Best of the Week
Most Popular
1.China Crash, Greece Collapse, Harbingers of Stock Market Apocalypse Forecast 2015? - Nadeem_Walayat
2.Gold Price Awaiting Outcome of Greece Crisis - Clive_Maund
3.Gold Price Peculiar 6 Month Cycles - Rambus_Chartology
4.Gold Price Just a Little Bit More - Bob_Loukas
5.8 Unprecedented Extremes Indicate a Stock Market Bubble in Trouble - EWI
6.Gold And Silver – Without Either, You Will Be Greeced - Michael_Noonan
7.Lies, Damned Lies and Statistics - James_Quinn
8.China Crash, Greece Crisis Harbingers of Stocks Bear Market? Video - Nadeem_Walayat
9.Gold and Silver Record Shorting - Zeal_LLC
10.Markets Big Deflationary Downwave Quick Reference Guide... - Clive_Maund
Last 5 days
Will Chinese Stock Market Crash Affect the US? - 27th July 15
Crude Oil Price Under $48! - 27th July 15
Are We Seeing a Trend Reversal with U.S. Interest Rates? - 27th July 15
How to Know When the Gold Bear Market is Over - 27th July 15
Gold Bear Market Phase III - 27th July 15
Silver Bull Hammer Buy Signal - 27th July 15
Gold Cracks Support and Plunges to New Lows - How Low Will Price Go? - 27th July 15
Commodity Markets Breakdown Of 2015 Is Now A Fact - 26th July 15
Gold Price at a Five-Year Low: Here’s What to Do - 26th July 15
Stock Market Primary III Inflection Point - 26th July 15
Central Banks and Our Dysfunctional Gold Markets - 25th July 15
Gold And Silver - The US Dollar Does Not Exist, Part II - 25th July 15
How Wall Street Put Apple Stock in Animal House - 25th July 15
How to Trade Markets Using the Stochastic Oscillator - Video - 24th July 15
A Bond Market Crisis Is Coming... Here's What to Do - 24th July 15
Why There's Resistance to the Iran Nuclear Deal - 24th July 15
Absurd Gold Stock Levels - 24th July 15
Gold Mining Stocks Nearing Rebound - 24th July 15
Misperceptions Create Significant Bond Market Value - 24th July 15
Commodities Distressed Investing - 24th July 15
OPEC Shorts Are Driving Down the Crude Oil Price - 24th July 15
USD Index Rebounds - 24th July 15
If You’re Worried About a Tech Bubble, You’re Focusing on the Wrong Thing - 24th July 15
Gold Stocks Bear Market Bottom Buying Opportunity? - Video
The Stealth War on the United States - 23rd July 15
Commodity Prices, Gold and Silver Stocks Next Leg Down - 23rd July 15
The ‘Real’ Reason the Fed Wants to Raise Interest Rates - 23rd July 15
Crude Oil Price Slump is a Once in a Decade Opportunity to Make Money, Guaranteed - 23rd July 15
Gold Price Hits a 5-Year Low: How to Time the Next MAJOR Bottom - 22nd July 15
Silver and the Deflation Thesis - 22nd July 15
Gold Price Crash - Trend Forecast 2015, Gold Stocks Buying Opportunity? - 22nd July 15
The Three Reasons Behind Iran’s Resistance to the Nuclear Deal - 22nd July 15
Winning the Hunger Games - How to Choose Successful Agriculture Investments - 22nd July 15
Are Free Markets The Solution? - 22nd July 15
Gold Hammered “Unprecedented Attack” - 21st July 15
The Turkish Enigma - 21st July 15
Gold and Silver: The Final Capitulation Commences - 21st July 15
Greater Israel Setback from Iranian Nuclear Agreement - 21st July 15
U.S. Housing Market: Is the Roof About to Cave In (Again)? - 21st July 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stock Market Bubble in Trouble

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.


© 2005-2015 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

Biggest Debt Bomb in History