What tax is that you say? GOVERNMENT INDUCED INFLATION, says I.
First off - is it a tax and why is it the most insidious (and sinister)?
- It is not recognized for what it is and it IS a tax.
- It goes unnoticed.
- It affects everyone, even the very poor.
There is a difference in government induced and naturally occurring inflation. Both affect everyone and both are a form of taxation but government induced is within the control of the Federal Government. I will cover that in detail in a moment.
Naturally occurring Inflation:
First let me explain how naturally occurring inflation affects taxes. We are a “tiered” tax system. Everyone is in a tax bracket. These brackets are indexed for inflation but with the acceptance of the change in methods of measuring the CPI (eliminating the volatile items of food and energy) many believe the cpi is no longer relevant. Yes inflation is low if you don’t eat, turn on your lights or drive your car.
So inflation means you make more money but it cost you more to live. As your salary goes up you move into higher tax brackets and pay proportionally more tax. This is bad but not horrible. The next section is the horrible part.
Government Induced Inflation:
I have often heard it said “the government can print all the money it wants”. That is not exactly true, or at least it isn’t supposed to be. The process of introducing money into the US economy is complicated but it is basically driven by banks for purposes of lending. Individual banks maintain reserves at the Federal Reserve Bank (the Fed). The amount of actual currency in circulation is relatively small in comparison with the size of our economy. As an example, in 2008 the amount was $829 billion. By Obama’s inauguration it was estimated at $850 billion. Compare this to the national debt at the time of $10 trillion and you will see we didn’t get into debt by printing money, we borrowed it. It was not “possible” for the government to simply print money to pay bills, although many for years made that claim.
Doesn’t Congress have control over this?
Congress has very limited control over the Fed. The Fed is one agency that doesn’t even have to respond to Freedom of Information Act requests. As recently as June 23rd, 2009 Fed Chairman Ben Bernanke promised Congress he would not Monetize our debt. However, times have changed. This concept of “monetizing the debt” will be explained in a minute but just know this is a process were the government can literally “print all the money they want and spend it”.
Sheldon Filger writes “the Federal Reserve [Ben Bernanke], made a bombshell policy decision on August 10, 2010, one fraught with dangerous long-term consequences for the American and global economy.” http://www.huffingtonpost.com/sheldon-filger/federal-reserve-begins-ma_b_677483.html The fed announced a $600 billion monetization which is to be followed with $300 billion more next year.
I have tried to get exact numbers on the amount of money in circulation currently and have not had good results so I will have to use the understandings I have from a variety of sources not deemed to be perfect. The first thing I understand happened was Obama authorized the Treasury to print an additional $850 billion dollars and put it on deposit with the Fed. This money was to be a reserve and is not available to pay US Govt bills with. However, subsequently Obama authorized the Fed to use the money to buy US Treasury bills, then THAT money could be used for government spending. so in an end run, the Government can now print all the money it wants and spend it. This process is known as monetizing our debt. It is also known as “QUANTITATIVE EASING”. http://en.wikipedia.org/wiki/Quantitative_easing (Wikipedia). This is actually a method of devaluing our currency.
If Social Security is the 3rd rail of politics, The Fed is the 4th branch of government only without checks and balances.
Why monetize the debt?
The reason for all of this stems from the lack of buyers, worldwide, for our government securities (t-bills). The Chinese, Japanese and Saudi’s have had enough. Now that no one else wants them we will buy our own. Exactly how far this process has already gone I am not certain. The process was dubbed QE and we are now on QE2. It is possible QE topped out at 1.7 trillion dollars. It seems everything is in increments of $850 billion.
In an article entitled “The Money Illusion” http://www.themoneyillusion.com/?p=5816 quotes an article from The Telegraph states “ Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed’s balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. This expansion of the amount of currency in circulation would be devastating.
As it is the additional $800 billion recently announced by Bernanke is projected to devalue the dollar by 20%. It is odd to me. It would seem to me if I owned one dollar out of $850 billion and you printed $850 billion more my dollar would immediately be worth 1/2. The formula is more complicated and allows for the fact that it takes everyone some time to notice all the extra cash floating around or maybe the reduced value t-bills still have SOME value, or … Anyway, what it does mean is the cost of your groceries, gasoline and everything else is going to go up. Your wages might but it is unlikely they will keep pace.
