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Author Topic: Inflation: "The Hidden Tax Hike" and what it means for you.  (Read 1409 times)
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« on: January 09, 2010, 10:57:36 AM »

INFLATION, THE HIDDEN TAX

by Lawrence Wilson, MD

© December 2009, The Center For Development

________________________ ________________________ ____________________
 
In his classic book, The Economic Consequences of the Peace (1920), John Maynard Keynes observed:

“Lenin (the founder of the former communist Soviet Union) was certainly right.  There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.  The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose”.

Many people do not realize that inflation is with us, and it is an extremely destructive hidden tax, especially on the poor of all nations of the world.  Inflation reduces the buying power of your money, so you become poorer, even if you have the same amount of money in the bank or in your pocket.

Suppose, for example, the inflation rate is 3.5%.   If you have $30,000.00, in ten years it will only buy $20,550.00 worth of goods.  If the inflation rate is 5.5%, (which is closer to reality, as inflation is often underestimated by the government’s measurements), your $30,000.00 is worth only $16,650 in ten years.  This should be enough to scare anyone.  Let us explore what inflation is and why it is occurring.

WHAT EXACTLY IS INFLATION?

      People believe that inflation is rising prices.  That is not quite true.  Inflation means there is more money out there chasing the same number of goods and services.  As a result, the value of the money is diluted.  One result is higher prices.  There are also other negative consequences, as we will explore below. 

Inflation is like if a person were to slowly add water to our gasoline.  You might not notice the difference at first.  But after a while, the gas would not power your car as well and eventually it would not work at all.  Your gasoline would no longer have the value it had before.  Another common analogy is that it is like adding a little water to the milk that is sold in the store.  For a while, no one might notice at all.  However, the milk is less nutritious, and won’t taste quite right.  Eventually, the people wake up and realize the milk is not nearly as good, although it might still look okay.

Since the money is diluted, it does not work as well and it takes more of it to buy things.  For example, good, solid money 100 years ago could buy a nice house for about $20,000.00.  Today, with the diluted money, it takes $200,000.00 or more to buy the same house.  Higher prices are just a way we express the fact that the diluted money of today does not buy as much.

INFLATION AS A HIDDEN TAX

Inflation is actually an old, secret method of taxing the people without their knowledge.  This may sound strange because no one talks about inflation as a tax.  However, I will explain.

When extra money is printed up and put into circulation, it costs the government very little.  The only cost is that of printing.  Each paper bill of any denomination from $1 To $1,000 or more costs less than fifty cents to manufacture.  So it is almost free money for the government.

They just run the printing press and it suddenly exists.  It seems like they can create value out of nothing.  It is wonderful for the government, which is why most governments do it all the time.  Most nations, by the way, do it far more than the United States.  We are not used to inflation, but in other nations of Africa and Asia, it is business as usual.

The government can then lavish the money on all their favorite projects without worrying about the people complaining, because the money seems to be “free”.

However, it is not free.  What it does is to slowly dilute the money that is in existence already, like diluting the milk in the analogy above.  So all the money the people already have, including all their savings, salaries and all the rest, slowly start to be worth less.  In this sense, inflation is a very hidden tax, or way the government confiscates the people’s real wealth.

If the government gave its new printed money to each of us to spend, it wouldn’t be so bad.  Then at least we would all have more of the diluted or less valuable money.   But they never do this, as a rule.  They give it their favored friends and projects.  Everyone else is just cheated out of some of their wealth.  This is indeed a sneaky way to tax people because:

·      It happens so slowly that few people see it.

·      It is hidden, as there are no tax forms to fill out or taxes added to your purchases or bills.

·      Unlike other taxes, no one seems to force you to pay up on April 15 or any other day

·      People actually feel richer because often their salary and the price of their house goes up.  In fact, many actually have more money, but of course all that cash is worth less.

·      Inflation does not require any new laws that people could debate and vote down. Thus it happens silently and secretly.


WHY, THEN, ARE SOME PRICES LOWER TODAY?

Inflation has caused the price of land, cars, houses, energy and other things to rise dramatically over the past 50 years or so. However, a few items seem to be getting less inexpensive today, like computers and even clothing.  This is occurring for several reasons:

1. New technology has dramatically reduced production costs in some areas.  This helps keep some prices low.

2. Innovation reduces the cost of certain items like electronics.  For example, today’s computers are simply much more advanced than those of 10 or even 5 years ago.  We get more for our money.

