaning money they never had in the first place. No matter how much the interest payments themselves are devalued by inflation, they are still greater than zero and, hence, profitable.

Clayton -

5

Banks take into account inflation when making loans by charging a premium based on expected inflation. Slow steady inflation can be planned for so it really dosent hurt banks. Inflation that cant be planned for and incorporated into the price of borrowing money would.

6

Southern: No, they don’t need to “take into account” inflation. Let’s say I am a central bank. I can simply cause money to come into existence which I then loan out. So, I wave my wand and wish $1,000 into existence which I loan to you. You pay it back with 5% interest after one year. I wave my wand and wish the original $1,000 back out of existence so I can maintain the pretense that I’m not really printing money. However, I now have a nice $50 in interest in my pocket. It doesn’t matter whether inflation during the past year has reduced the nominal $50 to the same purchasing power as $25 a year ago… $25 still represents pure profit.

Most of the time, it’s not this blatant. The money supply is usually expanded through the much more subtle system of inter-bank loans but when you patiently pick apart the mechanics of this system, you will find that it is logically equivalent to the more blatant system. It’s just really complex so it’s hard to connect the dots… it’s a lot like trying to understand how a money launderer “cleans” money through a highly complex network of fake companies, bank transfers, and so on. The purpose of the complexity is to obfuscate the true nature of the system.

Clayton -

7

Southern: No, they don’t need to “take into account” inflation. Let’s say I am a central bank. I can simply cause money to come into existence which I then loan out. So, I wave my wand and wish $1,000 into existence which I loan to you. You pay it back with 5% interest after one year. I wave my wand and wish the original $1,000 back out of existence so I can maintain the pretense that I’m not really printing money. However, I now have a nice $50 in interest in my pocket. It doesn’t matter whether inflation during the past year has reduced the nominal $50 to the same purchasing power as $25 a year ago… $25 still represents pure profit.

I agree with you. When a bank creates money it is essentially earning interest on nothing. Which results in pure profit. But from an accounting sense banks do have a “cost of money”. Which is the base from which the decide how much to charge in interest. From they they take into account other things such as the risk of the loan, expected inflation and target profit for which they add premiums to the interest rate.

8

Not only is it a matter of getting the new money first (and yes, therefore still coming out ahead despite the money lost through being a lender in an inflationary environment), but it’s also a matter of forcing people to put their money into your system. Whereas in a free society, people’s money would generally grow in value over time, meaning they could simply save it and feel confident their purchasing power would be there in the future.

In our current system, people don’t have the first clue how it works, but they know their dollar tomorrow won’t buy what that same dollar bought yesterday. That’s about all they know. People understand so little, they just accept inflation as if it were a normal thing…it’s just something that happens. Money loses value. But they don’t even understand it that deeply. They just think “prices go up over time.” That’s it. And because they at least know that much, they know that if they don’t use it, they lose it.

This means, either spend it, or put it in the system…buy some stocks, buy some bonds…something. Because if you just keep it, you’re screwed. This forcing people to keep their money in play is a large part of what allows the stock market and the banking world to function the way it does. It pushes capital into these sectors when it otherwise might not. This is really just one more revenue stream…because who handles all that activity? Who is at the center of the financial world were all this takes place? When you get right down to it, it’s still the banks.

First they get newly printed money and are among the first to be able to spend it, so they win there. Then, they get paid to handle everyone’s money after it’s finally in the average (and even not so average) man’s pocket. And the amount of profit that can be made from managing accounts, brokering transactions, market making, and all the other finance-related activities a Goldman Sachs is involved in, only grows with the amount of money in that system. So it’s kind of like a positive feedback loop…where one thing is done for its own sake, but it creates a secondary activity that allows even more benefit and entices more of the original behavior.

So not only does being able to print money and spend it make you wealthier (at the expense of others..i.e. stealing), but it also forces people to partake in the activities and businesses of the finance industry…allowing the original thieves even more profit…not only directly through more business, but also indirectly, through simply having so much capital tied up in that sector…basically meaning the league they play in is more lucrative. In that sense it’s like playing in the NLL versus playing in the NBA. This is part of the reason Peter Schiff always says the banking industry is a great place to work if you can get hired.

To look at it from another angle, check out the Nuttiness of Negative Interest Rates.

9

Can I have a link explaining how banks print money and then loan it out? It sounds too good to be true.

10

http://mises.org/media/2472/Money-Banking-and-the-Federal-Reserve

11

One of the few decent parts of Zeitgeist:

http://www.youtube.com/watch?v=vm3DixfL9o0

Here it is from the horse’s mouth.

Clayton -

12

I’m somewhat surprised that Modern Money Mechanics lays out the history of banking so straightforwardly. Of course, if bank notes really were treated as money per se, there would’ve been no reason for bank runs and the like. So it seems to me that people knew they weren’t holding the real money, just a pointer to it (to use a programming term).

13

Aside from the two videos above, yes, definitely check out Modern Money Mechanics for yourself.

Another film(s) which does a decent job explaining this part is Money as Debt (1 & 2). Of course, as is the case with Zeitgeist, and the Bill Still films, it falls off the deep end and ends up being on net a harmful film, but if you use it for education on how the current banking system works, it can help to wrap your head around it.

For literature on the subject, see:

What Has Government Done to Our Money?,

The Case for a 100 Percent Gold Dollar, & The Case for a Genuine Gold Dollar by Murray Rothbard

The Mystery of Banking by Murray Rothbard

And

The Creature from Jekyll Island by G. Edward Griffin

The Money Matrix series by Jake Towne

(which are included with a couple of great videos here)

14

I don’t remember this exactly, but something like half of all the money that was earned on the stock market in the last 80 years was earned on only 12 special days. Inflationary bubbles, if you can predict them, can be incredibly lucrative.