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The other tax -- am I wrong in my reasoning?

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Tigermoose Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 07:02 AM
Original message
The other tax -- am I wrong in my reasoning?
The other tax not being mentioned is the inflation tax. In order to keep interest payments down on the deficit, the government will keep interest rates down through the Federal Reserve. This will cause inflation that will largely impact the poor and lower middle class that does not have enough money to invest in stocks or commodities that would offset inflation. This is the preferred "taxation" method of politicians, because most people aren't aware they are being taxed.

Is this a major driver in the separation of the classes? Are we not solidifying a system that divides us between those who have the capital to invest in stocks, bonds, and commodities versus those who do not? As liberal democrats, we attempt to lessen the impact on the poor by providing welfare and other entitlement programs. But is that just a feel-good bandaid that covers the enormous theft being perpetuated by our federal reserve system of perpetual inflation?
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Sherman A1 Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 07:10 AM
Response to Original message
1. Inflation was once described as a tax
I think that was during the Reagan Campaign.
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plumbob Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 07:21 AM
Response to Original message
2. It's a classic thought, going back at least to Keynes' 1920 book.
http://www.drlwilson.com/Articles/INFLATON.htm

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.
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Yupster Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 07:33 AM
Response to Original message
3. Hurts people with money in
bank accounts, CD's, bonds, muni bonds the most.

That's mostly the elderly and the rich.

It can wipe out a lifetime of savings in a few years of high inflation.

Inflation is good for people who owe money. Bad for people who've lent money.
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Tigermoose Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 07:41 AM
Response to Reply #3
6. But doesn't it cause people to go into debt in the first place?
If the value of your dollar isn't keeping up with the cost of goods and services, doesn't that mean you will end up incurring debt to pay for goods and services?
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Yupster Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 08:06 AM
Response to Reply #6
9. Yes but just to use an extreme example
You borrow $ 200,000 to buy a house over 30 years, and then three years later a loaf of bread costs $ 200,000.

So your house cost you a loaf of bread.

Inflation is generally good for borrowers. You borrow good dollars and pay them back with crappy dollars.

On the other hand, the lender gave away good dollars for the promise to get more crappy dollars in the future.

A person may studiously save $ 100 his/her whole life and put it in bank cd's. In a few years that lifetime of savings could be worth a loaf of bread.

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Tigermoose Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 08:45 AM
Response to Reply #9
12. Good point - home ownership is still a good idea.
nt
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AlabamaLibrul Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 07:44 AM
Response to Reply #3
7. I disagree
It hurts people with no savings and little debt the most through increased costs of goods, as we're already seeing now.
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Yupster Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 08:16 AM
Response to Reply #7
10. I disagree with your disagreement
Two families. Both families of four, both teachers, both makle $ 80,000 a year per household.

One family always spent every penny they had. In fact, due to a love of travel, the family also has $ 80,000 of credit card debt.

The other family saved $ 8,000 a year in their 403 (b) plans. Safe investors, they've stuck with fixed accounts and didn't lose anything through the last decade's two crashes.

Ten years later one family has no savings and $ 80,000 of credit card debt, the other family has $ 120,000 in savings.

Now hyperinflation hits for three years.

Both families pay extra for all their goods and services. Both families are having trouble having their salaries even hope to come close to keeping up with inflation.

One family has no savings but they're delighted to find out that they can pay off their credit card debt with hyperinflated dollars. Turns out all those cool trips only cost them a loaf of bread.

The other had its decade of savings turn into the value of a loaf of bread.

I claim the family with the savings who lived frugally were the ones hurt worst.

The free spending family can smile that it spent valuable dollars and can repay with worthless dollars.
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AlabamaLibrul Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 08:26 AM
Response to Reply #10
11. Out of those two, you are correct
but those who don't have large savings to be worn away by inflation, and who do not have debt that is relieved by the inflation, are neither directly helped nor hurt from the two scenarios but instead has to deal with the increasing cost of goods while, if we assume the current trend in America, wages don't go up.