3. Lower wages that are paid to workers in nations such as China, India, Vietnam and others also help keep prices down.

4. Our trading partners such as China, Japan, Canada and Europe are all inflating their currencies.  In fact, some are doing so faster than we are in the United States.  We are in a curious situation with competitive destruction of the currencies by a number of nations.  This keeps the cost of many foreign goods lower, as well.

5. As more nations become developed and join the family of industrializing nations, more goods and services are being offered.  In this sense, the larger amount of printed money is not chasing the same number of goods and services.  Instead, the number of goods and services is also increasing.  This also offsets some tendency for inflation.

6. A deceptive reason for some lower prices today is the goods are not as high quality.  For example, I have some older bed linens, for example, and even coats that were left to me by my parents when they died.  They are much better made than most linens today, and have lasted far longer.  This concept is sometimes called planned obsolescence.  It is a fancy way of saying that things are made cheaply.  It is not all bad, because it enables us to buy the most energy-efficient new things, for example.  However, it wastes a lot of resources and creates a lot of extra garbage, at times, as people throw away equipment that breaks quickly, for example.

THE DARK SIDE OF INFLATION

Printing paper money that is not backed by gold and silver has many other negative effects connected with ever-higher prices and price instability.  Here are just a few:

 ·      Businesses and individuals cannot plan for the future nearly as well.  They simply cannot depend on stable raw material and other prices.  Instead, they are forced to hoard goods, buy things they may not need but can use as bargaining chips and do other things that are costly and often counterproductive.

·      Businesses are often far more afraid to take risks in inflationary times.  They simply don’t know what the future will bring.  This is terrible, because businessmen taking risks is critical for innovation, research and development of new products and new technologies.

·      People lose faith in the government and in each other.  Everyone has a tendency to believe that everyone else is cheating them.  This causes social unrest, crime, violence, and other social problems.


·      Because planning is so difficult, maintaining a business or even a household becomes far more difficult.  This causes many more bankruptcies, foreclosures, loss of homes and businesses and other very disruptive effects on society.

·      As social unrest grows, strikes, protests and riots occur more frequently because so few people understand inflation and how to cure it.  Anger mounts and civil society disintegrates.

·      Inflation encourages people to go into debt.  After all, when the time comes to repay your loan, you can do it with inflated and less valuable dollars.  It is like borrowing good quality gasoline and being allowed to repay it in diluted gasoline.  This favors those who are not the productive people in society and it punishes those who save their money.  This is not at all healthy for society.

·      It is very tough for the working and middle classes in particular.  They often depend on their labor, which is just not bringing them as much money as it did before.  They don’t have assets that appreciate with inflation such as large homes and some stocks.  Thus the poor people are hurt the most.  Even beggars and those on welfare are hurt badly as they find their limited means just won’t buy as much as before.

·      People who are used to saving some money find they cannot save money or the money they have saved is worth much less.  They also feel cheated and become angry and fearful.

·      Basically, it impoverishes the people and ruins the health of society.

·      It also tends to destroy democratic principles and substitutes a welfare type of state that rewards its friends and punishes its enemies by withholding money.  This leads to distrust, anger and often revolution and decay of society.

 PREVENTING INFLATION

Inflation is really the most terrible of crimes.  The American founding fathers knew this well and did their best to prevent it.  The United States of America, among all nations, is perhaps the only one that has written into its Federal Constitution that “no state shall … make any thing but gold and silver coin a tender in payment of debts”. - Article I, Section 10. 

This was put into the Constitution specifically to prevent inflation.  Unfortunately, this intent was violated almost 100 years ago.  The American people need to find Supreme Court and other justices who actually understand the intent and the wisdom of the original Constitution so as to prevent the government from violating this important clause concerning the nation’s money.

All paper money in America, by law, must be redeemable in gold or silver.  This was the case for years.  Old dollar bills printed before 1913, or perhaps even later, all were required to state “Redeemable in Silver”.

