You Call It Inflation, I Call It Theft

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On my daughter’s birthday, she received a crisp new $5 bill, which she promptly deposited in her piggy-bank. Never foregoing an opportunity to expound on free market principles, I warned about her susceptibility to a subtle means of theft even more devious than a burglar breaking in at night against whom you might get a clear shot.

Usually, when she asks why it’s, “Because I told you so!” But for inflation, because Washington wills it, that explanation hardly suffices. And as often as economic prognosticators prescribe currency debasement as some miraculous panacea, her question is a good one. Why do we suffer inflation?

I searched online for “benefits of inflation.”

Inflation Spurs Growth – The theory goes something like this: Since savers realize the value of their money will erode, they spend more quickly thus stimulating the economy. If we believe tomorrow brings higher prices, we buy today. Basically, we spend before the monetary authorities steal our money’s value. Hmm.

The proponents of consumption-based stimuli overlook the essentiality of saving. While burying your money in the ground wastes its talents, most save via bank accounts or through the purchase of capital assets. Thus saving makes investment capital available for new businesses hiring new workers and creating new products that sustain and beautify life. The accumulation of capital drives growth.

Inflation discourages saving. Inflation buries capital into the ground as people flee toward real estate as a protective hedge. Inflation stymies growth.

Inflation Decreases Debt Burdens – If we borrow say, $14 trillion and then cheapen our debt through dollar devaluation, the repaid lenders can’t buy as much thanks to diluted dollars being returned to them. Inflation essentially harms savers for the benefit of borrowers. Every dollar borrowed requires a dollar saved. The economy gains nothing by such mischief.

Generally, borrowers aren’t responsible for this debauchery so it’s not fair to label it theft. In government’s case, dilapidated debts at least rise to the level of fraud. Why does Washington willfully reward the profligate by cheating the prudent? Ah yes, because they exude profligacy.

Inflation Increases Asset Values – As the dollar falls, the price of our assets raises commensurately. Stocks, real estate, etc. surge. That sounds wonderful, but their value increases against what? Since the prices for everything else rise too all we’ve secured is a nominal gain for tax collectors to confiscate. We derive no real benefit.

A stock that cost $20 thirty years ago would need to fetch over $50 today just to match the CPI, understated as it remains. If it now costs $40, you pay the IRS on the $20 nominal gain even as your stock actually lost value. Washington thus rewards itself for its own reckless monetary policy. The more they inflate, the more they take.

A similar phenomenon nails your wages. As your salary increases, you pay more taxes even as you can afford less. A two percent raise increases your tax bill two percent, but if prices also rise only the IRS derives any benefit.

Inflation Offsets Unemployment – The Philips Curve, the illusion that increasing inflation decreases unemployment, remains a staple of macroeconomics even as few still publicly acknowledge its role. Bernanke, Geithner et al remain smitten by the Philips Curve.

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