Money Inflation Gold

We have been raised to believe that inflation is a natural phenomenon, but in fact it is a hidden, regressive form of taxation. It is government siphoning away resources from people and spending it without their recognizing it. Why do I say this? And is inflation bad or good?

First, a couple of basics. What is money, for example? Money is a store of value that makes it easier for people providing various goods and services to do business with each other. The smoother the process, the more goods and services there are for everyone. Money must have a generally recognized value and quality so that negotiating parties need not negotiate over that part of the transaction. When money and goods are beyond any individual's control, the market will naturally assign values to products based on what people want.

This is the most efficient form of market, and it will create the most value overall as people energetically compete for wealth. But the economy is rarely permitted to operate in this way. Government steps into the economy in many ways. To put one form of intervention very simply, governments take money away from some people by taxation and give money to others through entitlement programs or simply by spending.

Every time government takes money from successful individuals and gives it to less successful individuals or enterprises, it imposes two inefficiencies. It "punishes" successful actions by imposing costs on them, and it "rewards" unsuccessful actions by subsidizing them. I use the quotation marks because "punishment" and "reward" sound so intentional, whereas in reality most of the interesting features of government spending lie in the area of "unintended consequences." But the economic effect is the same, so naturally taxing and spending create factions of people vying for government largesse or to avoid taxation. There are political consequences for all taxing and spending, and they provide some checks and balances for one another. It is the natural political give and take in a democracy.

But it is also natural for governments in control to try to please as many people as possible while offending as few as possible, and this is made easier if taxation can be hidden. Then government can give to discrete subgroups, pleasing them, without the cost of alienating other groups. How can this be done?

When money is beyond the control of government, the cost of government is relatively obvious because every dollar commanded by government is a dollar subtracted from somewhere else, and the factions are competing for discrete funds. But what happens when government is free to create money out of thin air? This is called "fiat" currency (as opposed to "commodity" currency). Fiat currency depends upon the stability (to survive) and integrity (not to overprint) of the government assigning it value, whereas commodity currency depends on the underlying value or rarity of the commodity independent of government. People in the U.S. now seem to regard fiat currency as a natural and permanent right of government, and a good thing, but historically it is a fairly recent development (and one which was heartily distrusted by the Founding Fathers).

Fiat currency allows inflation, which is the creation of currency at a rate faster than the economy grows.

Let's take a very simple example. If an island has $100 on it and $100 worth of goods, what happens if the island's people learn how to create goods worth $10, while the government prints up an additional $10 in currency? Nothing. The economy has grown, and the currency has expanded in lockstep. The currency retains its familiar value, and so do the goods.

But what if government prints up an additional $100 and distributes it without the accompanying increase in the amount of goods? This is inflation, an increase of money relative to existing goods. The price of all the goods will eventually double to reflect the increase in money relative to goods.

The real question in this model is how the money is distributed, since who gets it, or who gets it first (before the prices reflect the inflation) will certainly redistribute actual wealth. For example, what if the government gave all the money to the twenty percent of the people on the island who owned huts? In that case, not only would the money not actually increase the net wealth of the island, but it would also effectively redistribute wealth from renters to owners. If the government could sufficiently hide the process, it could make the owners happy without actively antagonizing the renters. I hope the parallels between this hypothetical island and the actions of the U.S. government over the past several years (for example) are obvious.

When the government operates at a deficit, what it is doing by definition is spending money without having taxed it out of anybody first. It is printing money into existence and spending it. Because it is spending it in various ways it makes the receiving classes (owners and selected welfare groups) happy. It is actively and thoroughly redistributing income, but doing so in a way which very few people understand. People think of it as giving without taking, but government can never actually do this. Because it is spending without previously taxing, there is no political cost for taking the money and spending it-no counterweight to restrain government. The result is a naturally increasing tendency to inflate and spend.

Not only does inflating and spending redistribute the wealth in unexamined ways, it also skews the economy, increasingly "punishing" economically viable actions and "rewarding" economically foolish actions or conditions. It should be no surprise that all currencies that have gone into this inflationary spiral unchecked have perished, with dramatically negative consequences for the people and countries who possessed the currency. Because the United States has begun this process, a spirit of self-preservation strongly suggests reducing your holdings of fiat currency and increasing your holdings of commodity currency.

Gold is the primary form of commodity currency in the world.