You might ask, how is it possible that our government can just ignore the Constitution?  It is largely because the people are totally ignorant of the Constitution.  It is taught poorly if at all in public school.  Also, there is a prevailing attitude that the Constitution is just an old piece of paper.  Judges have ignored its intent, often at whim, and their understanding of it is limited.

Finally, there is much corruption in the government.  We have elected many representatives who care more about money or power than they do about following the law.  I hope this will change as more people understand inflation, and that our leaders need to be held accountable for their actions.

The only way to prevent inflation, as far as I know, is to have an honest government that is not permitted to print endless amounts of money.  The best way to do this is to have a gold standard, or something similar, so that the government is forced to put some value behind their paper money.

WHAT CAN A PERSON DO ABOUT INFLATION?

         Live healthfully.  The reason for this is that when inflation really hits, the health care system will be cut back.  This is especially the case if it is a government-run system.  Costs will rise and the government usually just cuts back services to save money.  This website is full of articles on how to live healthfully and prevent most diseases.

Call and write your representatives in the state and federal governments.  Tell them:

·      They must stop spend so much money.

·      They must work to get the nation out of debt.

·      They must not print more paper money, or just create electronic book entries, also called “monetizing the debt”.

·      They must return the nation – all nations - to a precious metal standard, like the gold or perhaps a silver standard.  This would effectively prevent the government from just printing money because all the paper money would have to be backed by some precious metal.  This means that anyone could turn in their paper dollars for real gold or silver coins that cannot be faked or just ‘printed up’ at random. 

Inflation hedges. These are investments, basically, that tend to hold their value in a time of inflation.  They include any tangible items that are useful to people, such as cars, houses, tools, equipment, land or real estate, electronic devices that don’t go out of date quickly, even good clothing, shoes and other real goods.

Another inflation hedge is to own some gold or silver in some form, since its value usually goes up with inflation.  Finally, if someone has extra money to invest, one could talk with an accountant or financial counselor about other investments that are likely to increase in value if inflation gets worse.  These might be selected stocks or other things.  Be very careful with investment advisors, however, as many are not honest.

Also, do not live beyond your means.  Save some money in the form of coins or other tangible goods. 

 THE ACTUAL SITUATION TODAY

          Today’s inflation is unique, in a way, because almost all nations are inflating their money.  It is like a competitive race to see who can destroy the currency fastest.  However, this has hidden benefits for everyone.  If only one nation inflates its money, that nation would be doomed.  Many people say this about the USA, for example.  However, today most nations are inflating their money and the USA is just starting to ‘go with the crowd’. 

Therefore, I believe the doomsayers are absolutely wrong about the downfall of the USA.  Instead, all prices will rise slowly, most likely, although gold and silver prices could climb faster.  In fact, they have tripled since around 1991, along with a few other prices like health care costs and land values in some places.

Worldwide inflation tends to “spread the misery” so it will not be as devastating for any one nation, most likely.  However, it still causes instability which is always bad.

          A few hidden benefits of inflation include:

 ·      It may bring some people back ‘down to earth’, so to speak, forcing them to think about their purchases, their investments, and what is real and what is fluff in their lives.  This is actually a spiritual benefit that unfortunately usually requires some pain and deprivation.
 
    Inflation often follows a period of prosperity where people get lax and allow the government to violate the law, as has happened in America.  So it is a wakeup call for many people that eventually is helpful for society if it can return to sound monetary and governmental policies.

·      It is good for some businesses that borrow money.  They can repay with cheaper dollars, so at least it seems like a benefit.  Unfortunately, interest rates usually rise in inflationary times, so borrowing tends to cost more, offsetting some of the benefit.

·      Inflation tends to teach a good lesson, which is not to trust the government.   This is a lesson I think most Americans and others around the world need to learn.  It was clear to the founders of America, but liberal teachers and leaders have convinced many people that government is benign, when it is never the truth.  To paraphrase George Washington, I believe he stated that “Government is force.  It may be necessary, but government is never good.”  Thomas Jefferson expressed the same idea when he wrote “that government is best that governs least”. 

________________________ ________________________ _______________

When any of these idiot politicians talk about spending more money we dont have, remember this article.   

