Sunday, March 08, 2009
The problem and promise of inflation
I am sitting by Baggage Claim 2 (Area A) in Orlando's airport, waiting for the rest of the TigerHawk family to show up, they having taken a slightly later flight than me (long story, but it involves frugality). On the way down I read the first 100 pages or so of George Cooper's fascinating book The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy
I'll write more on the book later -- it made me realize that the regulation of financial markets defies the usual libertarian/regulation dichotomy -- but I did want to note this crisp aside for those of you who are too young to remember the 1970s:
The modern taxation system is tremendously efficient. First you're taxed when you earn money (income tax) and then again when you spend it (value added or consumption tax). But between what you earn, after tax, and what you spend there is occasionally a bit left over, which we call savings, and without inflation governments can find it very difficult to help themselves to this bit in the middle. However, with inflation, a whole realm of taxes on savings becomes viable.
You have to wonder whether that is part of the plan.
12 Comments:
By 
Who Struck John, at
Sun Mar 08, 07:24:00 PM:
No, no you really don't (have to wonder whether that's part of the plan). Inflation, after all, is a very difficult tax to evade ...
By 
, at
Sun Mar 08, 07:46:00 PM:
All I know is that if I owed a whole lot of money and could print it with impunity, I think I just might come up with a plan to pay off my debts come hell or high inflation.
By Mrs. Davis, at
Sun Mar 08, 07:48:00 PM:
Some old guy said inflation was the cruelest tax of all.
In thinking about the coming inflation, I have wondered a lot about the decision in the 20th century to bias the currency toward debasement via inflation as opposed to constancy. I suspect a major contributing factor was the extension of consumer credit.
The first major use of consumer credit, I believe, was by the farm implement dealers. In the later 19th century, deflation was a frequent problem and exacerbated the farmers' debt problems as it has now for most of us. Farmers were not happy with their debt.
With the coming of the Federal Reserve, World War I and the mass purchases of automobiles on credit, we were locked into inflation. So the Great Depression was made Great by the decision that wages could not be allowed to fall, as they had in every previous contraction. The only way left to accommodate the fallen real value of labor was to inflate the currency while nominal wages remained constant. Money became a veil.
Perhaps I learned this in an economics class once. It didn't make sense till now. In any case, I'm not sure we're better off for it.
By , at
Sun Mar 08, 08:00:00 PM:
You are correct on the origins, Mrs D. Since there's never a bad excuse to link to the Cross of Gold speech, I'll do so here:
Bryan’s “Cross of Gold” Speech: Mesmerizing the Masses
Maybe our friends from YouTube could even learn something from it.
By MainStreet, at
Sun Mar 08, 08:46:00 PM:
Everyone asks how Obama is going to pay for his programs. As you can see. he can't tax it away, so he might as well make everyone's savings disappear thru hyper-inflation.
By , at
Sun Mar 08, 09:07:00 PM:
Here's where I part with the estimable Mr. Bryan: "The income tax is a just law. It simply intends to put the burdens of government justly upon the backs of the people. I am in favor of an income tax. When I find a man who is not willing to pay his share of the burden of the government which protects him, I find a man who is unworthy to enjoy the blessings of a government like ours."
Well, I agree with the "on the backs" part. But I've trod this blue orb for 53 years and during darn little of that time have I felt the Federal government was "protecting" me - unless you mean "protection" in a Tony Sporano Wise-Guy way. And I never once felt this "government like ours" had anything to offer in the way of "blessings".
The combination of a Central Bank issuing fiat currency and a legislature full of non term-limited individuals who pursue "public service" as a life-long career is among the greatest threats to liberty yet devised.
By , at
Sun Mar 08, 10:21:00 PM:
Aside from the idea that a big crisis can be a vehicle to pursue more "socialist" policies because the guise of emergency shortens the time frame of debate, I don't think there is a plan. Or if there is a plan it is simply to transform society.
I don't know what to call it when someone fails to see that the problem they were determined to solve is no longer the problem most in need of a solution.
M.E.
By Purple Avenger, at
Sun Mar 08, 11:00:00 PM:
I don't know what to call it when someone fails to see that the problem they were determined to solve is no longer the problem most in need of a solution.
I'd call it stuck on stupid.
By SR, at
Sun Mar 08, 11:50:00 PM:
REmember the last episode of TH TV?
Victor Davis Hanson addresses it this way:
Stop the dissimulation. Your plan might work for a while given the incineration of trillions in stock and home equity and the need for replacement cash, but its revenue-raising component is not just aimed at the miniscule number of “rich,” which you imply to the American people are flying the skies of America in private jets while being unpatriotic in avoiding taxes and violating regulations.
In fact, for your plan to succeed, you must go after the upper, upper middle-class, those making between $250,000 and $600,000 who are restaurant owners, home builders, labor contractors, architects, surgeons, engineers, hospital executives, college administrators, Ivy-League law professors, and many dentists.
These households are wealthy, yes; but they don’t own or even fly on $50 million private jets or host private Super Bowl parties. Their income is all reported, and with such good salaries come high insurance and, in the case of business, constant reinvestment and expensive inventories. They are not greedy, but the bulwark of the United States’ productive classes who in aggregate pay over 40% of the collective income taxes, and provide most of the jobs in the country. Under your plan many in these high-tax states will pay nearly 70% of their incomes in FICA, Medicare, federal income, and state income taxes. Why gratuitously mislead the American people that those for whom you will lift FICA ceilings or up their IRS bites to 40% are in any way synonymous with the super-rich? Remember the very, very wealthy voted overwhelmingly in your favor precisely because their riches gave them immunity from high taxes, and in many cases they were far removed from the everyday risk and worry of owning a hardware store or trying to keep together a family-owned construction firm. George Clooney is a world away from a paving contractor, just as making $400,000 a year on call 24/7 is not quite making $40 million investing or $2 million for a cameo.
So please no more intellectual dishonesty, Mr. President. Those in great numbers who will pay your higher taxes are not really the rarer Warren Buffets, Bill Gateses, Diane Feinsteins, Teresa Heinz Kerrys, Sean Penns, George Soroses, Oprah Winfreys, or Tiger Woodses, whose mega-wealth really does result in private jet rides, and yet exempts them from worries that increased taxes might wreck their small businesses.
By Gary Rosen, at
Mon Mar 09, 05:29:00 AM:
"So please no more intellectual dishonesty, Mr. President."
Isn't it a bit too much to ask, that BO give up the very thing that got him where he is today?
By Doug Muder, at
Mon Mar 09, 09:17:00 AM:
TH:
A bit off topic here, but I would love to here your reaction to Eric Beinhocker's recent book The Origin of Wealth.
It's about what he calls "complexity economics" -- changing the underlying model of economics from the fluid-seeking-equilibrium model to an evolving-complex-system model, where the mathematics is more combinatorial and less calculus-based.
The gist is that complex adaptive systems are just weirder than equilibrium systems, and things like the efficient-market hypothesis go out the window.
By , at
Mon Mar 09, 09:57:00 AM:
The main objective of Obama and the people who own him is to destroy the middle class in America. The easiest way to do that will be the roaring inflation that will certainly follow his drunken spending. All dollar based assets will be worth pennies (if that) on the dollar. Income streams (except for government employees whose incomes will be indexed to inflation) will not buy anything.
The bare necessities of life, food, power, water, etc. will be controlled by government pols. Private property, mostly houses and vehicles will be bought up by the government (and their friends) and "resold" to truly deserving folks.