So the government doesn’t raise your taxes to get more money to waste, they print it and devalue what you have. Yes their money goes down too but then they have the printing press, not you.
How serious is this?
It isn’t possible to explain the consequences of this with being an alarmist. One man, George Soros, a billionaire currency speculator, is credited with destroying the British Pound. He has already stated that a gradual decline in the value of the dollar is desirable. If we continue to spend more than we have and promise to deliver more in entitlements than we can, the only way out is to devalue the currency to nothing and pay everyone the promised dollars which have no value. Picture the Confederacy handing out money to try to fund its army in the Civil war.
To gain a better perspective on how serious this is read “Federal Reserve Begins Massive Monetization of U.S. Government Debt” http://www.huffingtonpost.com/sheldon-filger/federal-reserve-begins-ma_b_677483.html. He comments “But this Federal Reserve monetary injection will be as beneficial as money printing was in Weimar Germany in the early 1920s, or Zimbabwe more recently.” These two nations experimented with demonetization to their destruction.
As an update, on his recent Asian trip and at the G20 Summit, President was criticized by Germany and several of the Asian countries for this program of intentionally devaluing the dollar.
Some of the effects of a “watering down the dollar” include:
The cost of everything goes up, possibly way up.
If you travel overseas your dollar won’t go very far and could even be refused as valid currency to pay for things in other countries.
The US dollar is the world’s “reserve currency”, we could lose this status and the market would then be flooded with dollars as the world shed their holdings. More US currency is held outside the US than is in circulation inside the US. This would represent a collapse of the dollar.
Who are the winners and who are the losers: Oddly there are some actual benefits although outweighed by the negatives.
People, businesses and even countries, who owe more money than they should, get to pay off their debt with worth less (not worthless, zero value, just worth less, a fraction of the original) dollars which are easier to come by.
The US gains an export advantage because our worth less money won’t buy much in the way of imports and our goods are perceived to be of greater value since other countries can buy our goods at a great discount. China has artificially restricted the value of it’s currency to keep this advantage but they use a different method. So our manufacturers can sell our goods oversees but the money they get isn’t worth as much as it used to be and the workers get paid in the less valuable dollars and can’t buy as much with them. This is like saying there is more work but you have to take a pay cut to get it.
This is probably very tempting to politicians. They can get rid of debt to everyone with worth less money. The Chinese get paid their interest on the T-bills with the less valuable currency but of course so do the American people who own T-bills. Don’t worry about a bankrupt Social Security System, we will give everyone just what is promised. We will just pay them off with money that isn’t worth as much. It is all a matter of printing more until we reach the levels we can afford. The Social Security recipient gets the exact amount of money promised, it just won’t buy what it should. This is one way politicians don’t have to face an angry voter block and tell them the truth about the whole system of Social Security and that for years they have been spending the money taken in and now they can’t pay it back.
To the individual, let’s say you are upside down in your mortgage. This fixes that. The house zooms up in value compared to the worth less money and you pay off the debt with those same worth less dollars. You get raises and the money goes down in value as fast as you get more of it. But what about all the Americans who are NOT upside down in their mortgages? They have little or no debt to pay off with the new less valuable currency so they go backwards and renters are blocked out of the market indefinitely.
People who gain:
- People who owe a lot of money, speculators who are highly leveraged.
- People who own or control a lot of assets other than cash, T-bills, CDs, etc. Even your toaster goes up in value compared to the dollar.
People who lose:
- The youth who have not yet had a chance to accumulate. This is the worst of it as it represents the destruction of the American Dream
- Everyone who was conservative in their finances. People with low debt and large savings in liquid assets.
- Older people on fixed incomes. This is the saddest of it as it lowers the standard of living for millions who are not able to do anything about it.
- All tax payers since they move into higher percentage brackets with their new inflated dollars.
So if you were reckless, like our government, you are rewarded. If you were careful, like most of the country, and paid as you went, you are penalized. If you were too young to have participated your are closed out. As Ray Charles said “If only them that’s got is them that gets, how you get the first is still a mystery to me.”
Of course, like everything else bad, this could never happen here.