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« Reply #1 on: January 09, 2010, 12:03:32 PM »

I blame aliens.  They're obviously tied into this CT somehow  Grin
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« Reply #2 on: January 09, 2010, 12:10:29 PM »

I blame aliens.  They're obviously tied into this CT somehow  Grin

Ha ha.  This is one of the better articles I have posted and should be read by everyone. 
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« Reply #3 on: October 15, 2010, 07:39:08 AM »

Bump -

With the news out of the Fed today - this article needs to be bumped. 

Reminder to me - go buy more ammo, toilet paper, tooth paste, razors, toilitries, etc. 
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« Reply #4 on: October 15, 2010, 07:39:50 AM »

I blame aliens.  They're obviously tied into this CT somehow  Grin

240 - was I correct over a year ago posting that?  Yes or no? 
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« Reply #5 on: October 15, 2010, 07:45:07 AM »

"They" need inflation and will do anything to get it, anything. And with Madman Ben signaling that he wants more inflation means we, the not middle class or millionaire or connected person, will be in deep shit.
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« Reply #6 on: October 15, 2010, 07:48:56 AM »

"They" need inflation and will do anything to get it, anything. And with Madman Ben signaling that he wants more inflation means we, the not middle class or millionaire or connected person, will be in deep shit.

We are royally screwed TBH - I said so from day 1 and am more convinced than ever.  and I don't blame only the govt and people like bwen, obama, timmy, etc.  I blame all of us. 

Whether its the teachers demanding more and more pay and benes and pensions, the cops doing the same thing, endless welfare for everyone, endless food stamps and UE, state govts refusing to cut spending, state govts refusing to maturely deal with the pension tsunami, mature adults acting like children on our unfunded liabilities in entitlemkent programs, endless wars and foregin committments, etc,

BOTTOM LINE IS THAT THERE IS SIMPLY NOT ENOUGH MONEY OR GROWTH IN THE ECONOMY TO SUSTAIN OUR PONZI SCHEME ECONOMY AND SPENDING.   
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« Reply #7 on: October 15, 2010, 07:51:44 AM »

I've said it before, the govt. has stated that it needs 5% growth to meet all spending and borrowing expectations.

5% is a million miles away right now.
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« Reply #8 on: October 15, 2010, 07:52:58 AM »

The only thing I do think that might work, but will never happen, is to sell off some of our natural gas to foreign sources and have it go directly to paying down the debt, shrink govt by 50%, lower taxes, end the EPA, mass tort reform, end govt pension system, etc.  
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« Reply #9 on: October 15, 2010, 07:56:46 AM »

I've said it before, the govt. has stated that it needs 5% growth to meet all spending and borrowing expectations.

5% is a million miles away right now.

We can't achieve 5% growth, or anything close tot hat so long as we have economy killing regs, epa, hostile labor laws, etc etc.  In a global economy, businesses will simply set up shop elsewhere. 

Shit - just go persue my thread on how Obama is killing the economy.  Every day we have more and more job killers  being tossed our way. 
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« Reply #10 on: October 15, 2010, 08:05:24 AM »

The only thing I do think that might work, but will never happen, is to sell off some of our natural gas to foreign sources and have it go directly to paying down the debt, shrink govt by 50%, lower taxes, end the EPA, mass tort reform, end govt pension system, etc.  

We should be exploiting our massive natural gas reserves and begin to convert it into fuel for our cars and transportation fleets.
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« Reply #11 on: October 15, 2010, 08:27:31 AM »

We should be exploiting our massive natural gas reserves and begin to convert it into fuel for our cars and transportation fleets.

GigantorX - the more i have been reading lately - whether its Creature from Jekyll Island, Econ books, DSouzas book, Hayek, and many other items the last 2 years, I have come to the conclusion that we are basically FUCKED! 

When you tally it all together and take a macro view of everything, like Celente does, I really don't see where we are going with all of this. 

We simply don't have the will anymore to be honest about our issues and do what is necessary to thrive. 

 
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« Reply #12 on: October 15, 2010, 09:12:26 AM »

Food prices about to EXPLODE - Thank you Obama and Ben

http://www.businessinsider.com/food-inflation-in-the-september-cpi-2010-10#comment-4cb87cc67f8b9a39621a0000

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« Reply #13 on: October 18, 2010, 07:18:37 AM »

BUMP
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« Reply #14 on: October 18, 2010, 07:26:14 AM »

Hey Mal - do you see what we are talking about yet? 

