An economics lesson from Ron Paul: Inflation is theft

[sailingaway]

http://communities.washingtontimes..../2/economics-lesson-ron-paul-inflation-theft/

 

[ababba]

The argument is often not correctly stated. Inflation is a tax more on holdings of currency. Rates of return on savings invested increase with the rate of expected inflation.

Of course the biggest holders of US currency are foreigners and criminals. It doesn't seem terrible to have a moderate tax of foreigners and criminals.

 

[Tyler_Durden]

"Once inflation is recognized as a tax, it becomes clear the tax is regressive: penalizing the poor and middle class more than the rich and politically privileged." - Ron Paul, April 25, 2006

 

[ababba]

"Once inflation is recognized as a tax, it becomes clear the tax is regressive: penalizing the poor and middle class more than the rich and politically privileged." - Ron Paul, April 25, 2006

That's just not true. The rich hold much more currency than the poor. In addition, the biggest holders of currency are foreigners and criminals. Even if you believe inflation is a tax on savings, the poor do not save very much, even as a fraction of their income. Instead, they tend to have a lot of debt. Inflation can often be good for people with a lot of debt if the inflation is unanticipated.

 

[Jovan Galtic]

That's just not true. The rich hold much more currency than the poor. In addition, the biggest holders of currency are foreigners and criminals. Even if you believe inflation is a tax on savings, the poor do not save very much, even as a fraction of their income. Instead, they tend to have a lot of debt. Inflation can often be good for people with a lot of debt if the inflation is unanticipated.

Huh, not true.

First, the rich are first to get new currency while prices are still not inflated. Second, they keep most of their wealth in assets - companies, real estate etc. - which don't lose value. If careful, not even they are not hurt by monetary inflation, they can gain a lot from it (especially if close to the gov).

 

[sailingaway]

Huh, not true.

First, the rich are first to get new currency while prices are still not inflated. Second, they keep most of their wealth in assets - companies, real estate etc. - which don't lose value. If careful, not even they are not hurt by monetary inflation, they can gain a lot from it (especially if close to the gov).

also, the poor are already at subsistence level, and dependency is not a dignified alternative.

 

[Crystallas]

Huh, not true.

First, the rich are first to get new currency while prices are still not inflated. Second, they keep most of their wealth in assets - companies, real estate etc. - which don't lose value. If careful, not even they are not hurt by monetary inflation, they can gain a lot from it (especially if close to the gov).

QFT

 

[Jovan Galtic]

Here is one interesting interview:



Notice how it always goes together with wars and destruction.

 

[ababba]

Huh, not true.

First, the rich are first to get new currency while prices are still not inflated. Second, they keep most of their wealth in assets - companies, real estate etc. - which don't lose value. If careful, not even they are not hurt by monetary inflation, they can gain a lot from it (especially if close to the gov).

The Federal reserve exchanges money for bonds so getting the money first is a joke because the bank that got the money gave up a bond that they were willing to either buy or sell within a very narrow range of basis points. Its not like the money is just given away. It is exchanged for an asset that the bank is willing to buy or sell.

The poor simply do not hold nominal bonds, but hold a lot of nominal debt. Your arguments about the assets of the rich explain why the rich are not hurt as much as they could be by inflation. It doesn't explain why the poor are hurt. They aren't because they don't hold much currency and they hold a lot of nominal debt.

Foreigners and criminals are hurt the most by inflation. No one ever responds to this point.

 

[Jovan Galtic]

Poor earn, for example, $1,000 each month and spend most of it on basic necessities like food, gas etc. Now imagine what happens if gas gets to $100/g and milk to $50/g. I would say that hurts...

It is true that foreigners would get hurt and they would be very pissed. I am not that worried about criminals, they will be first to switch to alternative currencies and take over the emerging black market.

I am not an expert though, just have some real life experience living through a somewhat similar events as my brother Milos explains in the video above.

