Sunday, February 27, 2011

Inflation, the invisible tax...

Inflation, “Painless Taxation”

Inflation concepts are not taught in school, it is just something we are told to live with. Historically, it has ranged between 3 to 12 percent. Prices increase and employers raise pay rates to offset it. It lends to the perception that you are moving up with each “pay raise.” Notice as you “earn more” you tax rate increases accordingly. Congress doesn’t need to raise the bar, inflation did it for them.

What is inflation? In simple terms, it is the government printing money instead of taxing the people. But there is more to it, than that. In a normal economy we produce 100 widgets and get paid 100 dollars. You get a dollar for each widget. If the government needed 50 widgets, they would print 50 dollars, purchase them, and then consume them. Then there would be 50 widgets left for consumption and 150 dollars chasing the remaining widgets. The net effect is that widgets have jumped in price to three dollars apiece. This is what inflation is all about.

Inflation is too much money chasing too few goods. When Spain brought tremendous amounts of silver back from the new world, inflation took off. This was “real money” but there wasn’t any product to match to it, prices increased dramatically. The same thing is happening here. We get paid money for making product. When dollars are printed, the product is still consumed, but now there are more dollars chasing fewer products. The government can print money, but they cannot print food, energy, and housing. Government consumption, by way of food stamps and unemployment insurance, makes goods scarcer for consumption and prices rise.

The government taxes about 20% of our earnings through income taxes. With inflation there is no government paperwork. Let’s say you were lucky and saved up a million dollars before retirement and it took you 20 years. In this case, inflation is an invisible tax, you haven’t lost any dollars, but your dollars have lost half of their purchasing power. The government’s printing of money has confiscated half of your bank savings. The reason this government game works so well, is that the average person has a complete disconnect, between the concept of the real purchasing power of the dollar, and the apparent value of their savings. Their dollars are all there, nothing is missing---shhh, no need to upset them.

The politicians want to tax the rich; I suggest they are already doing an outstanding job of it. The sky rocketing ascent of the national debt is proof enough. Inflation is rampant if you include food and energy. We will see a dramatic loss of our purchasing power over the coming years. You won’t lose one dollar, but a dozen eggs could cost 12 dollars. Naturally, there will be a Congressional investigation into the chicken farmers gouging the public.

The thing that ought to make everyone angry is that inflation is stealing from those that saved a lifetime. You save hard earned money only to have the government make it worth less over time. Inflation is not perceived by our youth, it takes time to experience the reality of it. But, to those about to retire, they have experienced its effects. The silver foxes can see what it has done to their retirement savings and their plans for the future. Mention any of this to a Congressman and he’ll look back over his/her shoulder to see who you are talking to,--it can’t be him.

What’s next, ten dollars for a cup of coffee? -- And a dollar for cream and sugar? Of course with Obamacare, maybe I can get my doctor to write me a prescription for Bacon and Eggs with Coffee and OJ ( I have a $10 co pay on prescriptions). That’s an inflation pill I can swallow.


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