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« Reply #15 on: October 18, 2010, 07:46:09 AM »

Guys:

If you want a real doom and gloom article on the economy as a result of our money printing schemes - check this out.

http://www.businessinsider.com/eric-sprott-keynesianism-2010-10

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« Reply #16 on: October 28, 2010, 04:43:33 PM »

The Fed's 'tax on the consumer'
CnnMoney ^ | October 28, 2010: 8:45 AM ET | By Hibah Yousuf, staff reporter




Investors have been cheering the prospect of the Federal Reserve pumping more money into the economy, but some experts warn it may wind up hurting consumers' wallets.

Ever since Fed Chairman Ben Bernanke pledged that the Fed would take "unconventional measures" to keep the economy afloat, the S&P 500 has climbed more than 11%.

Those 'unconventional measures' would likely be another round of asset purchases, known as quantitative easing, or QE2 for short. The move is designed to boost the economy and lower interest rates. But it would also add further pressure on an already weak U.S. dollar.

Since Bernanke's comments in August, the dollar index has dropped 7%, while commodities have surged. Crude oil has jumped 14%, while gold has spiked 8%. Prices for cotton, corn, sugar, wheat and coffee also have all hit new highs during the past two months.

Ultimately, those lofty prices will trickle down to consumers in the form of higher prices for coffee, bread, pizza, gas, clothing and more.

"The problem I have with QE2, is it behaves like a tax on the consumer," said David Giroux of T. Rowe Price. "People want to believe it's a free lunch for the economy, but it's definitely not. Next year, we're going to be paying more at the gas pump and the grocery store."

American households already spend $340 billion a year on gasoline, according to U.S. economist Paul Dales of Capital Economics. Since late August, the price of a gallon of gas has jumped 4.8%.

All it would take is another 10% increase, and the average cost per gallon would rise above $3, adding $51 billion a year to your household tab, he said. Even a modest 5% rise in food prices would force a family to add about $350 a year to their grocery budget.


(Excerpt) Read more at money.cnn.com ...


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« Reply #17 on: October 29, 2010, 09:27:09 PM »


Inflation is like if a person were to slowly add water to our gasoline.  You might not notice the difference at first.  But after a while, the gas would not power your car as well and eventually it would not work at all.  Your gasoline would no longer have the value it had before.  


Ummm... you do know I've got the perfect solution for that don't you?
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« Reply #18 on: October 30, 2010, 05:01:58 AM »


Ummm... you do know I've got the perfect solution for that don't you?

i thought you were into gold now/
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« Reply #19 on: December 02, 2010, 11:48:03 AM »


Inflation Is Rampant In Tuition, Healthcare And Property Taxes
Charles Hugh Smith, Of Two Minds | Dec. 1, 2010, 11:06 AM | 819 |  14





Here is my simple definition of rampant inflation: you're paying a lot more money for the same item/service but the quality/quantity is the same or lower--and your income is stagnant/declining. We are constantly told that inflation is near-zero, but the basket of goods selected for measurement seems not to include healthcare/health insurance, college tuition or property taxes.

These costs are skyrocketing, and they are non-trivial expenses, running into the tens of thousands of dollars per year. I have addressed the difference in scale of expenses for the wealthy and the "middle class" before. For instance, $10,000 per year for healthcare insurance is a massive percentage of the after-tax income of a household earning $60,000 a year, while it is a modest percentage roughly equivalent to the sums spent eating out and traveling for a household earning $160,000 a year.

The same scale differences are present in all measures of inflation. Onions might well have declined over the past year, which means that the $30 I spent annually on onions declined to $29--a grand savings of $1.

Even a 10% decline in natural gas costs would only yield a modest $50 reduction in costs for my household. Let's say another household consumes a lot more natural gas, and their savings would total $200 a year.

Compare these modest reductions due to deflation with the thousands of dollars in increases in big-ticket items like tuition, property taxes and healthcare.

Take property taxes. Nationally, according to the Census Bureau report on state and local tax revenues, total property taxes in the U.S. rose from $225 billion in 1998 to $476 billion in 2009 -- an increase of 111% over a time period that saw costs rise 32% (i.e. Bureau of Labor Statistics calculated inflation from 1998 to 2009 at 32%).

So nationally, property taxes rose at a rate that was triple that of inflation.