 

[G-Wohl]

The poor simply do not hold nominal bonds, but hold a lot of nominal debt. Your arguments about the assets of the rich explain why the rich are not hurt as much as they could be by inflation. It doesn't explain why the poor are hurt. They aren't because they don't hold much currency and they hold a lot of nominal debt.

Foreigners and criminals are hurt the most by inflation. No one ever responds to this point.

What does it matter how much currency the poor hold? The currency that the poor *do* hold is still losing value, and that is going to be, dollar for dollar, a lot more of a hit to them than to a wealthy individual who has a diversified investment portfolio.

Your point about "foreigners and criminals" being hurt most by inflation is really not something that can be responded to; it's a subjective statement that borders on anti-conceptual. I would argue that "criminals," such as drug dealers who are capable of holding huge amounts of cash, are usually funneling those earnings into what are commonly referred to as "fronts" .... other businesses or ventures that make their earnings look normal to the IRS. And foreigners don't *have* to use USD-denominated assets as investment tools, whereas Americans are forced to use the greenback to make their purchases. And it is, of course, the standard by which we assess all value in our country - by law. So I suggest that the people who get "hurt most by inflation" are those Americans whose savings are denominated in USD at American banks. Poor and middle class Americans fall under this broad category more-so than foreign investors or powerful criminals.

 

[socal]

ababba

Your analysis is too simplistic. Total US currency in circulation is only about $1 trillion, but marketable Treasury debt is about 10 times as large, and the yield on short term Treasuries is close to zero. So fixating on currency is not the correct approach.

Secondly interest rates are being suppressed by the Federal Reserve and savers are not getting a fair return on any instrument tied to Treasury yields.

It's not useful to make a comprehensive list of all the winners and losers, but the big banks with access to zero interest rate loans who then buy higher yielding Treasuries are making risk free profits. And the bank bondholders who got bailed out were obviously winners. People with knowledge and capital who have access to inexpensive credit can also make a decent return. Losers would include the elderly on social security whose payments are not keeping up with inflation, debtors who lost their homes, and the poor with high interest rate credit card debt.

Daniel Amerman has some good articles explaining what's going on in more detail, here's one:

Financial Repression: A Sheep Shearing Instruction Manual
http://danielamerman.com/articles/2011/RepressionA.htm

As we will explore in this article, the essence of Financial Repression is using a combination of inflation and government control of interest rates in an environment of capital controls to confiscate the value of the savings of the world's savers. Rephrased in less academic terms - the government deliberately destroys the value of money over time, and uses regulations to force a negative rate of return onto investors in inflation-adjusted terms, so that the real wealth of savers shrinks by an average of 3-4% per year (in the postwar historical example), and it uses an assortment of carrots and sticks to make sure investors have no choice but to accept having the purchasing power of their investments shrink each year...

In a theoretical world, some would say that governments can't inflate away debts because the free market would demand interest rates that compensate them for the higher rate of inflation. Sadly, this theoretical world has little to do with the past or present real world...

 

[Danan]

The Federal reserve exchanges money for bonds so getting the money first is a joke because the bank that got the money gave up a bond that they were willing to either buy or sell within a very narrow range of basis points. Its not like the money is just given away. It is exchanged for an asset that the bank is willing to buy or sell.

The poor simply do not hold nominal bonds, but hold a lot of nominal debt. Your arguments about the assets of the rich explain why the rich are not hurt as much as they could be by inflation. It doesn't explain why the poor are hurt. They aren't because they don't hold much currency and they hold a lot of nominal debt.

Foreigners and criminals are hurt the most by inflation. No one ever responds to this point.

People on fixed income are hurt the most, because their income doesn't gow up with inflation (respectively: the adjustment always lacks a year behind).

Business owners are hurt less, since they can adjust their prices immediately when their costs go up. Although higher prices (while most costumers still have their old income) do affect them too because it lowers demand and thus decreases their profits.


In economics there are very few lose-lose-situations - so who's the winner of inflation?

In case of directly government driven inflation it are government contractors, workers and so on whose programms couldn't exist without inflation.

