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Thursday, June 23, 2011

Redistribution Through Inflation

Too many dollars competing for a finite amount of products causes inflation, resulting in a loss of confidence in that currency which, in turn, fuels the fires of inflation.  Until recently, local governments enjoyed windfall revenues as property values skyrocketed.  When salaries increase due to cost of living increases, the tax collected increases too.  If workers’ wages move them into higher tax brackets, the percentage of tax taken from them increases also.

Taxing officials love inflationHyperinflations are caused by extremely rapid growth in the supply of ‘paper’ money.  They occur when the monetary and fiscal authorities of a nation regularly issue large quantities of money to pay for a large stream of government expenditures.  In effect, inflation is a form of taxation in which the government gains at the expense of those who hold money while its value is declining.  Hyperinflations are very large taxation schemes.

The US Federal Reserve has been creating inflation through its QE1 and QE2 printing press extravaganza.  This has bloated the amount of fiat currency in the nation.  In Bottom Line Personal, author Irwin Kellner writes in his article “The Inflation Time Bomb Is Ticking” that our own government has set the stage for higher prices.  Since 2008, the [Fed] has kept short-term interest rates near zero and purchased hundreds of billions of dollars’ worth of US Treasury bonds, flooding the economy with money.

Kellner points out that in the past year, the cost of sugar has increased by 60%, wheat by 55%, silver by 50%, and copper by 36%.  Gasoline prices have risen steadily since Obama took office.  Nonetheless, the Fed claims that inflation is under control and sky-high commodity prices won’t derail the economic recovery. 

This claim seems improbable; in February and March of this year, energy prices rose 6.9%.  Wholesale food prices have risen more than at any time in the last 36 years, yet the federal government’s Consumer Price Index as of June 15, 2011, shows a 3.6% rate of inflation, just over the historical average of 3.4%.  This is largely because the CPI does not include prices of food and energy.

Unfortunately, food and energy costs severely affect households.  We may be facing hyperinflation levels exceeding those of the Jimmy Carter era.  Simultaneous double-digit inflation and unemployment during the 1970s should have driven the final nail into economists' use of the Keynesian economic theory, but it persists due to a short public memory and O-bumites’ desperation to buy votes with deficit spending.

Hyperinflation is nearly always caused by governments spending far beyond their ability to tax, coupled with an inevitable loss of confidence in the currency.  The national debt is nearly $14.5 trillion and mounting, and it is the result of federal deficit spending.  Whoever prints the money determines the rate of inflation.  Lenders become reluctant to lend because they are repaid in dollars that are worth much less than those that they lent.  This stagnates real economic growth.

If we continue our rampant printing of valueless dollars, more homes will be lost to foreclosure, gasoline prices will hit $5 a gallon, beans will replace pork and chicken on our dinner tables, the cost of heating and cooling homes will become prohibitive, and the number of families on welfare will increase exponentially.  Thus is the progressives’ wealth redistribution scheme.

May your gods be with you.

1 comment:

  1. You are right, Lin. Inflation redistributes wealth from creditor to debtor.

    It is also true that the CPI does not reflect the basics elements of consumption. The CPI is being restrained by unemployment for the moment.

    Good argument.


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