My own property taxes rose 25% from 2004 to 2010, while inflation in that period was officially 16%. So my property taxes rose at a rate that was 50% ahead of inflation. This is for property in California, supposedly protected from increases above 1% per annum by Proposition 13. (Local voters can approve additional parcel taxes, and they regularly do when presented with "save our schools, libraries, etc." tax increases.)

These increases amount to several thousand dollars a year. Medical insurance (stripped-down basic coverage from Kaiser) and our property taxes take a huge percentage of our after-income tax income. Whatever items now cost less than a few years ago are essentially trivial in cost over a decade (how many TVs am I going to buy every decade?), while the increases in healthcare and property taxes amount to several thousand dollars a year. Together, those increases above the "official" low rate of inflation add up to $50,000 over a decade.

Here is a typical example of how property taxes have doubled in the San Francisco Bay Area (this is not our house, but one picked from zillow.com):

A modest house valued at $270,000 in 2004 paid $5,090 in property taxes. (Please note California is a "low tax state," according to those anxious to raise all state taxes.)

The house was sold in July 2005 for $725,000 (near the top of the bubble) and property taxes promptly jumped to $10,977. By 2010, taxes had climbed to $12,193: a grand a month.

The utility value of the house remained unchanged. There was still the same number of rooms and square footage. The owners received no "hedonic" improvements; they're just paying $12,000 annually in property taxes instead of $5,000.

Tuition to the public universities and colleges in California has skyrocketed. Tuition to attend the University of California system was $1,820 annually in the 1990-91 school year; the tuition for the 2011-12 academic year is $12,151.

According to the BLS inflation calculator, $1 in 1990 equals $1.67 in 2010. If UC tuition had matched inflation, then tuition should now be about $3,040 a year, not $12,000.Tuition has quadrupled, even when adjusted for inflation.

The State University system has also seen tuition jump:



Image: California State University


So while clothing and electronics may have declined by a few hundred dollars a year per household, tuition for a four-year university now costs $40,000 more -- and that's not counting student fee increases. So while a laptop might be a few hundred bucks less, and clothing might be a little less, it costs $50,000 more to send your child to a state university. That is not "low inflation."

As for healthcare--if you buy your own healthcare insurance as a business owner or self-employed worker, then you know the drill--huge annual increases, year after year, recession or not. Our household medical insurance costs have doubled in a few years, and that's for stripped-down coverage (no dental, eyewear, drug coverage, etc.) and higher deductibles on every category.

Add the thousands of dollars more per year for property taxes and health insurance, and you are talking sums of money which are orders of magnitude greater than the modest reductions in expenses for other items as measured by the Central State. Most households are reaping extremely modest savings on clothing, electronics, and the other items which are a bit cheaper, while the increases in healthcare, property taxes and education are running in the thousands of dollars annually.

I may have saved a few dollars on onions and shirts, but we are paying $5,000 more per year for property taxes and healthcare insurance. If these costs were increasing at the official low rate of inflation (1.1% per annum), then they would be registering increases of a few hundred dollars every decade, not thousands of dollars more every few years.

"Low inflation" doesn't add up when you consider the tens of thousands of dollars in increases stacking up in tuition, taxes and healthcare. I have addressed some of these issues before:

Does Healthcare Reform Address Rising Inequality? (September 17, 2010)

Wall Street's "Recovery" Leaves Main Street Mugged in the Gutter (November 17, 2010)

Tags: Inflation, California, Taxes | Get Alerts for these topics »

Read more: http://www.businessinsider.com/inflation-is-rampant-in-tuition-healthcare-and-property-taxes-2010-12#ixzz16yulIimb

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« Reply #20 on: December 02, 2010, 08:48:33 PM »

Don't Believe The Fed, Inflation Is Theft From The Middle And Lower Classes
The Business Insider ^ | 11/29/2010 | Mike "Mish" Shedlock



Deflation is often natural, but inflation is a real threat

In Unthinking Economic Parrots and Deflation Fighting Madness I trashed unthinking writers who parrot the Fed's misguided beliefs about the importance of inflation expectations and why falling prices are bad.

I specifically quoted one parrot who said "Deflation is particularly damaging to economic growth as consumers delay purchases until prices fall further."