But that's not even very much compared with the most important factor that drives inflation - fractional reserve banking (which is in itself only "sustainable" through the FED and governmental deposit insurance) . And in this case the profiteers are the ones who get hold of the newly created money first. The banks themselves benefited from this method a great deal.

 

[tfurrh]

Inflation calculator: http://data.bls.gov/cgi-bin/cpicalc.pl

 

[ababba]

What does it matter how much currency the poor hold? The currency that the poor *do* hold is still losing value, and that is going to be, dollar for dollar, a lot more of a hit to them than to a wealthy individual who has a diversified investment portfolio.

Your point about "foreigners and criminals" being hurt most by inflation is really not something that can be responded to; it's a subjective statement that borders on anti-conceptual. I would argue that "criminals," such as drug dealers who are capable of holding huge amounts of cash, are usually funneling those earnings into what are commonly referred to as "fronts" .... other businesses or ventures that make their earnings look normal to the IRS. And foreigners don't *have* to use USD-denominated assets as investment tools, whereas Americans are forced to use the greenback to make their purchases. And it is, of course, the standard by which we assess all value in our country - by law. So I suggest that the people who get "hurt most by inflation" are those Americans whose savings are denominated in USD at American banks. Poor and middle class Americans fall under this broad category more-so than foreign investors or powerful criminals.

It matters that the poor never hold a large amount of assets relative to their income. Since they live month to month and never have a lot of savings, the inflation tax doesn't hurt them very much. We have to look at the people who have a large currency or checking account balance relative to their income.

 

[ababba]

ababba

Your analysis is too simplistic. Total US currency in circulation is only about $1 trillion, but marketable Treasury debt is about 10 times as large, and the yield on short term Treasuries is close to zero. So fixating on currency is not the correct approach.

Secondly interest rates are being suppressed by the Federal Reserve and savers are not getting a fair return on any instrument tied to Treasury yields.

It's not useful to make a comprehensive list of all the winners and losers, but the big banks with access to zero interest rate loans who then buy higher yielding Treasuries are making risk free profits. And the bank bondholders who got bailed out were obviously winners. People with knowledge and capital who have access to inexpensive credit can also make a decent return. Losers would include the elderly on social security whose payments are not keeping up with inflation, debtors who lost their homes, and the poor with high interest rate credit card debt.

Daniel Amerman has some good articles explaining what's going on in more detail, here's one:

Financial Repression: A Sheep Shearing Instruction Manual
http://danielamerman.com/articles/2011/RepressionA.htm

The interest rates are market clearing interest rates.

The Federal reserve sets the interest rate by adjusting the money supply to make markets for loanable funds clear at the interest rate they want. At that interest rate, there are no savers that want to save at that interest rate that cannot and their are no (risk adjusted) borrowers that want to borrow at that interest rate that cannot.

This is different than a price floor or ceiling on rents, when the government literally sets the price of rental housing. A price ceiling creates excess demand for housing. More people want housing than is supplied at the set price.

 

[The Gold Standard]

How much cash poor people "hold" is completely irrelevant. They are living paycheck to paycheck, which means every paycheck has value stolen from it, which is why they are hurt the most. It still doesn't matter. It is immoral to steal from poor and rich.

 

[NIU Students for Liberty]

It matters that the poor never hold a large amount of assets relative to their income. Since they live month to month and never have a lot of savings, the inflation tax doesn't hurt them very much. We have to look at the people who have a large currency or checking account balance relative to their income.

So the poor are not affected by rising prices, especially if they are living paycheck to paycheck with next to nothing in savings? Do they not purchase food, clothing, gas, etc?

 

[J_White]

this is good !

Inflation calculator: http://data.bls.gov/cgi-bin/cpicalc.pl

 

[thesnake742]

So the poor are not affected by rising prices, especially if they are living paycheck to paycheck with next to nothing in savings? Do they not purchase food, clothing, gas, etc?

I believe the rationale is that wages increase along with prices. So money earned always has a similar relative purchasing power, while it depreciates the longer you hold it.