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The Cruelest Tax

Inflation: an increase in the price of a basket of goods and services that is representative of the economy as a whole.

By November of 1923, Germany's whole sale price index was rising at the rate of 726,000,000,000% per year.  Business no longer made sense and businessmen spent their time speculating in stocks and goods.  Speculation in fabrics, shoes, meat, even soap was rampant.  Each fall in the mark, their currency, brought a rush to the shops by those with money.  Workers were being paid as often as three times a day.  Their wives would meet them, take the money and rush to he shops to exchange it for goods before they increased in price later that day.  By this time, however, more and more shops were empty.  Storekeepers could not obtain goods or could not do business fast enoughto protect their cash receipts.  Farmers refused to bring their produce to the cities in return for worthless paper.  Food riots broke out.  Parties of workers marched into the countryside to dig up vegetables and to loot the farms.  Businesses started to close down and unemployment soared.  The economy collapsed.  Millions of middle-classed Germans were ruined by the inflation before the government finally succeeded in bringing it under control by the "miracle of the Rentenmark" in 1924.  Many historians believe however, that this experience, and the resulting distrust of the government, prepared the way for the German people to accept Hitler and his vile beliefs and message.

Inflation: the expansion of the money supply without a corresponding increase in the product base.

Today in the wreck that is Zimbabwe (formerly Rhodesia) inflation is roaring at 6.5 quindecillion novemdecillion percent.  This mind numbing number can be expressed as 65 followed by 107 zeroes, and the number is doubling every 24.7 hours.  Zimbabwe's Harare Tribune recently reported that bank withdrawals are limited to an amount that won't cover even half a loaf of bread.  Zimbabwe's troubles began in earnest when their president, Robert Mugabe, moved to confiscate the primarily white-owned farm land and redistribute it to primarily black farmers in the 1990s.  To the surprise of few, farm production fell dramatically.  He has also repudiated Zimbabwe's debt held by the International Monetary Fund.  Furthermore, in February 2007, the Zimbabwe government declared inflation illegal, outlawing any rise in prices on certain commodities.  Of course this action has proven time and again throughout history to be futile.  The Zimbabwe currency is worthless, and there is no end in sight for Zimbabwe's long-suffering population.

Inflation: too many dollars chasing too few goods.

The United States has not been immune to bouts of inflation.  Beginning in the mid 1970s and continuing on and off until around 1982, inflation varied from 8% to 14.6% where it peaked in the first quarter of 1980.  When Secretary of Treasury Paul Volcker was confirmed, he and President Reagan made fighting inflation their primary focus and in steps increased short term interest rates.  The prime rate eventually reached 21.5% in 1981.  Not surprisingly, this resulted in a severe recession, tumbling real estate prices, and an unemployment rate of near 12%, but inflation's grip on the economy was eventually broken; the economy was finally set on the path of stability and growth.  It was not a fun time for most Americans; I can well remember the frustration we felt as we tried to buy a house and get a mortgage during this era.  We eventually found a home where the previous owner agreed to carry an 8% mortgage for us.  This was very common then, and about the only way many homes were selling.

During inflation everything gets more valuable except money.

Many historians and economist have referred to inflation as the "cruelest tax" because it most affects the poor and the retired on fixed incomes.  Those working have the possibility of seeing their wages inflate along with inflation in goods and services; not so the retired.  Could we be facing another bout of severe inflation?  Last week the National Inflation Association released the following statement, "The Federal Reserve's announcement Wednesday to expand its balance sheet by $1.15 trillion puts our country on a direct path towards hyperinflation."

 The U. S. Treasury has recently spent $300 billion on long-term U. S. Treauries, pledged $750 billion on worthless mortgage-backed securities, and $100 billion more on other federal agency debt.  This means that $1.15 trillion has been printed, magically appearing out of thin air.  This spending is apart from Obama's amazing proposed budget which will further increase deficit spending.  A causual glance at the graph on the money supply chart shows a gradual incline upwards over the past several years until you come to late 2008 and early 2009.  At this time the graph jumps almost vertically illustrating the extreme increase in the money supply over the past few months.  Of course goods and services have not increased in the same fashion over the same time.  This virtually guarantees a decrease in the purchasing power of our dollars.

Government is the only entity in the world that can take an intrinsically valuable commodity such as paper and render it absolutely worthless by applying ink.

Are we in for a bout of hyperinflation?  Some think so.  For this to happen a number of other things would have to occur.  First, domestic consumer demand would have to increase substantially from where it is now.  Second, the Chinese could exacerbate the situation considerably if they suddenly decide to become net sellers of the US debt that they now hold.  This would drive up interest rates and of course would eventually work against their own interest.  I doubt it will happen simply because they have no better place to stash their huge reserves.   Third, Congress would have to prove to be even dumber with their collective wisdom than I now believe them to be, and I believe them to be pretty incompetent when it comes to economic matters.  And finally, President Obama would have to ignore every word from his economic advisor, Paul Volcker, who has been to this rodeo before.  Though we may avoid hyperinflation, I believe that an inflation rate well above what we have become accustomed to is baked into the cake.  I could be wrong.  I hope I am wrong, but considering the massive government spending proposed, and the resulting deficits, inflation running near 10% for the next several years should not surprise us.  The cruelest tax is making a comeback! As a soon-to-be retiree, that scares me.


Fly/Drive Safely


21 March, 2008

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