Time For The Middle Class To Eat The Cost of Government

Posted by Jason | Posted in Economics, Government | Posted on 19-02-2010

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When Democrats want welfare programs and Republicans want wars, ultimately the bill comes due. When asked how they are going to pay for them, they always default to their standard line, “We’re going to tax the rich.” Well, the rich are not that stupid to pay for other people’s free lunch. How do they avoid paying? Well, let’s look at how we are going to pay off the debt we have accumulated with all the government spending.

As the White House tried one more time Thursday to galvanize support from a recalcitrant Congress for a deficit commission to tackle the nation’s dangerously bloated debt, fears are growing that the United States will once again resort to printing money and ginning up inflation to resolve its debt problem.

While accelerating the printing presses could do irreversible damage to the dollar’s international reputation and the U.S. economy, history suggests that this is the way Washington will go to avoid the political pain of having to raise taxes and cut spending on popular programs such as Social Security, defense and Medicare.

Some notable economists argue that such a move would avert a debt crisis like the one confronting Greece and other European countries that have been unable to reduce spending because of strong public resistance.

Political leaders and the Federal Reserve, which is charged with printing and circulating U.S. dollars, strenuously deny that they have any intent to “inflate” out of the debt.

Nevertheless, a sign emerged this week that the prospect is increasingly becoming an issue in internal Fed deliberations.

The Fed’s most strident inflation fighter, Thomas Hoenig, president of the Fed’s Kansas City reserve bank, warned on Tuesday that “short-term political pressures” are prompting Congress to take a risky gamble by continuing to borrow at unsustainable rates rather than address the deficit problem and he expects political leaders to be “knocking at the Fed’s door” to demand that it print money to pay for the debt.

This path “inevitably leads to financial crisis,” Mr. Hoenig said, while the inflation it would spawn would threaten American living standards and destroy the independence and credibility of the Fed, whose most important job is to prevent inflation.

That’s right. How do you rob the middle class without most of them knowing you are taxing them to pay for government? You devalue the money they have. Think this isn’t a tax on the middle class? Well, prices will effect he poor as well, but they get inflation adjusted government benefits anyway. How about the rich? Well, the rich own assets, which go up with inflation. Rich people aren’t sitting around swimming through their devaluing dollars like Scrooge McDuck. They own real estate, businesses, etc. Real estate prices go up with inflation. Businesses will charge more for their products and services, so their value will go up with inflation. Now, how about the middle class? The middle class will be the ones paying this tax. Their pay will not adjust before prices increase, so their pay will be eroded and they will afford less goods and services.

Keynesians, the ruling economists of our government, believes that in a recession wages will not decrease enough to help with improving the economy. They believe this to be the case, because workers are unwilling to take less pay. I can tell you from real world experience this is not the case. Many workers have taken one or more pay cuts in our current recession to help their companies and to remain employed. The Keynesians though argue that because workers won’t take pay cuts, you must lower their pay without them knowing it. How do they do it? They devalue their pay with inflation. Just more of the government trying to manipulate the economy at our expense.

But despite some resistance and wariness at the Fed, a growing number of Wall Street gurus expect the U.S. to adopt at least an unofficial policy of growing or “inflating” out of the debt in light of Congress’ unwillingness to tackle budget deficits running at more than $1 trillion for the foreseeable future.

“Inflation was the largest factor behind debt reduction” after World War II, he said. “Growth was the second-largest factor,” with Congress making only a small contribution through modest budget restraint. The behind-the-scenes role of the Federal Reserve in accommodating faster growth and inflation through faster money creation was critical, he added

I guess this is supposed to be an example of us doing this in the past, so you should just say, “Oh, OK. If it worked then, then I guess we can do it now.” This is a horrible example though. One, we went into debt to fight the largest war the world has ever known. Currently our debt is largely frivolous spending, with more spending in the pipeline. Second, we had tremendous growth after the horrible policies of FDR were removed from the economy after the war. Imagine how fast you would be able to run, after throwing another person off your back. That is what happened to the economy. The rationing and price controls implemented during the new deal and the war, shackled the economy. When they were removed, the economy boomed. Do you see that happening now? Of course not, it will take much more inflation than it did after the war.

“The independence of the Fed is extraordinarily important. If the Congress or the administration were to begin to interfere with our monetary policy decisions, then the markets would say, wait a minute, there’s going to be more inflation because of political reasons, more inflation because the government wants the Fed to spend money in order to pay for the deficit.”

