Thursday, January 17, 2008

What Has Government Done to Our Money?

This is a great explanation of how money works in a free society and what the government has done to destroy it.

What Has Government Done to Our Money?

Thanks Ben for another great article.

Here's a small quote to wet your appetites. It succinctly sums up the inflation tax and why it's the most regressive tax of all. Unfortunately, the politicians who most claim to want to help the poor are often the ones most in favor of monetary inflation.

To gauge the economic effects of inflation, let us see what happens when a group of counterfeiters set about their work. Suppose the economy has a supply of 10,000 gold ounces, and counterfeiters, so cunning that they cannot be detected, pump in 2000 "ounces" more. What will be the consequences? First, there will be a clear gain to the counterfeiters. They take the newly-created money and use it to buy goods and services. In the words of the famous New Yorker cartoon, showing a group of counterfeiters in sober contemplation of their handiwork: "Retail spending is about to get a needed shot in the arm." Precisely. Local spending, indeed, does get a shot in the arm. The new money works its way, step by step, throughout the economic system. As the new money spreads, it bids prices up, as we have seen, new money can only dilute the effectiveness of each dollar. But this dilution takes time and is therefore uneven; in the meantime, some people gain and other people lose. In short, the counterfeiters and their local retailers have found their incomes increased before any rise in the prices of the things they buy. But, on the other hand, people in remote areas of the economy, who have not yet received the new money, find their buying prices rising before their incomes. Retailers at the other end of the country, for example, will suffer losses. The first receivers of the new money gain most, and at the expense of the latest receivers.

Inflation, then, confers no general social benefit; instead, it redistributes the wealth in favor of the first-comers and at the expense of the laggards in the race. And inflation is, in effect, a race, to see who can get the new money earliest. The latecomers, the ones stuck with the loss, are often called the "fixed income groups." Ministers, teachers, people on salaries, lag notoriously behind other groups in acquiring the new money. Particular sufferers will be those depending on fixed money contracts, contracts made in the days before the inflationary rise in prices. Life insurance beneficiaries and annuitants, retired persons living off pensions, landlords with long term leases, bondholders and other creditors, those holding cash, all will bear the brunt of the inflation. They will be the ones who are "taxed."

In our economy, the banks, the military-industrial complex, and other recipients of corporate welfare are the first-comers that benefit from the system. The middle class and the poor are the latecomers who lose out.

1 comment:

Eugene said...

Jon,

One more large group you forgot to mention - homeowners with fixed rate mortages benefit from inflation as well.