Monday, July 17, 2006

The Inflation Tax

Ron Paul on "The Inflation Tax":

All government spending represents a tax. The inflation tax, while largely ignored, hurts middle-class and low-income Americans the most. Simply put, printing money to pay for federal spending dilutes the value of the dollar, which causes higher prices for goods and services. Inflation may be an indirect tax, but it is very real- the individuals who suffer most from cost of living increases certainly pay a "tax."

The erosion of purchasing power and ensuing increase in the cost of living is a recurring theme in Ron Paul's speeches on inflation. And why not? These phenomena must have accompanied every inflation known to man. Representative Paul is attempting to make clear, to his constituents and the politicians who should be representing their constituents, that inflation acts as a hidden tax. Slowly but surely, even a "properly managed" fiat currency will lose its "value" (read: purchasing power) over time.

In fact, you could make the case that inflation represents a form of double taxation. You are paying higher prices for goods and services, while at the same time experiencing a decline in your standard of living. People take on more work and increasing amounts of debt just so they can maintain their lifestyles and an outward appearance of prosperity. Mothers leave their children to enter the workforce, hoping to achieve financial stability by adding a second income to the household. Still, we find ourselves deeper in debt than our parents' generation, consoled though we may be by the appearance of luxury items that surround us.

The average person is running in place on a treadmill that leads to nowhere.

As the inflation progresses, the quality of goods and services becomes watered down. Many of the goods we buy today are engineered for obselescence, and even the simplest products have a relatively short shelf life (ever heard the complaints about Wal Mart hammers?). Do you feel wealthier because you are able to afford a dozen crappy hammers?

Please do not be fooled by the BLS' assertion that substituting hamburger for steak represents a comparable trade off of purchased goods. While it might play in the broadcast studio, it won't wash here.

For more on the redefining of inflation, see "The Core Rate" by Jim Puplava.