10.01.2008 0

The Hidden Tax

  • On: 10/16/2008 13:51:20
  • In: Monetary Policy

  • “Inflation is taxation without legislation.”
    —Milton Friedman

    [Note to Bill: The following video will be embedded in this piece at http://www.redlasso.com/ClipPlayer.aspx?id=abce2361-b678-479b-9343-c1e2688818cc]

    Rep. Ron Paul (R-TX) has made it no secret how he feels about the Federal Reserve and the monetary policy at present. Because of the situation at hand with the devaluation of the dollar and subsequent crumbling of the financial sector, Ron Paul has found an opportune platform for his perspective, his primary audience being the Chairman of the Federal Reserve, Ben Bernanke.

    On Wednesday, in a Financial Services hearing on the Hill, Dr. Paul did not stray from his stance on the Federal Reserve and asserted that “we are seeing the unraveling of the dollar bubble that has been building for the past 35 years”. Of course, just because we have had this coming for a while does not detract from the issue at hand: Inflation is running rampant and there does not seem to be an end in sight.

    Inflation is essentially the lack of value in money. When the Fed decreases the Fed Funds rate, this increases the supply of money in the economy. This means that for the same money value, there are more actual dollars. In the economy, this translates directly into higher prices, because it essentially takes more physical dollars to equal the same value of the good. Frankly, a dollar today is worth less than a dollar yesterday. Historically, this was seen in a very extreme form in Germany following WWI, when hyperinflation was so bad, it was best to purchase all the beer one wanted for the day in the morning, because the price would go up by lunch! A contemporary example of this is the dire state of the economy of Zimbabwe, where prices are seen in the trillions for basic necessities.

    Dr. Paul, and those who believe the quantity theory of money, would argue that this inflation problem is inherent to our system. He champions a return to the gold standard; when the currency is backed by gold in an equal value. This convention of Austrian economics (via the likes of Hayek and Mises) is arguably more stable, because there cannot be a greater supply of money than the amount of government holdings in gold, thus eliminating a multitude of the sins we are witnessing today. The gold standard, or variations thereof, was held until about 1971 when the system broke down because the fixed price on gold was lifted by President Nixon.

    Not only is inflation damaging the U.S. economy with regards to trade, the financial sector and overall growth, but it is hitting the average American consumer hard. The Consumer Price Index (CPI), which tracks the price changes of consumer goods and services on a monthly basis increased 1.1 percent in June from the inflation index in May. The expected rate was 0.7 percent. This signals the fastest change of inflation since 1991.

    In his hearing with Chairman Bernanke, Rep. Paul stated very poignantly that “inflation is a tax, and if the Federal Reserve and you as chairman have this authority to increase the money supply arbitrarily, you’re probably the biggest taxer in the country!”

    And with this tax increasing at 1.1 percent in a single month, there doesn’t seem to be much chance of a respite in the future. Ron Paul also pointed out that this is the very worst kind of tax—especially from a liberal’s point of view—because it hurts the poor more than any other group. This is due primarily to the fact that a higher percentage of their income is devoted to the purchase of necessities, and it is taking a significantly larger chunk of their income to buy the same goods. If only for this reason, the Democrats in Congress should be motivated to do everything possible to stop inflation. Which, of course, could be accomplished by doing nothing at all.

    The very reason we are in this situation is because Congress has been robbing “Peter to pay Paul” for years, trying to bail out the banks and keep the financial system afloat. Finally, it is all coming to a head and there appears to be nothing anyone can do to stop it.

    In his interview with Ron Paul, Larry Kudlow claimed that we are experiencing a “new kind of socialism” that there is no longer “freedom to fail”. According to this “new socialism” anything and everything should be bailed out, no matter what the cost—the Fannie and Freddie catastrophe is just the most recent example. Well, today we are seeing what it is costing: inflation and unemployment are both increasing, the banking industry is toppling and gas prices are higher than ever before!

    Unfortunately, the Federal Reserve and Congress think that the best solution to the problem is to seize more power from the private sector and place it in the hands of the government. And unlike China, ours was never intended to be a centrally planned economy. Like Paul said, we are witnessing a new kind of socialism, where the “government is controlling markets in favor of certain industries, whether its the banks or other industries, where they are socializing their failures” and putting the burden on everyday Americans. This is a move in the opposite direction of capitalism, and embracing socialism.

    In a statement on Wednesday, July 9th, Rep. Paul reminded everyone that this is not a new problem, “authoritarianism has been around for a long time. For centuries, inflation and debt have been used by tyrants to hold power”. If government continues to seize more power and further move to centralize the economy, we can be assured that our personal liberty will diminish.

    ALG Perspective: At present, we are at a very significant risk of becoming a “guns and butter” economy, with the free market being steadily shouldered out of the picture. Like Ron Paul said on Kudlow & Co. “its a bad sign for free market capitalism”.

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