Friday, February 27, 2009
Inflation: The Hidden Tax
There are three ways that governments can raise revenue: taxation, borrowing, and inflation. Taxation is a fairly easily explained system of revenue production and is often the center of many debates between the left and the right. Borrowing, while responsible for financing a rapidly expanding portion of the federal budget, can be a confusing concept and will be addressed at a later date. Inflation is rarely discussed as a revenue provider and can also be difficult to understand but only because it has been improperly defined by high school civics textbooks and economists who have regurgitated this misinformation.
A simple Google search returned the following definition for inflation, which is consistent with what I was taught throughout high school and college:
"The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index. Over time, as the cost of goods and services increase, the value of a dollar is going to fall because a person won't be able to purchase as much with that dollar as he/she previously could. [emphasis added] While the annual rate of inflation has fluctuated greatly over the last half century, ranging from nearly zero inflation to 23% inflation, the Fed actively tries to maintain a specific rate of inflation, which is usually 2-3% but can vary depending on circumstances."
This definition has about as much substance as a father's response to his child of "because I said so". The circular logic here is astounding and contains about the same level of intelligence as the students for whom it was intended. Inflation is treated as a natural and inexplicable economic phenomenon for which there is no cause or explanation.
There IS an explanation and it is just as mysterious as the inflation it pretends to fight: the Federal Reserve.
Inflation, properly defined, is the artificial increasing in the quantity of the money supply, whereas the increasing cost of goods and services is merely the consequence of inflation - not the cause. By definition and by virtue of the act of congress granting monopoly privileges, the Fed is the ONLY entity that can legally print new dollars. If you or I printed new dollars, we would go to jail; when done by the Fed, not only is it legal and accepted, its effect - inflation - is cloaked with a planned level of desired misdirection and obscurity.
Like a detective, one must adhere to the old adage and follow the money to find the beneficiary of any scheme in order to get to the truth. The case of inflation is no different, and a simplified scenario will illustrate this point:
Borrower borrows money from Lender at Time A and must repay the loan at Time B. In an inflationary environment, Borrower had the benefit of utilizing the dollar at Time A while it still possessed a relatively higher level of purchasing power than when paid back at Time B. Borrower is marginally better off because of the presence of inflation in the scenario.
So if one knows that borrowers are the chief beneficiaries in an economy ladened with inflation, then one must only ask who the largest borrower in the economy is. If you said the United States government, go to the head of the class.