They have no savings which, yes, are being eroded by inflation, but I suppose having $120,000 in newly devalued crappy currency is better than no newly devalued crappy currency.

Then the issue becomes at which point it is impossible to purchase everyday products with one's wages, and what happens then. If they take on debt, and the inflation continues, they will come out ahead of someone with constantly devaluing savings and no debt. If they can't take on debt and/or an even more debilitating price/wage spiral develops, then you end up with people burning dollar bills instead of wood to stay warm.
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Yupster Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 08:55 AM
Response to Reply #11
13. I would say the family that took a cool trip every year
had it better because at least their money bought something valuable.

The family that refrained from expensive purchases found their money whittle away to nothing.

Which brings up the other cost of hyperinflation which is the educating of the savers.

Sounds ridiculous to say benefit, but one benefit of the Great Depression was it created a generation of thrifty savers. We all probably have stories in our own families of parents or grandparents who lived through the depression and saved every penny their whole lives. That generation created and preserved much wealth.

Inflation teaches the opposite. It teaches to spend your money the minute you get it because it will buy less tomorrow. That lesson might also last a whole generation, and that would be a disastrous lesson for the country.
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AlabamaLibrul Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 09:42 AM
Response to Reply #13
14. That is a very interesting way of looking at it
I certainly hope that we do not have to deal with an American hyperinflation scenario in the future, whether you've got debt, savings, or neither.
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muriel_volestrangler Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 07:35 AM
Response to Original message
4. Low interest rates *may* cause inflation, if they cause demand to overheat
They cause inflation if people borrow a lot of money to spend it, or give up saving and spend it instead; or if investors move their money abroad to get better interest (which decreases the value of the dollar, and thus increase the price of imports). However, inflation is low.

I don't think this is a 'separation of the classes' thing; the richer you are, the more money you have to earn interest. If interest rates went up, rich people would get more income for just having money. Poorer people, who tend to have few assets and have to borrow to buy cars, houses etc.
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Tigermoose Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 07:47 AM
Response to Reply #4
8. We always have inflation -- low or high
It is in the nature of our monetary system to perpetually create inflation. In the media, we tend to only call high inflation "inflation," but if you look back historically the price of goods has risen incredibly since this system was put into place.

Good point that higher interest rates would allow the rich to park their money in CDs and such. So it looks like as long as we have an inflationary monetary system it is necessary to redistribute the wealth back into production in some manner - voluntarily or otherwise.

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Tigermoose Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Apr-14-11 07:39 AM
Response to Original message
5. I think I see what has gone wrong
The inflationary system is not necessarily a bad system. This system ensures that the wealthy invest their capital in the idea that this will generate more production within the economy, which in theory would mean more jobs for the non-capitalists. But with globalization, we are seeing a disconnect in that system for our country's working class. Instead of investing all that capital in production here in this country, corporations are using those investments to produce in other countries. So what we will continue to have in store for us is a growing divide between the rich and the poor in this country, while the poor in other countries gain wealth while they are the centers of production. To offset this disconnect, we must do one of the following:

1. Redistribute the wealth in this country via taxation of the rich into entitlement programs
2. Increase interest rates which would reduce the rate of inflation and allow working people's money to retain its value over time
3. Revolutionary changes in our federal reserve capital system (not likely unless a major meltdown occurs)
4. Place tariffs on imports

The Republican answer of trickle-down economics might have worked in the past, but with globalization it does not seem that reinvestment in U. S. production is keeping up with the erosion of the dollar through inflation. Granted, any of these assumptions or statements might be proven wrong through statistical data.

So it seems that option #1 seems like the most feasible of the options at the present time. However, I do think there is a justified concern for creating a class of citizenry that is dependent upon the government rather than themselves for their livelihoods. This seems to be something akin to the Roman empire distributing grain and games to the nonworking populace of Rome in order to keep civic order. I think it would be much better to create a system that is fair and just.
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