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Old Oct 11, 2007, 2:34am   #17
Lord Mushroom
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Quote:
Originally Posted by skeptix82 View Post
Also, if you listen to him talk about the "inflation tax", this is a result of the FED printing the money. Many of these economists have some sort of financial interest in the inflation tax. The current system makes things run better on Wall Street, but that's not the economy, that's rich people.
Wow, if your central bank (the Federal Reserve) is allowed to print currency at will, that is ridiculously stupid. That basically means it can give itself unlimited funds (well, up to the total value of everything in the country).

The fact that it is not 100% government-controlled makes it even more hopeless. The people with a stake in it will naturally be tempted to exploit this possibility just like I would if I had a print in the basement and a government permission to print.

What happens if they print more than simply replacing damaged/destroyed currency is:

1) The value of money goes down (in the form of higher than otherwise inflation). If the amount of money in the economy increased by say 2%, the inflation rate would be 2% extra high.

Say you had $10 000 in the bank, then the Federal Reserve prints like mad and gives itself money equal to 2% of the total money in the country. That leads to 2% inflation, which means prices are 2% higher.

This is because money represents the value of the things in the country. And when you increase money, you donīt increase the number of things, you just set a higher price for it. The increase in price for an average good per year = inflation rate.

The $10 000 is thus worth $10000 / 1,02 = $9804, a decrease of (10000-9804) / 10000 = 0,0196 = 1,96%

This means that everyone who had money lost 1,96% of their money to the Federal Reserve.

But you donīt lose any value of things. If you had a house worth $1 million, the price of the house is now $1,02 million, and when you divide that by 1,02 you see the value remains the same.

So financing public stuff by printing more money than the public expects is very unfair to people who have most of their fortune in banks. On the other hand it is very nice for people who have loans, as their loans are magically disappearing.

And it is also nice for people who neither have big loans or bank accounts, but rather have their fortune in things as they (like the people with loans) didnīt have to pay taxes.

2) The value of the currency (dollar) decreases. The extra inflation means you need more dollars to buy an item than you used to. So for a foreigner to buy an American item at the same cost in terms of his own currency as in the past, he has to pay less for the dollars.

The increased amount of dollars in the economy leads to more supply of dollars for foreigners, so they do get to buy dollars for a lower than usual price.



So while people who have money in the bank are getting screwed. Your Federal Reserve is actually reducing your foreign debt as such loans are usually in the currency of the country loan-taker. It is basically stealing money from the countries it owes money to.

I find it strange that these countries donīt protest and respond by ignoring American copyrights and stuff to get their value back.

The negative effects of printing money as a form of tax are:

1) It affects a few hard instead of many a little. I am sure you can imagine that it hurts someone with a $100 000 fortune more to lose $50 000 per dollar than it hurts 5 people each with a $100 000 fortune to lose $10 000 per dollar. It is the principle of decreasing utility per additional dollar.

2) It creates higher than necessary inflation, which means businesses must adjust their prices more frequently, which costs money.
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Last edited by Lord Mushroom; Oct 11, 2007 at 2:41am.
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