Independent my ass. The Fed was created by the congress, which means ultimately the congress can pressure them to do what they like. Watch Bernanke testify before congress, and see how often he mentions what congress tasked the Fed to do. The congress could easily change what they task them to do. There is no such thing as independence when one party has a gun.

But some analysts say the Fed undermined its own case last year by instituting programs that had the effect of helping to underwrite the Treasury’s debts.

The Fed printed money to purchase $200 billion of Treasury bonds last year in an effort to keep interest rates low and nurture an economic recovery. The rationale was that interest rates paid by consumers and businesses are linked to Treasury rates. But Fed officials ended the program in the fall, partly out of concern that it gave the appearance that the central bank was printing money to help underwrite the national debt.

Some respected economists have openly advocated an inflation strategy for reducing the debt. Kenneth Rogoff, a former chief economist at the International Monetary Fund, has suggested a 4 percent to 6 percent inflation target for the Fed to help deal with the debt.

via Induced inflation feared as way to cut debt – Washington Times.

How many people have are getting 4 to 6 percent raises every year just to keep their same purchasing power. Of course, what this number really is is disputable. The Fed uses the Core CPI with energy, food, and housing excluded. It just so happens those are the areas where most of your money goes.

“What? No, No, there’s no inflation here. Look! The CPI says so. Nothing here to see. Get back to work. You’ll need to get some extra hours in.”

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Comments (6)

Hi, Jaded here,

I was wondering how long it was going to take before inflation was seen as an accepted solution to this problem. I think you may have even talked about this in one of your first posts on this blog.

Not only did the US use it after WWII like you mentioned, but Germany destroyed their economy after WWI by inflating their currency to pay off the reparations they owed after the Treaty of Versailles. Interestingly enough, the economic and social mess left after that massive hyper-inflation left Germany in a position to allow Hitler to come to power.

I think at this point the American people understand this country is in a deep hole. I think they also understand that there is no magic bullet here that will fix this without any pain. Unfortunately I don’t think Congress feels the same way, which is why inflation is even seen as an option.

What happened to the open and transparent Congress we were promised? If they were open and transparent, at least then the American people would see what the options were: Slash spending (I’m thinking 25-40% across the board) and Share the Burden (lower the tax rate, but increase the tax base so more people are paying in), or a massive tax increase on the middle class by inflating the currency and robbing us of purchasing power.

Maybe I’m giving the American people too much credit, I don’t know.

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We need to repeal the income tax to start, and then end the federal reserve. I believe Ron Paul said, if you got rid of the income tax, we’d basically go back to 1994 spending levels.

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I like the idea of repealing the income tax, but that’s the least likely outcome.

If you repealed the Corporate and Personal Income Tax (and even replaced it with a consumption tax of say 10%), you’d be able to eliminate the IRS, reducing both time and effort that’s wasted dealing with that bureaucracy. That means you could also eliminate all agencies that deal with the taxes – H&R Block and all those accounting firms and income tax lawyers (I’m already giddy at the thought).

For consumers and businesses, there is no downside. The only ones who see a downside are the politicians.

Since a flat consumption tax is simple, fair and just, there would be no loopholes, nowhere to hide. Because there are no loopholes, there are no favors to give. Politicians would lose a huge chunk of their power, power they claim allows them to guide the economy in the “right direction” (whatever that means), as well as gives them cover for political handouts to their pals.

For that reason, and that reason alone, we will never see an elimination of the income tax, even though that would be the most economically just way of raising funds (taxing consumption is far less damaging than taxing productivity).

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John,

The things you and I would like to see will never happen because people have been brainwashed into believing the government actually provides things. They believe without the government robbing us, people would starve, die on the streets, or become educated, whoops. I mean not get educated. (I really meant what I said the first time).

The truth is if the government got back to what the founders envisioned, we wouldn’t need an income, corporate or consumption tax. We’d be able to pay for a small government with the taxes written in the constitution.

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what taxes were written into the Constitutions? I only remember the Constitution noting that Congress has the power to levy taxes, but it didn’t specify the manner or means on how it goes about it. Did I miss something?

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John, they are authorized to pass excise taxes. Notice they do not have the power to pass a progressive tax. I guess this all depends if the 16th amendment really was ratified, although I still don’t see anything in the 16th amendment that authorizes a progressive tax.

“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States”

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