INFLATION, THE HIDDEN TAX

by Lawrence Wilson, MD

© June 2007, The Center For Development

In his classic book, The Economic Consequences of the Peace (1920), John Maynard Keynes observed:

“Lenin (the founder of the former communist Soviet Union) was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose”.

Many people do not realize that inflation is with us, and it is an extremely destructive hidden tax, especially on the poor and middle classes. Inflation reduces the buying power of your money.

Suppose, for example, the inflation rate is 3.5%. If you have $30,000.00, in ten years it will only buy $20,550.00 worth of goods. If the inflation rate is 5.5%, (which is closer to reality, as inflation is often underestimated by the government’s measurements), your $30,000.00 is worth only $16,650 in ten years. This should be enough to scare anyone who is thinking about saving money or retiring soon. Let us explore what inflation is and why it is occurring.

WHAT EXACTLY IS INFLATION?

People believe that inflation is rising prices. That is not quite true. Inflation means there is more money out there chasing the same number of goods and services. As a result, the value of your money is diluted. One result is higher prices. However, there are many more negative consequences as well, as we will explore below.

Inflation is like if a person were to slowly add water to our gasoline. You might not notice the difference at first. But after a while, the gas would not power your car as well and eventually it would not work at all. Your gasoline would no longer have the value it had before.

So inflation is about damaging the money supply by diluting it. Since the money is diluted, it does not work as well and it takes more of it to buy things. For example, good, solid money 100 years ago could buy a nice house for about $20,000.00. Today, with the diluted money, it takes $200,000.00 or more to buy the same house.

This is the same as saying that with good gasoline, your car gets 30 miles to the gallon. But if you dilute the gas, it takes a lot more of it to drive the same distance, if it works at all. Higher prices is just a way we express that the diluted money of today does not buy as much.

INFLATION AS A HIDDEN TAX

Inflation is actually an old, secret method of taxing the people without their knowledge. This may sound strange because no one talks about inflation as a tax. However, I will explain.

When extra money is printed up and put into circulation, it costs the government very little. The only cost is that of printing. Each paper bill of any denomination from $! To $1,000 or more costs less than fifty cents to manufacture.

As a result, inflating the money by printing up too much is like getting free money for the government.

They can then lavish it on schools, roads, welfare, farm susidies, high salaries for government workers or anything else they wish. They just run the printing press and it suddenly exists. It seems like they can create value out of nothing. It is wonderful for the government, which is why most governments do it all the time. Most nations, by the way, do it far more than the United States. We are not used to inflation, but in other nations of Africa and Asia, it is business as usual.

However, printing too much money is not creating something out of nothing. This is why. If you pour water into your gas tank, it may seem like you are creating more gas out of cheap water. But you are not. You are just diluting the gas, which now will not work as well, if it works at all.

Instead, it dilutes all the money that is already in circulation, much of which is in people’s pockets. So the effects for the public is like diluted gasoline - none of the money is now worth as much. This is why inflation is a hidden tax.

Now, if the government gave its new printed money to each of us to spend, it wouldn’t be so bad. Then at least we would all have more of the diulted or less valuable money. But they do not do this, as a rule. They give it only to those people, companies or causes that they want to. Everyone else is just cheated out of some of their wealth.

This is indeed a sneaky way to tax people:

· It happens so slowly that few people see it.

· It is hidden, as there are no tax forms to fill out or taxes added to your purchases or phone bills.

· Unlike other taxes, no one seems to force you to pay up on April 15 or any other day

· People actually feel richer because often their salary and the price of their house goes up. In fact, many actually have more money, but of course all that cash is worth less. It is really just a compensation for inflation.

· Inflation does not require any new laws that people could debate and vote down. Thus it happens silently and secretly.

THE REASONS FOR INFLATION TODAY

Inflation is occurring for a number of reasons at this time (2008). These are:

1) Our government and many other governments are printing up a lot of new paper money. This is the major cause of inflation, as explained above. They used to publish the amount they print, but as of March 2006, the Federal Reserve announced they will no longer publish what is called M3, a key indicator of the money supply.

2) Higher fuel prices. A second reason for inflation, somewhat related to the first reason, is that the cost of energy has risen sharply in the past several years. This is due to

· A much greater demand for oil, coming mainly from Asia.

· A total ban on oil drilling and refining on American soil or waterways by Democrats in Congress.

· Fall in the value of the dollar against other currencies due to exporting our manufacturing so we have to import many goods today.

· Less cheap oil available in the world.

