There are many myths about inflation; what it is, what it does,
whether it is bad or not, and how it can be controlled. The concept has been
confused and convoluted by "experts and economists," either through
ignorance or duplicity, for centuries. But inflation is one of the biggest
robberies any government ever perpetrated on its people, and therefore, it MUST
be understood to be stopped.

 

Let's go step by step.

 

Inflation: any
expansion of the money supply that exceeds
the demand for that money. 

 

Demand for money? What does that mean?

 

Although there is an infinite demand for the things
money can buy (i.e. we all want everything), there is actually a finite demand for money itself in our
economy. At any given moment, you and your family only demand so much actual cash (called base money) to have on hand. If
you have $20 in your wallet and it is enough for the day, then that is all
the demand you have placed
on the total supply of money out there that day. If you decide to
"withdraw" more from your savings, say $30, then you have increased the demand for money
that day by $30. At the same time, though, other people are deciding to
"turn in" some of their cash (base money) by depositing it into
banks, etc. This opposes your demand, because deposits and withdrawals
work in the opposite direction of each other. The net result between the two is called the demand for money. At
any given moment in our economy, if it were possible to calculate (and it is
not), there is a specific demand for money as a result of everybody's activity.
At some moments, the net flow of money is into
banks, etc., at others, the net flow is out. 

 

So what is inflation, again?

 

Inflation is when more base money is put into the economy (more about how this is
done in a future post, perhaps) than the amount demanded or required by
our economy at that time.

 

Some people say that inflation is every and all expansion of
the amount of money in circulation, but that is not entirely correct. All expansions of the money supply are
not inflationary. As an economy expands, there is a need for more money to
match the size of the growing pie. Just as a bigger pie requires more fruit, a
bigger economy requires more cash (base money) in circulation. There are more
people, more industries, higher production, more commerce, etc., etc., and
these things are all good for an economy. Remember, actual economic growth is
good!  Inflation is not the growing of
the base money supply that matches the expansion of the productive economy
itself. Inflation is when governments put more
money into circulation faster than it
is demanded by the economy. Since
this money is not demanded, reserves (the amount of base money banks actually have
on hand) are higher because there is more than is demanded. This means banks have to lower interest rates to get people interested in borrowing it. This
drop in interest rates increases borrowing, at which point more people take the
money and spend it in the economy. As this additional money makes its way into
the economy, there are more dollars than before fighting to purchase the same
amount of goods (this is most easily pictured if you view our economy as one
giant auction). More money fighting for the same amount of goods means
merchants will quickly realize they can raise prices. In millions of
transactions across the country this occurs, and overall, prices go up.

 

THAT resultant price increase is NOT inflation, but the
RESULT of inflation. (For a fun game, listen to politicians and
"expert" economists mess this one up. You will be astounded at how
often they say that rising prices is inflation!) 

 

So, once again, inflation is the expansion of the money supply beyond what is needed or demanded at
the moment by the economy. The result is rising prices across the board.

 

So why is inflation
considered a deadly and hidden tax?

 

I am glad you asked! Inflation, as we have just seen, raises
prices. There are no new products or services as a result of this price
increase, just higher prices. The only reason the prices are higher is because
the supply of money is higher. Everybody has more, so everybody can pay more.
(Stay with me). This means that each dollar in circulation is worth less. It used to buy X amount, now
it will only buy X-minus-whatever amount. Example: a nickel used to buy a hamburger,
now it won't even get you a minute at a parking meter.

 

So how is that a tax, exactly?

 

It is called devaluing
the dollar. Value has been taken out
of the dollar. Because prices have gone up, the buying power of the dollar has
gone down. It is a direct relation. As a specific illustration, consider that
the massive dollar devaluation we have come to accept as normal really got
going with the advent of the Federal Reserve in 1913. As a result of the
inflation waged by our government (in cahoots with the Federal Reserve) through
its manipulation of the supply of money (called "monetary policy"),
the dollar that was a dollar in 1913 is only worth 4 cents today in equivalent
buying power. Where did that 96 cents go? It disappeared! It was silently stolen
out of the value of the dollar by the government that issued the dollar in the
first place.

 

Wait a minute, you might say, how did they steal it?

 

Again, I am glad you asked! They stole the value out of the
dollar by putting more dollars into circulation than was demanded, thereby causing
a raising of prices, and making all the dollars already out there worth less.
Oh, okay, you've got that part already, well, the question begs to be answered:
WHY? Why would a government do that?

