WHY IS INFLATION A TAX? — PART 3

Four Horsemen of the Apocalypse, an 1887 painting by Viktor Vasnetsov. From left to right are Death, Famine, War, and Conquest; the Lamb is at the top. (from here (en.wikipedia.org))

Here is the third post in this series.

  • Part 1: Introduction
  • Part 2: How Much Money Do Our Leaders Want To Spend?

In this post we will consider why inflation seems to be such a complicated matter.

What Additional Factors Can Produce Inflation?

As we observed Part 1, inflation results when the money supply increases faster that the overall supply of goods and services. What does that mean? Well, even though the study of economics involves a lot of mathematics we don’t have to be mathematicians to understand the basic issues, but we do need to understand the terminology. So, here is some important jargon.

  • The money supply is the total amount of money—cash, coins, and balances in bank accounts—in circulation.
  • The overall supply of goods and services is the sum of what people are willing to sell.

Neither the money supply nor the overall supply of goods and services can be measured precisely. In fact, we measure the supply of goods and services according to their monetary value. An example of how this is done is the Gross Domestic Product (GDP) (investopedia.com). Therefore, if the value of our currency is not constant, that makes the accuracy of GDP a bit suspect.

Of course, inflation (or deflation) means we have trouble keeping the value of our currency constant. That is why we have The Federal Reserve System (Fed), the central bank of the United States. The Fed’s primary job is to conduct the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy, that is, maintain the stability of our currency so we can conduct business with each other.

As we observed in Part 2, big spending, power hungry politicians serve as the primary obstacle to a stable currency. Ever growing spending constantly drives up the money supply, but what else can cause inflation?

  • Four Horsemen of the Apocalypse: Death, Famine, War, and Conquest.
  • Supply shortages.
  • Labor shortages.
  • Interest rate increases and reductions.
  • Consumer optimism and hysteria.
  • Social instability
  • Fed manipulation.

Four Horsemen of the Apocalypse. Little grim humor here. Why the Four Horsemen of the Apocalypse? Economic shortages result when chaos ensues. Epidemics, weather extremes, crop failures, military actions, political turmoil and so forth all result in supply chain problems. Consider what has happened in recent years:

  • COVID-19. The lockdowns caused labor shortages and severely changed people’s buying habits.
  • Hurricanes in the Gulf of Mexico knocked temporarily out oil wells and refineries cause oil prices to rise.
  • Locust plagues in Africa destroyed crops.
  • Russia’s invasion of Ukraine has caused oil and grain supply shortages.
  • China’s takeover of Hong Kong, even though it was unopposed, caused havoc in once prosperous Hong Kong.

Supply shortages. Supply shortages don’t have to arise from Death, Famine, War, and Conquest. Government action, such as that caused by the Biden administration’s regulatory assault on the fossil fuels industry has cause severe rises in fuel prices that began well before Russia’s invasion of Ukraine. Since the fossil industry clearly has the capacity to buy votes, we probably have a somewhat exaggerated notion of how badly our fossil fuels industry is being hurt by Biden administration. Nevertheless, legislative battles over what led to the so-called “Inflation Reduction Act” clearly showed that Democrats are tax happy. Furthermore, Democrats have promised us that energy prices will go up, and they have gone up.

Labor shortages. Labor shortages can arise because of government action as well. Our government continued paying people not to work even after it was shown the threat from COVID-19 was exaggerated.

Interest rate increases and reductions. The Fed exercises considerable control over interest rates. Low interest rates encourage people to borrow money and spent it, effectively putting more money in circulation. That creates inflationary pressures.

Think about this fact carefully. Money that is not being spent is not being circulated. Therefore, money that is not being spent is effectively not part of the money supply. That is why the Fed is currently raising interest rates, to discourage borrowing and spending and reduce the money supply. Unfortunately, reduced spending is equivalent to a decrease in demand. That means, because fewer people are buying anything, fewer workers are needed to produce goods and services. That is, when interest rates rise, the GDP goes down and vice versa.