Higher oil, gas and even coal prices affect every good and service because we depend on fuel for heating, transportation, housing and all phases of making and distributing products we use every day.

This cost is passed on in the price of goods and services. Eventually, we will find new sources of energy. However, for now we are stuck with the old methods, and new ones will take years to develop. Fortunately, as the price of oil rises, there is more and more incentive for companies to develop new sources of energy.

3) Temporary Shortages Caused By Enormous Economic Growth, particularly in China, India and to some extent Eastern Europe. China and India are industrializing at a fantastic pace. To do this, they are using a lot of every conceivable resource from steel and concrete to wood, rubber, copper, oil, gas, coal and you name it. Their people want the same things we love - houses, roads, televisions, cars, computers and more.

The number of people involved in Asian economic development is staggering. America has some 350 million people. China has almost 3 billion and India another billion or more. They have ten times as many people as America! So they are using resources much faster than we will.

In Eastern Europe, the economy was stuck under communism for 50 years. Beginning in the 1990s, however, they broke free and they are developing, too. With modern transportation, nations can buy wood, cement, minerals and other goods from all over the world. Thus, the competition for resources is tremendous. This drives up the price of many commodities involved in industrialization. This will affect the world economy for many years to come.

In summary, three factors are driving price inflation: 1) governments printing large amounts of paper money, 2) the end of the era of cheap oil and gas, and 3) worldwide economic development, mainly in Asia and Eastern Europe right now.

WHY ARE SOME PRICES LOWER?

You may say, but many things are still so inexpensive, like computers and even clothing. This is true for several reasons:

1) Productivity has dramatically increased over the years and we can produce many goods more cheaply than before. This helps keep some prices low.

2) Innovation reduces the cost of certain items like electronics. For example, today’s computers are simply much more advanced than those of 10 or even 5 years ago. We get more for our money.

3) As manufacturing shifts to low-wage countries like China and India, prices are temporarily kept under control or may go down. This may change soon. Just in the past few months, the Chinese government began to allow their currency to ‘float’ against the US dollar. Their goods will begin to become more costly as their currency becomes worth more against ours.

4) Japan, Canada and Europe are all inflating their currencies. In fact, they are doing so faster than we are in the United States. We are in a curious situation with competitive destruction of the currencies by a number of nations. This keeps the cost of many foreign goods low or at least reasonable.

Having said all this, anyone who has tried buying a house recently, or doing construction, or buying food knows that many prices are soaring.

THE DARK SIDE OF INFLATION

Printing paper money that is not backed by gold and silver has many other negative effects connected with ever-higher prices and price instability. Here are just a few:

· Businesses and individuals cannot plan for the future nearly as well. They simply cannot depend on stable raw material and other prices. Instead, they are forced to hoard goods, buy things they may not need but can use as bargaining chips and do other things that are costly and often counterproductive.

· Businesses are often far more afraid to take risks in inflationary times. They simply don’t know what the future will bring. This is terrible, because businessmen taking risks is critical for innovation, research and development of new products and new technologies.

· People lose faith in the government and in each other. Everyone has a tendency to believe that everyone else is cheating them. This causes social unrest, crime, violence, and other social problems.

· Because planning is so difficult, maintaining a business or even a household becomes far more difficult. This causes many more bankruptcies, foreclosures, loss of homes and businesses and other very disruptive effects on society.

· As social unrest grows, strikes, protests and riots occur more frequently because so few people understand inflation and how to cure it. Anger mounts and civil society disintegrates.

· Inflation encourages people to go into debt. After all, when the time comes to repay your loan, you can do it with inflated and less valuable dollars. It is like borrowing good quality gasoline and being allowed to repay it in diluted gasoline. This favors those who are not the productive people in society and it punishes those who save their money. This is not at all healthy for society.

· It is very tough for the working and middle classes in particular. They often depend on their labor, which is just not bringing them as much money as it did before. They don’t have assets that appreciate with inflation such as large homes and some stocks. Thus the poor people are hurt the most. Even beggars and those on welfare are hurt badly as they find their limited means just won’t buy as much as before.

· People who are used to saving some money find they cannot save money or the money they have saved is worth much less. They also feel cheated and become angry and fearful.

· Basically, it impoverishes the people and ruins the health of society.

· It also tends to destroy democratic principles and substitutes a welfare type of state that rewards its friends and punishes its enemies by withholding money. This leads to distrust, anger and often revolution and decay of society.