 

Because the government has a habit of wanting to spend more
than it brings in. Of course, you and I do too. The difference is, when we try to spend more than we make we go
bankrupt. That's because we can't come up with the money we need to pay for our
mounting debts. AH, but the government CAN! They own the "printing
press!" All they have to do is print more money to pay their bills!
(Again, there are some magic tricks to put this extra money in circulation,
it's actually not all "printing" more money, but the simplification of
saying "printing more money" is easier to explain for now). If you
and I tried that, we'd be locked up for counterfeiting. But when the government
does it, they call it "Monetary Policy." As long as they make it
sound official, everything will be okay, right? (After all, those dumb citizens
will never catch on, we've still got them thinking inflation is natural!)

 

Anyway, by devaluing the dollar, the government's massive
amount of debt is actually less painful. This is where inflation can be
considered a tax. If the dollar is worth less, then the number representing the
government's debt is less, too.  They
borrowed the money back when it was worth X, and now they can easily pay it
back when the dollar is only worth X-minus- whatever.

 

Let's look at an extreme illustration to make this
clear.  Take Zimbabwe, which has something
called hyperinflation happening right now. Hyperinflation is, you guessed it,
hyper – inflation! It is inflation gone wild, out of control, rampant and
crazy. Suppose you bought a house ten years ago in Zimbabwe
for 100,000 Zimbabwe
dollars, and at that time, you were making 50,000 Zimbabwe dollars per year. You took
out a mortgage for 90,000. If the Zimbabwe dollar was never devalued,
you would pay back the entire 90,000 plus interest. Of course. So far, so good.
But with inflation, or hyperinflation
in the case of Zimbabwe,
over those ten years that same 50,000 Zimbabwe
dollars you were making as income has now become equivalent to 5,000,000 Zimbabwe
dollars!  Woo hoo! You're rich! Nope, not
with inflation. Just because your salary has gone from 50,000 ten years ago to
5,000,000 now, doesn't mean you can actually buy anything more with it, it just means more dollars are required to buy the
same thing. At any rate, notice how LOW your 90,000 mortgage looks now! You
could pay it off with less than one week's work! Yee-hah! And THAT, my friend,
is why governments like devaluation so much – especially the kinds of
governments that spend wildly beyond their means (say like the, um, U.S. government?)
So a government spends like crazy, recklessly, amounting massive debt, ALL THE
WHILE it is DEVALUING the dollar so that it can easily repay those debts with
the funny money of the future.

 

Well, this is great! you might say. We can all play that game!

 

Not so fast. One problem is that wages are the LAST thing to
go up, and they generally never catch up. Prices go up way faster and everybody
loses buying power in the meantime (except the government, and any insiders who
are privy to the new money influxes or have a way to get access to that money first before prices are driven higher.
Can anyone say, insider advantage? Bail-out recipients? ACORN, anyone?) The
problem with this scheme is that it hurts EVERYONE ELSE in the country, especially
those the farthest from the inside banking industry, or the farthest from
government handouts and doles, but worst
of all, it hurts the savers and the long-term investors. It hurts the
elderly who have counted on their savings and pensions for years. It hurts the
family already struggling to make ends meet and now find that their meager
income and savings buys them less and less.

 

Inflation is a tax.
It supports government irresponsibility at the expense of the average citizen.
It taxes the value of the dollars sitting in a savings account, in a safe, or
under a mattress. It invisibly takes money away from those who have earned it
so that the government, who hasn't earned it, can continue its spending
addiction. And for the governing class, it is wonderfully invisible. The
"little people" don't get to vote for this tax increase, they don't
get to debate it, they usually don't even get to hear about it. The Federal
Reserve privately, without audit or oversight by Congress, conducts its affairs
as it sees fit. I won't even get into the windfall profits generated to private
central banks by this process. You've probably stomached enough for one day.

 

Oh yeah, because inflation also eventually drives up wages, (although, as we've said, more slowly
than prices) and this too puts a person in a higher income tax bracket! This causes people to pay more in direct taxation as well! What a deal!
But a few percentages of higher income tax are nothing compared to 96 cents stolen
from a dollar in 76 years of  inflation.

 

Some people in politics don't understand this (just listen
to what they say and you'll see what I mean). We'll call them ignorant.

 

Others do understand
this. I wonder what we should call them?