The term inflation tax gets used quite a bit. However, some people are not sure what is meant by this phrase. With the Federal Reserve Bank set for quantitative easing (a fancy word for printing lots and lots of money), it only makes sense to cover this topic. So what exactly is the inflation tax?
First of all, it’s not formally a tax that is passed by the US Congress. That is precisely why it is so dangerous. Let me explain.
First off, we need to take a quick look at America’s current money and who issues it. The Federal Reserve Bank was created and established in 1913. The Federal Reserve Bank issues America’s currency. In simple terms, it produces our money. In fact, it prints it out of thin air. Since we have gone off the gold standard there isn’t even anything of value backing our currency. Our dollars are just pieces of paper with a fancy design and some numbers denoting its perceived value.
Next we should define inflation. Most people will tell you inflation means rising prices. That’s a commonly use of the word but it is only partially correct.
Inflation is the expansion of our money supply.
Inflation is the printing of money. Think about it. It is when we inflate our money supply. That makes sense, right?
The result is rising prices.
Recently the Federal Reserve Bank has printed trillions of new dollars. Thatmeans they are really inflating our money supply like never before. What does that mean to you?
The dollars in your wallet or purse right now will be worth less. Why?
Think about it. Let’s say you have 3 really hungry people on a journey. They magically happen upon some food in a cabin. On the table sits 2 slices of pizza. With 3 people and 2 slices the value of the slices is pretty darn high.
Now let’s imagine that the same 3 travelers came upon 2 whole pizzas. Although a slice of pizza still has value to the hungry travelers, each slice is certainly not as valuable in the second scenario. The addition of lots of new slices lowers the value of each slice.
Got that? Okay. Let’s move on.
How Inflation Tax Works
Here is how the inflation tax happens in 4 simple steps:
- Let’s say congress wants to spend more money on a new big government program or bailout some of their close friends on Wall Street. The Federal Reserve Bank prints, say, a trillion dollars out of thin air.
- The large increase of dollars in circulation will cause a rise in spending. The demand for products artificially caused via the printing press spurs a natural market reaction of rising prices.
- Therefore your money buys less. The dollar is now devalued.
- You are now poorer just like that.
Here are some other things you might find interesting.
The Federal Reserve Bank has Great Power.
The Federal Reserve can print money anytime they like. They have no oversight and have never been audited. This means anytime the Federal Reserve likes, it can prints loads of money, thus devaluing your money.
The Inflation Tax Doesn’t Hurt the Cronies of The Fed & Government
When the Federal Reserve Bank creates new money, how does it get into circulation? Generally it goes to politically connected big banking & lending houses like Goldman Sachs or other big business cronies. Then it goes down the line to commercial banks where it is lent to small businesses and individuals.
When the Federal Reserve passes new money off to its cronies, the money has not yet been in circulation. Since they get the new dollars first, they get to use the dollars at current value. Once the money goes into circulation, it begins dropping in value along with all other dollars. Once again this means the small businesses and individual taxpayers are the ones who hurt.
Inflation Tax is Especially Dangerous & Harmful
When you combine the ability of the Fed to create new money / inflate the money supply and the way the money passes into circulation, it is not difficult to see how dangerous the inflation tax can be. Neither the Fed nor their cronies in banking and big business suffer any direct consequences from printing a large amount of new money out of thin air. So, what is to stop them? What’s more, the small businesses and the individual get stuck with a devalued dollar and less wealth.
This gives the Fed unchecked power to print as much money as they want as often as they want and pass it out to whoever they want and not tell anyone. This allows the Federal reserve the power to choose who gains power and who to levy this inflation tax on, thus making them poorer. This creates giant moral hazard and the capacity for corruption. In addition, the inflation tax burdens the people and hurts the economy greatly.
That is a quick overview of the inflation tax. Hopefully it is helpful.