PREVENTING INFLATION

Inflation is really a terrible crime that the American founding fathers knew well and tried to prevent. They did this by specifying that only gold and silver are legal currencies in the United States. This section of our Constitution has been violated many times.

All paper money in America, by law, must be redeemable in gold or silver. This was the case for years. Old bills said at the bottom “Redeemable in Silver”.

The gold standard, as it is called, was abandoned during the administration of Franklin Roosevelt around 1932. This is when inflation began in earnest as there was now no control over the amount of paper money the government could print.

You might ask, how is it possible that our government can just ignore the Constitution? It is largely because the people are totally ignorant of the Constitution. It is taught poorly if at all in public school. Also, there is a prevailing attitude that the Constitution is just an old piece of paper. Judges have changed it, often at whim, and their understanding of it is terribly limited.

Finally, there is much cynicism in the government. We have elected many representatives who care more about their power than they do about following the law. I hope this will change as more people understand inflation, and that our leaders will be held accountable for their actions.

The only way to prevent inflation, as far as I know, is to have an honest government that is not permitted to print endless amounts of money. The best way to do this is to have a gold standard, or something similar, so that the government is forced to put some value behind their paper money.

WHAT TO DO RIGHT NOW – INFLATION HEDGES

In times of inflation, many commodities do very well. These include precious such as gold, silver, platinum, palladium and uranium, among others.

Other hedges include base metals such as copper and zinc, oil, gas, and other natural resources like timber, cement and others. I recommend that everyone who is an investor would do well to own some of these, either as a stock, or a mutual fund, or to take possession of actual metals such as gold and silver coins. The problem with owning the metals or other commodities is how to store them safely. For this reason, many people choose mining stocks as an inflation hedge and this is usually okay if the companies are sound.

Real estate and particularly homes are also inflation hedges. Owning a home is thus a good idea in these times. Try not to pay too much for it, however, as real estate prices are still declining in many areas. Also, do not get in ovr your head because then you could lose your home if you lose your job, for example.

Other hedges are things like cars and other tangible goods and even services that have definite value. These should be kept in good working order so that you can use them and sell those you don’t need later.

WHAT ELSE YOU CAN DO

Besides the above, be careful about taking on debt as much as possible. While it is true you can repay debt with cheaper money, it is also true that many people may find themselves without work and thus unable to repay. In that case, one can lose one’s home or even go to jail.

Also, do not live beyond your means. Save some money in the form of coins or other tangible goods.

Also, live a healthful lifestyle, since health costs can be devastating. Click here to read the article The Healing Lifestyle. You want to be able to take care of yourself as well as possible and not have to depend on a health care system that is falling apart, at least for now.

I recommend everyone buy or build an infrared sauna at home and use it at least three times a week. It will help eliminate toxic metals, toxic chemicals and infections, and is great for flu and other ‘bugs’. You can read about infrared lamp saunas on this website, where plans are also offered at no cost or we have available a book, Sauna Therapy, that discusses sauna design in greater detail.

WHAT NOT TO DO IN INFLATIONARY TIMES

Certain investments are very risky during inflationary times. These include certain real estate speculations, some bonds that pay poorly, including municipal bonds, and any investments in frivolous things that really have little tangible worth or usefulness.

This is also not a time to abuse your health with junk food, late hours or dangerous behaviors. You will need all your energy and mental sharpness in order to cope in the coming years.

CONCLUSION - THE GRACE TODAY

After all these dire words, there are good things that happen due to inflation. And today’s inflation is quite unique in history. Doomsayers often ignore these critical factors in their predictions.

Today, as opposed to past inflations on earth, the problem is worldwide. This may not seem important but it is! Usually, when one country inflated its currency and destroyed it, other countries would either start a war and take over the nation, or at least would buy up all its assets and take effective control of that nation.

Today, however, inflation is so widespread that its ill effects are being felt everywhere to some degree. Not only are many governments printing too much money and have gone off the gold standard, but the end of cheap oil and the industrialization of Asia and Eastern Europe and even parts of Africa are increasing the demands for resources in every nation on the globe.

This has the effect of “spreading the misery” a lot more than the old style inflations that affected Germany after World War I and many other isolated cases.

Other “benefits” of inflation is that it tends to bring people back to earth, so to speak, forcing them to think about their purchases, their investments, and what is real and what is fluff in their lives. This is actually a spiritual benefit that unfortunately usually requires some pain and deprivation.

Inflation often follows a period of prosperity where people get lax and allow the government to violate the law, as has happened in America. So it is a wakeup call for many people that eventually is helpful for society if it can return to sound monetary and governmental policies.

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