The Politics of Inflation: Theft by Other Means   (September 28, 2009)

A little inflation is supposed to be "good." From the perspective of the wage earner and taxpayer, it's simply "theft by other means."

Deflation is supposed to be horrible and awful, and a steady dose of inflation is supposed to be "good." So your cash gaining value is awful, and it's great when it is robbed by inflation. How "good" is that?

I've been pondering the politics of inflation. Here are the dynamics I discern:

1. Politicians need to distribute swag to the electorate every two years. Their perspective is thus necessarily short-term as no politician dares care about what transpires a decade or two hence.

As a result politicians must favor inflation, which enables them to borrow/print money and distribute it as swag to self-absorbed greedy voters now and then pay interest on the new debt with "cheaper" future dollars.

2. Voters possess the built-in human bias for present gain over future gain. "One in the hand is worth two in the (future) bush" is the default human response, and future insolvency is meaningless to those expecting and desiring swag in the present.

Indeed, politicians have noted that those who demand sacrifice in the present to address a long-term crisis lose elections while those who distribute the most swag now while ignoring the gathering storm on the horizon win elections.

3. Inflation is thus "good" for politicians and the government as it enables paying off obligations assumed in the present with devalued future currency. But is it "good" for the voters who actually earn income?

As Paul Volker recently observed (I paraphrase), is a policy which robs a third of your money every decade a worthy policy? For that is precisely what "low" inflation of 2.5-3% annually does: it reduces your dollars' values by a third every decade.

Will the swag "given" to you (is it "given" when it's your own future earnings?) now in the form of government benefits and tax cuts add up to more than a third of your future earnings over a decade? Unlikely, to say the least.

4. So politicians exploit the human bias for short-term gain even as they rob the taxpayers via inflation over the long term. Inflation is tolerable as long as you're a wage earner and your income rises at the same rate as inflation.

But income from labor (wages/salaries) have been flat to down since the early 70s for most Americans, and so inflation has only been "good" for those holding assets which have risen more or less in lockstep with inflation.

For those whose earnings might rise nominally by 15% a decade while inflation robs 30% of their wages' purchasing power, then "a little inflation" is a long-term disaster.

5. The usual argument in favor of inflation is debt-based. That is, inflation is wonderful because it enable us to pay off our debts with future "cheaper" dollars. But if our incomes are being robbed by inflation, then is that "benefit" of inflation really so valuable? If I lose a third of my purchasing power in a decade does being able to pay down my mortgage with depreciated dollars offset my loss of purchasing power? No--unless my mortgage payment exceeds my income by a fair margin, which is essentially impossible.

6. Deflation is excellent for those with cash and earnings and awful for kleptocracy governments and those with overleveraged debt. The entire idea that "inflation is good" masks a perverse incentive: take on as much debt as you possibly can because interest will become "cheaper" to pay in the future (assuming yuor earnings keep up with inflation).

If your earnings don't keep up with inflation, well, too bad.

7. The government's "earnings" are tax revenues. As we all know, these are in absolute freefall:

So as the purchasing power of its taxpayers' wages are stolen via inflation--truly "theft by other means"--then the government's ability to collect ever-larger sums of money via taxes is crimped. Unless, of course, the government can create asset bubbles via loose credit and unlimited liquidity which then generate huge capital gains for asset-owners which can then be taxed.

8. The entire "inflation is good" idea is a self-reinforcing noose. To enable distribution of swag to voters and special interests, the government/kleptocracy offloads the payment for the swag into the future, and by creating inflation then the government guarantees (or so it reckons) that it will be able to pay the interest on that money with "cheaper" money collected from taxpayers in the future.

But as taxpayers find the purchasing power of their earnings declining (theft by other means) then they respond to the incentives presented by the government: borrow to the hilt and speculate in asset bubbles as the only way left to maintain purchasing power.

This dependence by both goverment and citizenry on asset bubbles to maintain purchasing power leads to over-leverage and over-indebtedness which then leads inevitably to a collapse of asset values (which were based on exponential credit expansion) and the tax revenues which were dependent on a constant series of asset bubbles.

Now the taxpayers find their assets decimated and their purchasing power diminished while government finds its tax revenue base has been decimated. Paying interest on all that debt while distributing unlimited swag was predicated on rising tax revenues. That plan has now been revealed as fantasy.

Inflation is nothing but a "theft by other means" scheme which leads to impoverishment and insolvency.

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