This was my rebuttal.... The ineptitude of Japan's policies hoping to combat deflation is staggering. Worse yet, unthinking economic parrots talking about the "economic damages of deflation" have no idea what they are even saying.

I wish economic writers had the ability to think rather than parrot ideas espoused by Keynesian clowns.

Series of Questions If your refrigerator conks out, will you buy a new one or wait 6 months to take advantage of lower prices? If the transmission on your car fails will you wait 6 months to get it fixed?

If your pantry is bare, will you wait 1 month to buy food even if you expect food prices to drop? If you need a new winter coat, will you wait and if so, how long?

The answer to that last question is "Perhaps for a bit, but you will not wait 3 years even if you expect prices will be even lower 3 years from now."

Short of assets like stocks, bonds, and housing (and except for periods of hyperinflation) it is tough to cite any examples where inflation expectations mean a damn thing.


(Excerpt) Read more at businessinsider.com ...


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« Reply #21 on: December 03, 2010, 07:45:14 AM »

Bump.
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« Reply #22 on: December 03, 2010, 08:48:06 AM »

Interesting read. Wonder if the Obama nuthuggers have read it.
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« Reply #23 on: March 04, 2011, 07:29:15 AM »

You Call It Inflation, I Call It Theft
Mar. 3 2011 - 5:05 pm | 1,096 views | 0 recommendations | 3 comments
By BILL FLAX


http://blogs.forbes.com/billflax/2011/03/03/you-call-it-inflation-i-call-it-theft



On my daughter’s birthday, she received a crisp new $5 bill, which she promptly deposited in her piggy-bank. Never foregoing an opportunity to expound on free market principles, I warned about her susceptibility to a subtle means of theft even more devious than a burglar breaking in at night against whom you might get a clear shot.

Usually, when she asks why it’s, “Because I told you so!” But for inflation, because Washington wills it, that explanation hardly suffices. And as often as economic prognosticators prescribe currency debasement as some miraculous panacea, her question is a good one. Why do we suffer inflation?


I searched online for “benefits of inflation.”

Inflation Spurs Growth – The theory goes something like this: Since savers realize the value of their money will erode, they spend more quickly thus stimulating the economy. If we believe tomorrow brings higher prices, we buy today. Basically, we spend before the monetary authorities steal our money’s value. Hmm.

The proponents of consumption-based stimuli overlook the essentiality of saving. While burying your money in the ground wastes its talents, most save via bank accounts or through the purchase of capital assets. Thus saving makes investment capital available for new businesses hiring new workers and creating new products that sustain and beautify life. The accumulation of capital drives growth.

Inflation discourages saving. Inflation buries capital into the ground as people flee toward real estate as a protective hedge. Inflation stymies growth.

Inflation Decreases Debt Burdens – If we borrow say, $14 trillion and then cheapen our debt through dollar devaluation, the repaid lenders can’t buy as much thanks to diluted dollars being returned to them.  Inflation essentially harms savers for the benefit of borrowers. Every dollar borrowed requires a dollar saved. The economy gains nothing by such mischief.

Generally, borrowers aren’t responsible for this debauchery so it’s not fair to label it theft. In government’s case, dilapidated debts at least rise to the level of fraud. Why does Washington willfully reward the profligate by cheating the prudent? Ah yes, because they exude profligacy.

Inflation Increases Asset Values – As the dollar falls, the price of our assets raises commensurately. Stocks, real estate, etc. surge. That sounds wonderful, but their value increases against what? Since the prices for everything else rise too all we’ve secured is a nominal gain for tax collectors to confiscate. We derive no real benefit.

A stock that cost $20 thirty years ago would need to fetch over $50 today just to match the CPI, understated as it remains.  If it now costs $40, you pay the IRS on the $20 nominal gain even as your stock actually lost value.  Washington thus rewards itself for its own reckless monetary policy. The more they inflate, the more they take.

A similar phenomenon nails your wages. As your salary increases, you pay more taxes even as you can afford less. A two percent raise increases your tax bill two percent, but if prices also rise only the IRS derives any benefit.

Inflation Offsets Unemployment – The Philips Curve, the illusion that increasing inflation decreases unemployment, remains a staple of macroeconomics even as few still publicly acknowledge its role. Bernanke, Geithner et al remain smitten by the Philips Curve.

