Can anyone explain to me how government steals from citizens by creating inflation?
Thank you.
Save money and watch it being taxed not once but twice and you'll figure it out.
Fiat currencies coupled with legal tender laws and capital gains taxes on commodities used in barter plus the obligation in many countries for lenders to accept settlement of their debts in the currency that is legal tender mean you are more or less forced to use fiat currency to perform transactions as any alternative will come at a cost. Contemplate that an investment (or savings account or bond or whatever) will yield you 8% interest. Say that the true rate of price increases due to inflation for financing various government nutjob schemes is at 7% p.a., which means that by the time you collect the interest on your assets that you will now only earn 1% net, as your money's purchasing power will have declined (assuming no further taxes are chargeable.)
It amuses me how governments globally have the audacity to whine about the profligacy of the banks and debtors, when they encourage debt through their very tax schemes and inflationary policies.
Freedom of markets is positively correlated with the degree of evolution in any society...
You have to understand the old method of inflation to see how it applies to fiat money. In the old days money was metal and coins, and to inflate the money supply the ruler had to recall the coins and remint them at a lower weight. So say a 1 oz gold coin goes in, it gets reminted to .9 oz either by clipping it or alloying it with other metals with the .1 oz taken by the ruler. This effectively transfers 10% of the wealth to the ruler, likely a king, who then spends it on favored projects, a new throne, a new addition to his castle, etc. In the modern age fiat notes have superceded gold and metals as money thanks to government intervention and other reasons. It's easier to carry around and exchange notes, especially when you're dealing with larger transactions.
Now, the key point in the old method of inflation is that it is a direct confiscation of 10% of the metal in circulation, and that's necessary because they can't just 'print' new metal coins. They have to be produced at a cost that's not negligible. However with notes in circulation and largely electronic records, creating new money is essentially costless for governments these days. So instead of directly confiscating 10% of their citizens' wealth, the government merely prints the money it wants, or adds some money to certain accounts, and spends it first. As that money moves periodically into the wider economy the now greater supply of notes will be chasing roughly the same amount of goods and services, which means it will eventually devalue relative to those goods and services all else equal. Prices will rise. So, all else equal, by the time the new money has made it into the hands of the people in the general economy it has lost value roughly proportional to the increase in the overall supply in a macro sense. This loss of value will of course be relative to when people receive the new money after it is created - the sooner the better - and what goods and services they tend to want to buy, because not all prices will adjust equally or proportionately. In an overall sense though a certain percentage of wealth was transfered from people who received the money later to those who received it and spent it first and soonest. This is because the people who get it and spend it soonest do so at the current buying power, while those who hold on to it, those who save to spend later, will spend it at a lower buying power than when they first received it.
That's what people mean when they talk about the devaluation of the dollar over time, and how what you could get for a dollar ten years ago now cots more than a dollar. Well, say I traded you something for a dollar and I wanted a Snickers which cost a dollar right then, but decided to put the money in savings first. By the time I pull it out there has been some devaluation and now a Snickers costs 1.10, but I still just have the 1 dollar I got from you. I got screwed out of my Snickers. Now, technically the savings should have gathered interest from people using it productively, and nominally it may have. However, if the inflation matched or surpassed that interest, I'm still out of luck and can't get a Snickers.
3 ppl are on an island cut off from civilization: Mr A, Mr B, and President C.
Mr. A owns $1 and Mr. B owns $1. President C has nothing because he is the government.
Mr. A doesn’t like apples and can only produce one apple a day, and Mr. B prefers apples, but likes to have a banana and an apple a day. Mr. B is smart and is able to produce 2 bananas a day, one to consume and one to sell. They use their dollar to purchase each other goods on a daily basis.
Mr. A and Mr. B have been buying and selling apples and bananas for years for $1 each.
Well President C wants a banana too (obviously for national island defense)! So he prints $2 and out bids Mr. A by paying $2 for that day’s banana.
Mr. A still only has $1 and got screwed out of his daily banana and now Mr. B has $3.
Mr. B still wants his daily apple so he goes to Mr. A to buy it for a dollar.
Mr. A is stupid and does not realize that the market now has more money and sells his apple for $1.
So Mr. A now has $2 and Mr. B has $2.
Next day comes and market prices are still the same. Mr. B is charging $2 for a banana and Mr. A is selling apples for $1.
