A Tax by Any Other Name: How Inflation is Robbing You Blind

A recent Wall Street Journal article claimed “U.S. Debt Is at a Record High, but the Risk Calculus Is Changing.” But is that calculus really changing? According to some, the government can borrow and print all the money it wants without repercussions.

Modern Monetary Theory (MMT) advances the puerile notion that we have somehow moved beyond the antiquated restriction of scarcity under which our ancestors labored. This thinking is reminiscent of the childish fantasy that our actions will not have consequences, but realities like scarcity are inescapable.

What adherents of MMT have really done is determined their socialist agenda and then reconstructed the policy tools available to support the agenda. It’s a sneaky move but one not based on reality nor economics.

But our point is not to counter every flaw of MMT, but rather to note that similar bad economics is snake oil sold to us by those who supposedly have “better” economic theories.

The notion being peddled today is that D.C. can spend trillions of taxpayer dollars, run up massive deficits, fund most of it by the Federal Reserve through money creation, and voilà, no inflation—reminiscent of a bad magic trick. A growing body of political activists in economists’ clothing subscribe to this view. Inflation has become a dirty word, unbefitting modern discourse among intellectuals.

But ask yourself: Am I paying more for food and gasoline? Are home and rent prices going up, and property taxes with them? Are cars more expensive? Is lumber more expensive?

It seems everything is getting more expensive, and that is price inflation—a rise in the general price level of a basket of goods and services. But what exactly causes it?

You’ll hear all kinds of explanations. Some have blamed greedy businesses for raising their prices. Some have blamed grasping unions for demanding higher wages. Some have blamed the consumer-at-large for being a spendthrift.

Yes, businessmen are greedy—everyone is. Yes, unions are grasping—everyone is. Yes, the consumer is a spendthrift—everyone is. But they don’t cause inflation.

Inflation originates in one place: behind the façade of a Greek temple on Constitution Avenue in Washington, D.C.—at the Federal Reserve.

The Fed can create money out of nothing—or more technically, create money out of government debt. Only the Fed can churn out unlimited money, and that is why only it can cause inflation. Businessmen, consumers, unions, and investors do not have this magical printing press and so they cannot cause inflation.

But why does creating money cause inflation? Wouldn’t we be better off if we all had more money?

Imagine that Santa Claus writes you a check for Christmas equal to the amount of money you already have. You now have twice as much money! But imagine Santa does the same thing for everyone else. Shortly thereafter, the price of nearly everything you purchase would be about twice as expensive because there’s too much money chasing too few goods.

That is inflation—and the Fed has been playing Santa Claus.

As the big spenders in D.C. take the country further into debt, the Fed has been there to write trillion dollar checks to pay for it. Normally, the government would have to borrow money from the public—which doesn’t cause inflation but does crowd out private sector activity. But for more than a year now,  the Fed has kept its printing press in overdrive, thereby artificially holding down interest rates and distorting economic activity.

Initially, this appears to create an economic boom, as everyone thinks he’s better off with his government “stimulus” check and increased spending. But remember that nothing is free in a world of scarcity. Everyone discovers that others also have more money, and that prices are rising as more dollars chase fewer goods and services.

This inflation also acts as a tax on us as it reduces our purchasing power. Put simply, government uses inflation to confiscate a portion of your savings and your wealth.

If inflation averages just 2% per year (the Federal Reserve’s target), the government will have confiscated about half the value of your liquid wealth in just 36 years. For context, one measure of general price inflation was 2.6% for the 12 months through March 2021, but 4.1% in the first quarter of 2021 based on another measure. At a 4% average annual rate, the hidden tax of inflation will seize half of your money’s purchasing power in a mere 18 years.

Perhaps the Federal Reserve is not playing Santa Claus, but the Grinch. Instead of the massive spending boondoggles by the Biden administration and resulting costly repercussions, we need rules that limit excessive government spending and excessive money creation.