Marc Cuniberti: The stealth tax on the poor
Inflation has been called the stealth tax, as few people realize inflation is a form of tax, and that it enriches the wealthy as it impoverishes the lower income strata.
How this transfer takes place is easily explained.
Imagine I fill a room with 100 people and I lock the door. I give each person $1,000, then offer up a $5,000 Rolex watch to the highest bidder. The only rule is two people cannot combine funds. Since the watch (or whatever it is I offer to sell) has a higher value than the cash each person holds, the assumption is everyone will want to buy the watch.
Since each person only has $1,000 and cannot combine funds with another, the top bid would be $1,000.
Before I close the deal, I now hand out $1,000 more to each person.
The top bid would immediately rise to the maximum each person has which is now $2,000.
We have just witnessed “monetary” inflation which was inflation caused by an increase in the money supply when I passed out more money. The price of the watch doubled because more money was introduced into the system (the room).
Extrapolating, when more money is introduced into an economy, the prices of things rise as each person has more money to spend. This is monetary inflation.
Since the only entity allowed to manufacture more money is the government (in the case of the U.S. it is the Federal Reserve Bank), they alone are the cause of monetary inflation.
The transfer of wealth to the rich from the rest of the populace is accomplished by the inflation that is caused by the introduction of new money through government deficit spending.
Since the Federal Reserve creates money through the push of a button, at the instant the money is created, it goes into government coffers, which is then spent. An important note is that the first entity to spend this new money sees no increase in prices as the money is not in the system yet. Prices only start to rise as the money filters out to the rest of us. One could argue that not only does the government get free money from the Federal Reserve’s money creation ability, they are not the victim of the inflation they are about cause.
As the money filters down, imagine a family that sees a 5% increase in prices due to this newly created money. Their standard of living goes down because the price of the things they need goes up. Living hand to mouth as many do, this 5% price increase places undue hardship on the lowest income levels.
But because inflation increases the price of everything, those that own assets see those assets rise in value by the same percentage.
So if person owns 100 million in assets (like businesses, stock or real estate), they see a 5% rise in the value of these assets. In this example, a 5% inflation rate pencils out to an increase of 5 million. (5% of 100 million). The more assets that are owned, the more money is made. It is this rise in asset prices (inflation) that continually increases the wealth of the rich while steadily impoverishing the poor. The longer inflation runs, the more the rich get richer and the poor get poorer.
Because a majority of families do not own assets and spend all their money on living expenses, they are hurt by inflation, while those that own assets profit from it.
The stealthy part of inflation is that it also causes salaries to rise, increases home values and retirement accounts. This increase gives the illusion that things are improving. Nothing could be farther from the truth. Because wages never keep up with the overall price increases in the economy (called wage/price lag) people are left wondering why they find it harder to make ends meet despite rising salaries, retirement balances and home values.
In conclusion, the more cash governments hand out, the worse it gets for the lower classes and the more the wealthy profit. This wealth migration consistently drives more people into poverty as it concentrates more and more of the wealth at the top in the hands of the few. In essence, the loss of wealth from the poor is transferred to the rich.
Next time you see more government handouts, bailouts or stimulus payments, realize that the more money they spend, the worse the situation becomes for the majority of Americans.
Marc Cuniberti holds a B.A in Economics with honors from San Diego State University and is the host of Money Matters carried on 66 stations nationwide. California Insurance LIc# 0L34249. Call him at 530-559-1214 or visit http://www.moneymanagementradio.com
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