To succeed, this essentially entails deceiving workers. Since the price of labor, your wage, is less elastic than many other costs, businesses can raise prices quicker than can employees increase their salary demands. As businesses raise prices to cope with inflation, the cost of labor proportionally lowers. Thus, in Keynesian theory, more workers can be hired as inflation dilutes your pay.

Remember this when you hear some self-proclaimed friend of the working man imploring that we accept inflation as a means to expand employment. They peddle pay cuts for workers in real terms versus free marketers who promote wealth generating growth. Growth affords higher living standards for all. Inflation silently erodes living standards.

Inflation Promotes Exports – While few non-economists still accept the Philips Curve, the crowd espousing inflation as a facilitator of exports proves more enduring. Exporters love dollar debasement.

In theory, if the dollar falls then anything priced in dollars becomes cheaper for someone holding say, euros. But the dollar and the euro are merely measuring sticks. The underlying transaction involves trading our goods. Currency is a tool; a ticket of exchange. Currency simplifies trading relative to bartering. You may not want my output, but you definitely want my dollar so that you can acquire what you do want.

For illustrative purposes only, ignoring taxes, regulatory burdens, and transportation costs or differing local tastes, if the dollar equals the euro and it takes a dollar to buy a dozen eggs then it too will take a euro to buy those eggs.  Purchasing price parity.

But as the dollar plummets, a euro is now worth more. Thus it takes more dollars to buy eggs, but it still takes but one euro. Domestic eggs didn’t become cheaper in euros. This isn’t some mysterious or complicated economic theory or even subject to debate. It’s elementary school mathematics: the transitive property. If A equals B and B equals C then A too must equal C. Making A not equal B doesn’t change the value of C.

Markets are not perfect and as well as the arbitragers perform, timing differences remain. Gutting the dollar never makes eggs cheaper in euros other than timing discrepancies, which can make or break producers. Firms whose inputs are denominated in one currency and their outputs in another frequently get jilted.

As the dust settles, things must balance, but if you bought a dozen eggs yesterday in dollars to sell them tomorrow in Euros, the dollar’s lack of certainty promotes intrigue. Inflation wobbles the scale hindering international commerce.

When parties trade of their own volition, by mutual consent and to mutual advantage, both expect to gain and both should, assuming an honest scale. When Washington deliberately engineers a false balance, the likelihood that someone gets harmed rises dramatically. Cheating your trading partners can win the day, but isn’t a successful long term strategy.

Like the Philips Curve, promoting exports by debasing the currency effectively pokes the pendulum. The inflation driven exhilaration proves fleeting as the pendulum swings back like a wrecking ball. Some latch onto the pendulum as it soars higher, but others get whacked as it returns.

Inflation is deceitful and ineffective. It swindles savers, fleeces lenders, pumps taxes higher and triggers malinvestment. It doesn’t reduce unemployment; it whittles away your wage. Nor does inflation promote exports, but it does make international trade more frightening.

If inflation succeeded, it would be merely dishonest. But as history proves, it never works. Neither Bush, nor Obama’s weak dollar policies did anything to alleviate the overblown “trade deficit” and much to undermine growth. There is no evidence that inflation fosters exports or employment.

As Washington plunders the value of our property and expropriates the product of our labor, inflation reduces us to servitude. Debasement is a despicable ploy the government uses to rob you blind. Period.

So what do I tell my children?

 
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« Reply #24 on: March 14, 2011, 12:10:32 PM »

Frustrated Crowd To NY Fed Chief: 'I Can't Eat An iPad'
 Source: TalkingPointsMemo.com


New York Federal Reserve President William Dudley on Friday tried to calm people's nerves about rising food prices by reminding them that other products -- like iPads -- are getting cheaper.

"Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful," Dudley said in Queens, Reuters reports. "You have to look at the price of all things."

But better iPads don't put food on the table, audience members reminded him. "When was the last time, sir, that you went grocery shopping?" one person asked. And, perhaps most succinctly, another told him, "I can't eat an iPad."

Yahoo's The Lookout points out that food prices have been rising since November 2009, and that consumers should expect to pay 4 percent more for food this year.

Read more: http://tpmlivewire.talkingpointsmemo.com/2011/03/frustr...

 
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