Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

3 Ways Inflation Destroys an Economy

Economics / Inflation Sep 03, 2013 - 06:06 AM GMT

By: Richard_Moyer

Economics

If Batman has the Joker, I have inflation. Inflation, my great and worthy opponent, has shown me yet another side of his wicked, wealth-destroying ways. Let's have a look.


1. Inflation is a Double Stealth Tax

Inflation is sometimes called a "stealth tax", as people are robbed of their savings and pensions by their government without any notice. It is more than that, it is a double stealth tax. Here's how.

Imagine 6% inflation, understated as 2%. Imagine further that a $100 investment grew by 4% and you paid 25% tax.

  • On paper, you made $4.
  • After taxes, you kept $3.
  • According to official inflation, you made $1.
  • In reality, you lost $3.

You made money on paper, and you paid taxes on that paper profit, but in reality, the government robbed you twice, by taxation and by inflation. Even more insidiously, if not for inflation hiding the loss, you would have been able to write off the loss. Instead you get stuck with a tax bill for losing money. In this particular case, inflation is a triple stealth tax.

2. Inflation Punishes Productive Activity

Imagine you're in Serbia in 1993, and you bought a sack of corn for 1 dinar. It increases in price by a factor of 100 after six months. Imagine further that your neighbor grew corn at a cost of 1/2 a dinar a bag. When you go to sell your corn, both you and the farmer gross 100 dinars. You net 99 and he nets 99.50. Because of inflation, the productive activity of growing corn and the useless activity of hoarding it are indistinguishable in terms of profit. In going through all the trouble of actually producing corn, your neighbor made an extra half percent.

Furthermore, imagine the double stealth tax penalty you and your neighbor would pay on that 10,000% paper profit.

Because of these perverse incentives, when inflation gets high enough, people abandon most productive activity. This exacerbates inflation further, since fewer goods are being produced, driving prices up further, which encourages even more hoarding.

3. Consistent Inflation Encourages Speculators


Sitting on resources isn't only profitable when inflation is ultra-high. Speculators the world over borrow money to amplify the profits of even small increases in price. The small, consistent increases in price created by modest inflation can be exploited by speculators with access to cheap credit from central banks like the Federal Reserve.

Imagine a megabank buys $1.5 billion in oil futures, and the price of oil goes up 3% due to inflation. If the bank is leveraged 15 to 1, as is legal, they can control $1.5 billion of oil while only using $100 million of their money (generally the customer's money). As the price of oil inflates 3%, the bank makes $30 million in profits after paying 1% interest on the loan. All for doing nothing.

Because interest rates available to megabanks are well below the rate of inflation, and the money printers have essentially guaranteed that inflation is here to stay, futures contracts win more than they lose. If inflation were zero, futures would trend slowly downward as industry becomes more productive and efficient, so speculation wouldn't be nearly so attractive.

Because of inflation, sitting on resources is often equally or more profitable than actually producing them, especially because of the favorable tax status afforded to "investments". Steady growth in the financial sector, accompanied by a steady contraction of the manufacturing sector is the harvest we reap when we inflate our currency.

Inflation is the Enemy

The power to counterfeit money is never beneficial to anyone but the counterfeiters and their friends. Anyone who says otherwise is either misguided or dishonest. To imagine that by creating excessive taxation, confusing fair assessments of value, stealing people's savings and promoting non-productive speculation on a grand scale might somehow benefit society at large is to deny the entire history of paper money and its grievous consequences.

Richard Moyer

http://shadesofthomaspaine.blogexec.com

© 2013 Copyright Richard Moyer - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in