Inflation is a tax that doesn’t require legislative approval. In other words, inflation is taxation without representation. Let’s look at an example. Assume your savings account earns a very modest 3% interest. Whether that interest is taxed at 100% in a zero-inflationary environment, or earned tax-free with 3% inflation, the end result is identical. Considering the US is mired in over $100 trillion of debt and unfunded obligations, that’s especially convenient.
The bottom line: Legislators know that imposing onerous taxes on the public is political suicide – so they’ll keep encouraging the Fed to print currency, thereby devaluing the US dollar and letting inflation do the dirty work for them.
Photo Credit: kevindooley
Well said. Investing and wealth management would sure be easier if we did not have to beat inflation just to maintain purchasing power!
Brilliant..hopefully more and more people are becoming aware. Great post!!
Not to mention that taxes aren’t dependent on inflation levels.
So if inflation runs at 20%, and your investment account generates $2,000 in yields on $10,000, you pay tax on that $2,000.
If inflation runs at 2% and your investment account generates $200 in yields on your $10,000, you pay tax on that $200.
Mmmm…taxes for no net change in purchasing power. Bad deal, Howie.
So true! We’ve had relatively minor inflation with us now for so long that I think most younger people don’t realize what living in such an environment would be like!
An aside. If inflation really is increasing (as it is) and the government denies it just to maintain their offical COLA numbers (as they did this last year) our older Social Security dependant folks are getting it in spades.
Makes living in a mountain shack off the land kind of appealing.
Man, I wish my high school texts books had been written like this! Great post.
What gets me further is that the government creates incentives to take on more debt by offering tax credits (think Mortgage Interest Deduction, Student Loan Interest Deduction, etc.), but punishes savers and investors through taxes (Capital Gains tax, Tax on dividends, interest, etc).
Amen to that, brother! They don’t call it the stealth tax for nothing.
@MrCC: I agree; inflation is like a yoke around our financial necks.
@Derek: I think more people are slowly becoming aware. We need to keep spreading the word though…
@JT: Hey, those are some great points there. I wish I had thought of that!
@Candy: Sadly, I suspect a lot of middle-aged folk don’t remember either. They take relatively tame inflation for granted.
@Olivia: You know, we may have no choice if hyperinflation destroys our currency!
@Jenna: Aww, thank you. So you really think I have a career in text-book writing? 😉
@Robert: Great observation! Funny how that works. Wait, no it’s not.
@Centavos: That it is. That it is.
I know you were practicing your 100 word self-immolation, but since I am not:
What about the fact that the dollar is buying less secondary to being printed at a higher rate.
So our currency is devalued.
Oil is valued in Dollars.
All food commodities are valued in dollars.
So we pay more for our oil imports, which means we pay more for gas.
We pay more for commodities so our food is more expensive.
Food and energy are not counted in the Feds inflation numbers….
Bernanke testified yesterday before congress- his data shows no sign of inflation!
Cool huh! COL!(Crying Out Loud)
Wait, I thought there was no inflation and helicopter Ben is printing money because of concerns over Deflation…hahaha. It’s more of the same, kick the can down the road. Someday we’ll have a crisis and be forced into major austerity, worse than what the EU is enacting now. But discipline doesn’t get you elected in a democracy, promises do. In a perverse way, even though it’s the only way to live, all democracies are doomed to financial collapse.
Right on the money, as usual, Darwin! Bravo! 🙂
Rumor has it that the sanitation engineer (janitor) at the Federal Reserve makes over $200K a year. Nice gig.
Yeah, Instead of taking his $400/week paycheck ($10/hr. x 40 hours) in silver dollars from the bank worth about FRN 20 each to exchange at the Coin Shop* for 400 x 20 = FRN 4000/week, “they” skip the middleman* and “pay” him FRN 4000 x 52 = FRN 208,000.
There’s just two problems with your thought–
First, taxes are collected to pay for the expenses of government (whether you agree with those expenses is another discussion). Inflation is simple a devaluation of currency. It means your money doesn’t go as far but it doesn’t translate into value for someone else or money to pay for other services.
Secondly, resenting taxes when Americans are paying the lowest income tax rates since the 1950s is getting silly. No one likes paying taxes. But let’s be productive and discuss a simpler, and more transparent tax system. Or a tax system that is more equitable and fair.
