Inflation

The hidden tax. (Part I)

Inflation:

  • Is generated intentionally by governments.
  • It is an automatic tax on workers and the poor.
  • Although many harms, benefits others, including the government and its associates.

world inflation

What is it really?

U.S. inflation

Crash Course: Chapter 10 – Inflation by Chris Martenson

The inflation is defined generally as the prolonged and widespread increase in prices of goods and services. But in reality this is a symptom, fever patient. The real cause, the real disease is not as obvious.

The goods and services produced within a country for a year represent the wealth “real” one country generated in that year. The most common way to measure it is with GDP.

Money is only a medium of exchange. The tool to transform work or personal investment products and services needed to survive. No matter the money itself. What matters is the money used to acquire and use at some point these goods and services produced.

For the permanent interaction between supply and demand of goods where the amount of money in the economy grows faster than real wealth, inflation appears. Conversely, when the amount of real wealth grows faster than the amount of money, there is deflation.

Causes of inflation according to the different economic theories

Although various theories differ in the benefits and harms of inflation, whether to combat it, control it or leave it free, if optimal levels or not, agree on what is the origin of it.

Austrian theory of inflation: “Inflation is the increase in money supply over demand of the people”

Ludwig von Mises (Economic Policy p. 72): “The most important thing to remember is that inflation is not an act of God, not a catastrophe of the elements or a disease that appears like the plague. Inflation is a policy ”

Ludwig von Mises (The Theory of Money and Credit p. 479) “public control advocates can not ignore inflation. The need to finance its policy of reckless spending and generous subsidies and bribes to voters ”

Murray N. Rothbard: “Inflation is a powerful and subtle than the government has to appropriate public resources; procedure whose effect is not immediately obvious and, therefore, determined not painful reaction”

Friedrich von Hayek: “I think it’s an exaggeration to say that history is largely a history of inflation, inflation typically designed by governments to gain governments’

Marxist theory of inflation: “Inflation is the depreciation of the currency.” “There are several reasons why governments at different times follow a policy of currency devaluation. Some governments adopt it because it is a simple way to increase revenue without resorting to new taxes ”

Karl Marx (Capital Vol I, p. 108 Allen & Unwin): “If the amount of paper money issued, for example, twice what it should be, then a pound” (not yet mounted T.: originally Sterling was a gold coin from a quarter ounce of weight) “has become the name of an eighth of an ounce of gold instead of a quarter ounce of gold. The effect is the same as if there had been an alteration in the functioning of the gold standard price. The value previously expressed as £ 1, now expressed as £ 2 ”

Chicago School – Milton Friedman: “Inflation is the way to collect taxes that may be imposed without legislation”

Free to Choose Part 9: How to Cure Inflation Featuring Milton Friedman

John M. Keynes: “The best way to destroy a capitalist system is devaluing its currency. With a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of citizens ”

Example: Inflation in Argentina 2011

On the simplified example in 2011, where the Central Bank increased the monetary base by 38% of the country and the country’s GDP grew by 8.9%. Subtracting the GDP growth, we believe that 2011 out of nowhere a 29% more money to buy the same goods and services than before.

By increased demand for fixed supply, will occur in the medium term an increase in prices, ie inflation close to that value. Although as the supply of goods and services does not change, while rise in price is because the money actually loses some of its value to acquire the same as before. What really makes that extra money is to dilute the value of existing money to accommodate the value of assets is “real.”

Published data of inflation in Argentina for 2011 are:

  • INDEC (National Institute of Statistics and Census. Disturbed by the government in the year 2007): 9.5%
  • Mendoza Province: 21.3%
  • National Congress: 22.8%
  • San Luis Province: 23.3%

What is the advantage of increasing the amount of money if in the medium and long term value for money low and the price of goods and services will increase until it evens out?

This is where time comes into play. This 29% of money generated from the air is not immediately devalued. Loses value as it is using the economy to buy more goods and services. But the state, the first user of this money created from nothing, you can use before it loses value. I used to pay his debts, to pay its suppliers for all types of plans and public works, for the purchase of goods and supplies, salaries of politicians, advisers and all direct employees of the state. They are using that money to pay their own accounts, their own employees, purchasing their own goods and services. Thus, step by step, money created out of nothing is distributed by little throughout the economy.

And as prices rise, people start to ask for salary increases in order to equip the rise, and employers are beginning to raise product prices to maintain their% profit rise and face the costs.
The monetary expansion

There are several ways to expand the monetary base:

  • Printing of bills. The current situation.
  • The debt issuance, in addition to devalue the national currency by the amount of the loan, the state must raise revenue to pay interest on that debt. This is the case of the currency, where the amount of paper money remained fixed in the same proportion that the dollars that had the country, but the state’s deficit was financed by external debt. At the beginning of the convertible debt of the state was approximately 59,000 million dollars, and in 2002 amounted to 132,000 million dollars.
  • The decline in bank reserves. In short, banks can lend more money than they have in their deposits. The central bank regulates what percentage that banks must keep accounts of its customers, currently (March 2012) of 20% and can provide 80% of them. However, the borrowed money could in turn be deposited in the bank in the debtor’s bank account, creating in this case $ 180 of deposits for the $ 100 originals. If you turn 80% of the $ 80 are delivered to another person and if the cycle is repeated, the end result is that every $ 100 deposited, with a reserve of 20%, can generate $ 500 in deposits, effectively increasing the monetary base.

The state does not lose to inflation

Linear taxes (VAT, turnover tax, fuel, property transfers, cigarettes, etc.). The same% increase in prices increase, so long as inflation does not get to the point of affecting the economy. So the state does not lose these tax revenues although the currency was devalued. While that raises more money, it is actually devalued money.

But the problem is with everyone who can not get admission to the same extent that inflation, even if they received any increase, if less than inflation, end up paying more taxes than before in relation to income, being effectively a hidden tax increase.

The state gains

The state is the first to use the money from monetary expansion. Literally “free” money if it comes from increased paper money or is money whose cost will be faced in the future if it comes from debt.

The state gains x2

If taxes do not affect the linear state, progressive taxation (taxes as the amount exceeds a certain level, they begin to be paid or the tax rate increases) will generate new revenue.

Progressive taxes like income tax or tax on personal assets when calculating their databases are not updated at the same rate as inflation, cause anyone who had not paid them begin to pay, and people paid a percentage more low, begin to pay a higher percentage than before the onset of inflation. In this case the state receives new revenues not previously received.

The state gains x3

The state also has debts in domestic currency and foreign currency.

The money generated from nothing in monetary expansion, is used in two ways to benefit the state. Payments are made current debts in local currency with the “free” money. And if debts are not tied to interest inflation (bonds), future payments will be made with money already lost some of its value, or even to raise more, you pay less and less.

In the second part, we will discuss ways to deal with inflation

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