Consumer optimism and hysteria. To some extent, our expectations drive economic activity. If we reduce our spending because we don’t feel secure in our jobs, we will effectively reduce the money supply and reduce the rate of inflation. On the other hand, if we expect inflation and we want to spend our money before it becomes worth less, we will increase the money supply and thereby encourage inflation.

Social instability. People don’t invest, work, or buy when and where they don’t feel safe. Unfortunately, government actions related to and following the George Floyd riots in 2020 have created considerable instability in our inner cities. Because of the support of many big city mayors, rioters caused considerable loss of life and property damage. Defunding the police caused a shortage of law enforcement officers, decreasing the likelihood law breakers, including violent rioters, would be caught and punished. Furthermore, in many blue states and cities, some district attorneys are still making relatively little effort to enforce the law, further encouraging criminals.

The Biden administration’s refusal to enforce our border is creating even more social instability. That has led to increases in the numbers of terrorists and criminals within our country. Drug crime is increasing as evidenced by the statistics on drug overdoses. Human trafficking, especially forced labor, is also on the increase.

Fed manipulation. Since the Fed controls interest rates and regulates our banking system, confidence in the Fed is critical to the confidence in the dollar. That is, if we lack confidence in the Fed, we will lack confidence in the dollar, and the dollar will lose value. Conversely, if we have confidence in the Fed, the dollar will tend to gain or least retain its value.

Our confidence in the Fed is related to our confidence in the Federal Government in general. If we reach the point we don’t trust our leaders to do their jobs. we won’t trust the dollar.

One thing that is weird about the Fed is that it does not actually shoot for zero inflation. Instead, the Fed shoots for 2% annual inflation. Fed board members believe that a little inflation stimulates the economy. So, don’t expect the Fed to bring inflation to a complete halt.

The moral factor. Because we have let our leaders buy our votes — because we have voted with our personal pocketbooks — we have put into public office, even the highest office in the land, people who can be bought. We need to do our best to lawfully remove these people from office. Understand, however, our crooked elected officials will do whatever they can to retain power and not just because they are greedy for power. If the truth comes out and finds its way into a courtroom, these people probably have good reason to fear going to jail.

Additional References

11 thoughts on “WHY IS INFLATION A TAX? — PART 3

Add yours

  1. Tom
    Ironically, the poor voted for a Democrat Biden and inflation is their reward,
    While both rich and poor are affected detrimentally by inflation, the poor are hurt more than the rich/
    For example, the poor rent goes up and most poor do not get automatic wage adjustments for inflation.
    The prices for new cars go op along with services mainly purchased by rich than the poor.
    And ironically, most of the poor will blame the rich Republicans for inflation when they vote because that is what the media has indoctrinated them to believe instead of all the reasons in your post.
    Regards and goodwill blogging.

  2. Something that I think many people don’t understand, in the US we only tax earned income. That is stuff like wages, profits, gains, and interest. So one can be a millionaire and pay no taxes at all if one’s money is not doing anything but sitting there. This is why “tax the rich” is such an oxymoron. We don’t tax people’s wealth, we tax their earnings.

    If everything is paid for and you have enough money and stuff, you don’t have to buy anything at all so inflation won’t really affect you. Inflation becomes a “tax” on the working class and poor, because they have to continue to buy stuff like gas and groceries. Often they have to take a second job or work longer hours which also increases their fed tax bracket.

    So “spend more money” and “tax the rich” are kind of like running around with a “kick me” sign on your back and almost no one seems to understand this truth.

    1. insanitybytes22

      I don’t think most people understand the difference between taxing property and earned income. That is something I will discuss in Part 5. I will have to quote your comment,

  3. How about when the Spaniards began returning with all that gold from the America’s? The ensuing inflation turned a global empire into a European backwater with sunny shores.

    1. Well, they did discover a lot of gold, and that was the currency of the day. So, what they discovered wasn’t worth as much because they did discover so much. But that hurt other kings more than it hurt the King of Spain.

      The problem that Spain had was that they mismanaged that abundance of wealth. The nobles of Spain invested poorly whereas the businessmen of the British Isles invested relatively well.

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