Best of the Week
Most Popular
1.The Brexit War! EU Fearing Collapse Set to Stoke Scottish Independence Proxy War - Nadeem_Walayat
2.London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - Nadeem_Walayat
3.The BrExit War, Game Theory Strategy for What UK Should Do to Win - Nadeem_Walayat
4.Goldman Sachs Backing A Copper Boom In 2017 - OilPrice_Com
5.Trump to Fire 50 US Cruise Missiles To Erase Syrian Chemical Attack Air Base, China Next? - Nadeem_Walayat
6.US Stock Market Consolidation Time - Rambus_Chartology
7.Stock Market Investors Stupid is as Stupid Goes - James_Quinn
8.Gold in Fed Interest Rate Hike Cycles- Zeal_LLC
9.The BrExit War - Britain Intelligence Super Power Covert War With the EU - Nadeem_Walayat
10.Marc Faber: Euro to Strengthen, Dollar to Weaken, Gold and Emerging Markets to Outperform - MoneyMetals
Last 7 days
Elliott Wave Theory: Is Elliott’s Theory Enough? - 27th Apr 17
Billionaire Investor Paul Tudor Jones Says Stock Market Valuation Is “Terrifying” And He Is Right - 26th Apr 17
The Great BrExit Divides - Britain, USA and France - 26th Apr 17
10 Facts That Show Our Taxes Are Worse Than You Thought - 26th Apr 17
What Trump’s Next 100 Days Will Look Like - 26th Apr 17
G20: SURPASSING THE 2nd GLOBAL STEEL CRISIS - 26th Apr 17
What A War With North Korea Would Look Like - 25th Apr 17
Pensions Are On The Way Out But Retirement Funds Are Not Working Either - 25th Apr 17
Frank Holmes : Gold Could Hit $1,500 in 2017 Amid Imbalances & Weak Supply - 25th Apr 17
3 Reasons Why “Spring Forward, Fall Back” Also Applies To Gold - 25th Apr 17
SPX may be Aiming at the Cycle Top Resistance - 25th Apr 17
Walmart Stock Extending Higher - Elliott Wave Trend Forecast - 25th Apr 17
Google Panics and KILLS YouTube to Appease Mainstream Media and Corporate Advertisers - 25th Apr 17
Gold Price Is 1% Shy of Ripping Higher - 25th Apr 17
Exchange-Traded Funds Make Decisions Easy - 25th Apr 17
Trump Is Among The Institutionally Weakest National Leaders In The World - 25th Apr 17
3 Maps That Explain the Geopolitics of Nuclear Weapons - 25th Apr 17
Risk on Stock Market French Election Euphoria - 24th Apr 17
Fear Campaign Against Americans Continues Nuclear Attack Drills in New York City - 24th Apr 17
Is the Stock Market Bounce Over? - 24th Apr 17
This Could Be One Of the Biggest Winners Of The Electric Car Boom - 24th Apr 17
Le Pen Shifts Political Landscape- The Rise of New French Gaullism  - 24th Apr 17
IMF Says Austerity Is Over - Surplus or Stimulus - 24th Apr 17
EURUSD at a Critical Point in Wave Structure - 23rd Apr 17
Stock Market Grand Super Cycle Overview While SPX Correction Continues - 23rd Apr 17
Robert Prechter Talks About Elliott Waves and His New Book - 23rd Apr 17
Le Pen, Melenchon French Election Stock, Bond and Euro Markets Crash - 22nd Apr 17
Why You Are Not An Investor - 22nd Apr 17
Gold Price Upleg Momentum Building - 22nd Apr 17
Why Now Gold and Silver Precious Metals? - 22nd Apr 17
4 Maps That Signal Central Asia Is at Risk of War - 22nd Apr 17
5 Key Steps For A Comfortable Retirement From Former Wall Street Trader - 22nd Apr 17
Can Marine Le Pen Win? French Presidential Election Forecast 2017 - 21st Apr 17
Why Stock Market Investors May Soon Be In For A Rude Awakening - 21st Apr 17
Median US Household’s Wealth Has Declined by 40% Since 2007 - 21st Apr 17
Silver, Platinum and Palladium as Investments – Research Shows Diversification Benefit - 21st Apr 17
U.S. Stock Market and Gold, Post Tomahawks and MOAB - 21st Apr 17
An In Depth Look at the Precious Metals Complex - 20th Apr 17
The Real Story of China’s Strong First-Quarter Growth - 20th Apr 17
3 Types Of Life-Changing Crisis That Make You Wish You Had Some Gold - 20th Apr 17
The Truth is a Dangerous Thing - 20th Apr 17
2 Choke Points That Threaten Oil Trade Between Persian Gulf And East Asia - 20th Apr 17

Market Oracle FREE Newsletter

Why 95% of Traders Fail

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.


© 2005-2016 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

Catching a Falling Financial Knife