Notes Book

Inflation is a Tax

I know that because a high official of the USA said so. I saw it on TV. A reporter asked him if inflation was a tax, and he said it was and that was why they needed to keep it low. For further proof, just type "inflation is a tax" into Google.

I'm not sure if Obama has yet signed an executive order repealing that definition? If he has, he didn't tell me.

Inflation is a very peculiar tax. Who is it that decides how much the tax will be. What happens to the revenues from this tax.

The Federal Reserve controls the printing of money, and defines how much the tax will be. In that way it is totally unlike any other tax. The person who decides the amount of the tax, the chairman of the Fed is not even a government employee. The Fed is a private corporation set up to be outside the control of the government. There is no review by congress, much less feedback from taxpayers. The chairman of the Fed is the inflation Czar and what he says goes.

Of course, we all know that no bankster would use such dictatorial economic powers for his private gain, or to benefit associates.

The Fed also seems to control who gets the money, though I am a little less certain of how that actually works.

Some might think that inflation doesn't matter a whole lot because wages go up about as much as the costs of goods and services increases. If that were really true, we wouldn't be calling inflation a tax, and we certainly wouldn't see a high government official admitting that it is a tax.

To understand this a little better, just pretend that you were a counterfeiter who knew he could never get busted. You could print as much money as you wanted. It would be better than winning the lottery or being a rock star.

Of course, there would be some limitations. There are reasons that counterfeiting is a crime.

Suppose there were one million dollars in circulation. If you printed ten million dollars and spent it, that would not change the total amount of goods and services in the economy. The law of supply and demand would work it's magic and everything would end up costing 11 times as much approximately. Of course the price of things would start going up as you spent, so that is just a rough approximation to illustrate the principle.

A dramatic change in prices would tend to upset a few folks. Even if you lived in an impenetrable bubble and couldn't be touched, you might get some nasty emails and phone calls.

Another problem would be that the change in prices would not happen easily, but would create a lot of economic turmoil. All kinds of deals would have to be renegotiated, which would take up a lot of time and energy. There might even be some violent confrontations, and services might not be rendered, and goods might not be produced, or even destroyed. So maybe things might actually end up costing 15 times as much instead of just 11 times.

The counterfeiter might prefer widget A over widget B, where most people prefer widget B. The counterfeiter buys a whole lot of A type widgets. When the inflation is over, there are a whole lot of A type widgets that nobody wants to buy, and a shortage of B type widgets.

All this has already happened, just relatively slowly. Mysteriously, the government inflation calculator seems to have disappeared, so I use the one at:

I found out that it takes $20.73 today to buy what you could get for $1.00 in 1913 when the Fed was formed. And this is according to the government's own figures which are widely considered to misunderestimate inflation.

Before that, we had the gold standard. It took 58 cents in 1913 to buy what would have cost a dollar in 1800. That's because of technological advances like trains and telegraphs. If inflation is a tax, the deflation is a windfall for consumers. When we had the gold standard, everyone won from deflation. Now that we have the Fed, deflation causes the establishment to loose money. That's why they hate it.

Counterfeiting causes social turbulence, even if done in the most altruistic and honest way possible. Somehow, I doubt that the secret machinations of the Fed are either altruistic or honest.

If we must have a Fed, we surely need more transparency and congressional control.

But we really don't need either the Fed or the Congress.

Freedom works and economic despotism sucks.