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How Governments Expropriate Wealth with Inflationand Taxes
8 COMMENTS
TAGSMoney and Banks
11 HOURS AGODaniel Lacalle
In an interview with the Wall Street Journal, Treasurysecretary Janet Yellen admitted that the chain of stimulus plansimplemented by the US administration helped create the problem ofinflation. “Inflation is a matter of demand and supply, and the spending thatwas undertaken in the American Rescue Plan did feed demand,” Yellen admitted.Of course, Yellen went on to say that the spending was appropriate due to thecollapse of the economy as governments were trying to prevent a recession.
This reminds us of a few of the problems of disproportionate governmentintervention and the negative impact on the middle class. The misguided massivelockdowns were imposed by the government. Countries that had strict testing,like South Korea and other Asian and European countries, kept the economyworking and the pandemic under control. However, the problem is larger anddeeper. Central banks and governments have exhausted all demand-side policiesat the expense of the middle class by eroding real wages and deposit savings.
Even worse, governments created a larger inflationary spiral by maintainingall “pandemic relief” packages even after the reopening, well beyond therecovery. They expected a spectacular aggregate demand increase and they gotit. Now the result is higher inflation and lower economic growth. Butgovernment size and deficit spending remain.
Everything that government spends is paid by you. There is no freemoney. Even for the recipients of benefits in constantly depreciated currency.Inflation, the tax on the poor.
Governments do not avoid recessions through spending, they simply makethe accumulated problems larger by constantly adding debt that central banksmonetize via quantitative easing. This uncontrolled increase in M3 money supply(a broad money proxy) leads to asset inflation first and everyday goods priceinflation afterwards. Both consequences lead to inequality and a constantdeterioration of the purchasing power of the currency, making salaries in realterms lower.
Central-planned money creation is never neutral. It disproportionatelybenefits the first recipients of money, government and those with assets anddebt, and negatively impacts those with a monetary salary and some savings incash deposits, which dissolve over time. No socialist excel spreadsheet canerase the fact that massive deficit spending financed with newly created moneydestroys the poor and the middle class. They may say that government spendinggoes to social programs that benefit the poor, but that does not happen. Socialprograms in a constantly devalued currency become irrelevant, inefficient, andworthless while at the same time the wrongly named welfare state condemns asubstantial proportion of the population to being hostage clients of governmentplans.
Government does not give excess reserves as social programs. Governmenttakes away from existing and future wealth of the economy via currencyprinting, taxation, spending and debt, but math never works for those whobelieve extractive and confiscatory policies will work. The “tax the rich”crowd are doing an enormous disservice to the citizens they pretend to support.Interventionists may use the excuse of stealing from the rich to give to thepoor, but the reality is that government spending is so enormous that theycannot finance every entitlement and social program with the money of one percentof the population. Government takes from the 99 percent to give devaluated andincreasingly worthless funds to 45 percent of the population, and in theprocess bloating an ever-expanding bureaucracy to administer it all.
Did you feel happy when the government gave you a check paid withprinted money? Watch now as your daily groceries, gas and power becomeunaffordable.
Government always takes three when they promise one. Huge public debtaccumulation will be paid by the 99 percent via inflation, taxes, or both.
Deficit spending and artificial money creation are just two sides of thesame coin, dissolving the existing wealth of a nation by issuing morepromissory notes. Wealth is the same, just more units of currency incirculation. Hence, prices do not rise, the purchasing power of moneydiminishes.
The price of one good or service can go up due to a supply crisis, butif the quantity of currency issued is the same, it would be impossible to seeall prices rising with it. In fact, other prices would fall. Prices ofmost goods and services can only go up in unison if the quantity of currency isrising faster than its demand.
Governments and central banks will continue to impose demand-sidepolicies under the excuse that it is best for everyone and prevents arecession, the idea that it is good for you. The incentive to do it is immensebecause when it fails to work, they blame businesses, geopolitics, the rich oranyone else. If citizens believe that government can create wealth via moneyprinting, governments will do it, presenting themselves as the solution to theproblem they created. We got our pandemic cheque and now we are paying forit multiple times over.
Now Keynesians see there is only one way to curb inflation: Putting thebrake on aggregate demand. But governments are not going to reduce spending, sothe “aggregate demand reduction” will be making everyone in the private sectorpoorer.
Inflation has been created by using the lockdown to massively increasegovernment size. Yellen says that inflation is a consequence of supply anddemand, but if that were the case Argentina and Venezuela would have lowinflation. The problem is rising supply of currency and weakening demand forit.
The mirage of enormous government spending and exponential currency printingis a process of expropriation. Government expands its size at the expense ofthe rest of the population, especially those that defend rising publicexpenditure programs.
Demand-side policies expropriate wealth in three ways. On the way in, byrunning uncontrolled deficits financed with debt, which means higher taxes inthe future. Second, raising taxes to “reduce deficit.” Third, with inflation.Government weight in the economy rises in all three steps. Then, when it fails,repeat.
If youwanted more government, this is more government: Less growth, higher inflation,and poorer citizens.
Author:
DanielLacalle
DanielLacalle, PhD, economist and fund manager, is the author of the bestsellingbooks Freedom or Equality(2020),Escape from the Central Bank Trap(2017), The Energy World Is Flat (2015), and Life in the Financial Markets(2014).