No, no, no. Actually, Pamela, your first counterpoint is completely incorrect. When you say inflation does not translate into money to pay for other services, that’s EXACTLY what it does with respect to the government! The Fed prints money out of thin air, backed by nothing but the promise to repay it based on taxes earned by the productive citizens in the private sector — that excess money ultimately results in inflation which devalues our currency. The only value is to the debtor (our government) which gets to watch the real value of its debts decrease at the expense of everyone else — especially savers and fiscally responsible individuals.
On your second point, who said I resent taxes? I am railing against excessive taxation through inflation. I realize the government needs some taxes to function.
The real problem isn’t taxes — it’s a bloated federal government that is way too expensive to maintain and has grossly overstepped its duties as spelled out in the Constitution.
The last time the Constitution was amended was in May, 1992…the 27th. Been a lot of changes in the Country and in society since then, and mostly of a dysfunctional nature to undermine Govt itself. To say Govt should not change in scope, purpose, and size because the constitution has been locked in is a bit of a red herring, (excuse the pun) An example: The EPA is a fraction of itself after cuts beginning in 2011. But corporate lobbying surely isn’t. Think the tobacco lobby, pharma, banking, housing, health, all clamouring for less oversight which really means less gov. Look at the damage Hedge Funds do, but listen to the screams when banks fail. Even the prison system has been privatised which directly impacts what laws are passed and/or enforced.
“Gingrich realized nearly three decades ago that attacking government capacity and hijacking the budgeting process could benefit his corporate benefactors. It’s about time civil society developed a counterstrategy.”
Every year there is a threat to not fund the Guvmint, then CRAs are magically voted in just before shutdowns with all kinds of lobbied induced pork for political districts to ‘buy’ enough particular votes. The old Quid Quo routine. The problem with Govt is that has been demonised by agendas, and the agenda is usually the rich getting richer and the common folk losing,in both influence and wealth. And the clever lobbyists actually convince the losers it is best this way.
I actually heard someone on the news say, “No one’s going to tell me I need healthcare”. Yeah…rightttttt.
What could possibly go wrong with elected judges, sheriffs, election supervisors and such as opposed to a qualified civil service that oversees these departments? Could there be gerrymandering and lobbying interests put ahead of the common good? You bet if there is a buck to be made down the line for friends and family.
Inflation sucks. Deflation sucks. Public Policy often decides who gets the hind teat in dealing with change. Govt workers are hired to enforce the policies decided upon by a supposedly free standing and responsive fairly elected Government, pure and simple. When that is interfered with at all levels for some individuals to increase their wealth, it is not going to work well and is ripe for attack.
Now off to the sin bin (penalty box) for Paul. But this is a comment section and I stand by it and wholly agree with Pamela’s comment on taxes.
Deflation doesn’t suck; it increases savers’ purchasing power. The US saw its biggest period of economic expansion between the end of the US Civil War and the inception of the Fed in 1913 – a period that was marked by mild deflation for the vast majority of that time. What else was a common theme during that time? Limited government. Why? Because the gold standard kept government spending under control.
Government is self-serving; it is so bad now that in the US there are two parties, but they both advocate for more government – not less. In other words: They are the UNIparty. And when it comes to “the rich getting richer” these days that refers to the politicians and civil servants and other government employees who are allowed to retire at age 50 with gold-plated pensions that are adjusted for cost of living increases – unlike the plebes in the private sector who pay their salaries.
Inflation comes about because of the excess money being created and is pure and simple theft from the people. Pamela, Len has got it spot on,there are NO problems with his thought process. Of course most of this created money is being used to bail out the property boom.
@Len – Definitely!
Hoorah! You said it so eloquently! Come sit with my kids during their homeschool social studies lesson sometime… they could learn a lot from you. (Hubby especially likes this post, Len.. it’s so right on.)
@Derek: Good point, Derek!
@Jenna: 🙂
@Linsey: Aww, thank you. If I could I would. Glad your hubby enjoyed it too. Dare I say he sounds like a smart guy!
Wow, this is incredibly simplistic and/or wrong.