Mr. B demands $2 for his banana because that is the market price for bananas! Mr. A now understands what happened so he says well apples are $2 too then because I can’t afford to buy your banana tomorrow if I sell you an apple for $1 today.
They both agree, since a 1:1 ratio for apples and bananas was already agreeable to each other before.
Mr. A therefore had a banana stolen from him because President C didn’t put anything into the economy to get it. Nobody is any wealthier since the demand for the goods is still the exact same before the inflation, prices have just changed.
Or maybe you don’t think he had a banana stolen from him since he never owned the banana. Then you can say he had $1 stolen from him since President C made his dollar worthless on that market because the only way to buy a good is to have $2.
Or you can say his labor/time was stolen from him as he had to work as a slave for a day for the government to have his banana. It can easily be seen that Mr. A’s only purpose for working is to get a banana a day, but since President C printed enough money to buy the banana he could not get it. Mr. A still had an apple though and he can’t use it so he still had to sell it. So he sold it for $1, but that days labor is pointless since it didn’t give him anything. He worked so Mr. B could have an apple and Mr. B worked so the President can have a banana.
Next day comes along and the President becomes this banana sucking monkey and he needs his banana everyday!
So President C prints $4 to out bid the $2 banana market and the same things occur as with the previous inflation. Mr. A is getting screwed out of his daily banana and raising his apple prices the following day. This happens for two days. Banana prices are now $16 and Mr. A will never be able to afford one. Mr. A has $16, but as soon as he goes to buy his $16 banana the President will bid $32. So Mr. A decides to quit the apple business and he goes into the banana business. Mr. B still has a demand for apples and would rather have an apple over a banana or even 2 bananas. So he decides to quit the banana business and go into the apple business. Mr. A is dumb and isn’t as good as Mr. B at producing bananas so he can only make a banana every other day to sell. Well President C wants his daily banana! So he decides to create incentives for producing more bananas by subsidizing the banana business. This works for a day until Mr. A realizes that what’s the point in working harder for extra money if he is already producing a 1 ½ bananas a day?! Mr. A only wants a banana a day and what’s the point of money if he can’t buy anything with it? Mr. B doesn’t care what’s going on because he only really wanted an apple a day.
What’s a President to do?!?! Mr. A had a comparative advantage in producing apples and Mr. B has an absolute advantage in the market. So his next course of action is to create a law on his citizens to produce only the goods you are best at producing! Mr. A picks up his apple pitchfork and lobbies the President. “Mr. President how am I to survive in your world if I can only produce a single apple a day when that greedy Mr. B can produce two bananas?” The President being so caring for his citizens FINALLY understands the market. The greedy Mr. B has found a loophole in the system to out produce another citizen for his own personal gain. So the President made an announcement declaring that he was going to close a ‘tax loophole’ and tax his citizens that produce bananas 1 banana a day.
SO the market finally settles! Bananas and apples sell for $16 each. Mr. A gets to buy his banana a day and Mr. B gets to buy his apple a day. The President is happy because he is raising a banana a day in taxes! They all live happily ever after….
UNTIL July 4, 1996 (island’s independence day) the President decided that the island’s progress wasn’t going fast enough. So he decided to tell the people that they are facing an alien invasion of Paul Krugmans.
The President gives the greatest speech of his life:
“Good morning. In less than an hour, Mr. A will begin building a high speed rail from here and will be joining Mr. B where he will be building a healthcare clinic and school on the other end of the world. And you will be preparing to launch the largest apple and banana aerial battle in the history of mankind. "Mankind." That word should have new meaning for all of us today. We can't be consumed by our petty differences anymore. We will be united in our common interests. Perhaps it's fate that today is the Fourth of July, and you will once again be fighting for our freedom... Not from tyranny, oppression, or persecution... but from annihilation. We are fighting for our right to live. To exist. And should we win the day, the Fourth of July will no longer be known as an Island holiday, but as the day the world declared in one voice: "We will not go quietly into the night!" We will not vanish without a fight! We're going to live on! We're going to survive! Today we celebrate our Independence Day! [Mr. A and Mr B cheer]
Well it turns out there were no aliens, but at least we have a high speed rail, healthcare clinics, and schools. Right? Until A, B, and C die because no one was producing food. The end.
Can you explain to me how injecting money in the economy, distorts prices and incentives?
If it was done by counterfeiting ,how would you envision it doing so? Thinking through it for yourself is a great way to see that there's very little difference.