The dollar is not weak at all — in fact, it’s at one of its strongest points ever historically vs. foreign currencies (hence the cheapness of imports and lower export sales and their effects on domestic manufacturing). If the Fed truly was printing too much money (for whatever reason), then that would mean other foreign governments were printing even MORE money than that.
Inflation is at a virtual historical low — reflective of a growing economy but one in which monetary policy is appropriate in terms of the supply of currency. If the Fed were truly printing too much money, we’d see inflation VASTLY larger than the piddling 1-2% per annum that we’ve been seeing.
“Considering the US is mired in over $100 trillion of debt and unfunded obligations, thats especially convenient.” Inflation does nothing to impact government balance sheets. Inflation drives up interest rates, thereby increasing the cost of borrowing, meaning that every dollar of borrowing the government would do going forward (aka the “deficit”) would cost more in terms of interest costs. Indeed, the current historical low interest rates were one reason many economists and President Obama pushed for massive infrastructure investment following the 2008-09 crisis — we could build a lot of necessary infrastructure and put a lot of people to work using “cheap” money (i.e. money borrowed at low cost).
Nice try, though….and (truly) I do enjoy your blog!
Thanks for your comments. I’ll take each of your points one by one:
The US dollar index merely measures the buck against other currencies — it is a relative measurement — therefore, for you to imply that it is “at one of its stronger points ever” begs the question: “Compared to what?” Certainly not in terms of the only thing that really matters by those who use it: that is, purchasing power. Indeed, the buck has lost 98% of its value since 1913.
Low inflation is not “reflective of a growing economy.” Inflation is a monetary event resulting from an increased monetary supply. If anything, growing economies using fiat currencies suffer from higher prices — which I believe you are confusing with the phenomenon known as monetary inflation — not lower ones. Also, which measure of inflation are you relying on when you assert that “inflation is at a historical low”? Are you using the one the US government used up until around 1980, or one of the several revised methodologies that have been put in place since then? By the way, those are the same revised methodologies that use hedonic adjustments and ignore smaller package sizes in order to understate the true inflation rate. Also, the reason you don’t see even higher prices at the moment is primarily two-fold:
1. The US government has been exporting its inflation to other countries for years. As a result, the impacts won’t be seen until the countries that have been collecting our worthless paper in exchange for goods lose confidence and repatriate those dollars here in America.
2. The vast majority of the $4 trillion the Fed has printed since 2008 remain “quarantined” as bank reserves; the banks are too afraid to lend them out — and with fractional reserve banking rules, they can actually lend out $40 trillion, if they so choose to.
Next point: Is a US economy that has not managed to eek out a single year with an annual GDP 3% since 2008 truly “growing”? Three percent used to be the minimum standard of a healthy economy. Keep in mind this is despite more than $4 trillion in new currency being conjured up by the Fed. Heck, if you toss in inflation into the mix, GDP is even lower.
Next point: It’s not inflation that drives up interest rates. You also seem to think that interest rates are currently set by the free market; respectfully, you’re wrong. Unfortunately, the reality is — for now, at least — the Fed artificially controls interest rates. Ultimately, however, the bond markets will reassert themselves and they’ll have the final say on the price of money.
Next point: I fully understand the benefit of borrowing money at low interest rates. The trouble with holding interest rates artificially low is that it encourages malinvestment because there is virtually zero risk to the borrower. This is why President Obama’s stimulus failed. Instead of investing in infrastructure that could earn a true return, the cash was spent on speculative programs with little to no chance of an economic return; “green energy” (see: Solyndra) is one example, but others include “Cash for Clunkers,” and forays into government-backed student and mortgage loans.
Last point: Inflation is most certainly used by governments to settle their books — when confidence is lost in their currency, they have no choice. It has happened countless times before and it will happen again — including the US dollar. It’s even happening right now in Venezuela.
I encourage you to understand the difference between currency and real money. The bottom line is the US dollar isn’t money — it’s debt. Once you understand that, then you’ll truly begin to understand macroeconomics — and you’ll see why nothing will get better until the current system implodes.
LMAO… Great, very detailed, reply Len.
But I have to say it made me laugh to see that it took you 621 words to explain your 100 word post! Great info though, as always.
LOL! Good observation, James!