Article I, Section 7 of the Constitution says all bills for raising revenue shall originate in the House of Representatives.
Toss that right in the sewer.
The US Constitution is now little more than a rhetorical weapon for those not in power to use against those in power, while those in power ignore it. Four years later, reverse the parties, same crap.
Despite the Constitution, the most reliable revenue source in modern America originates not in the House, but at the Federal Reserve.
When it comes to the US dollar, inflation is not something that just happens. Officials at the Fed and the banks together choose to create inflation, and the US government politicians are thoroughly complicit. There are real people, making real decisions, who create inflation.
Why would they do this?
Because inflation is revenue for the government and the banks. It creates no new wealth. It just sneakily takes it.
So where does that wealth come from?
Inflation, as we Austrians use the word, means the addition of new currency units. Rising prices are but one of the effects of inflation. The net effect of inflation is that every single day, anyone who saves in dollars has some of their wealth transferred to those who have debt. And the biggest debtor in the world is the US government and the politicians and bureaucrats that run it. So they are the biggest beneficiaries of inflation.
And I do mean “They.” The US government is “They.” It most certainly isn’t us. And we’d have to be naïve, stupid or in denial to think it is.
It’s easy to spend other people’s money
The Federal Reserve’s stated target is a 2 percent price level increase per year in its preferred PCE index. They call it “2% inflation,” in their Keynesian-speak. Regardless, at compounded 2 percent, a dollar buys half as much in 35 years. That is, effectively, a hidden 50 percent tax on every dollar you hold, ratified by no elected representative of the people. The Constitution wouldn’t allow it. But then the Constitution is toast.
Tax increases put legislators’ votes on the record in a way they can’t conceal. And given that increased taxation appeals only to highly vocal morons, tax increases cost more votes than they gain.
But the politicians do love spending. And if they can’t tax, they move to borrowing. Borrowing invites a debt-ceiling fight, which is a momentary and occasional cage fight with a guaranteed outcome: various political players extort other political players in order to gain handouts and grift.
When the Treasury starts to borrow too much and the demand for loans outpaces supply, the Federal Reserve will step in. They create new currency units and use them to buy up previously sold bonds in the secondary market (with the primary dealers earning their piece of the action). This frees up resources, directly and indirectly, that are then used by the banks and their customers to buy the new Treasury debt.
Everyone is happy, right?
Not really. Everyone other than government and the big banks is screwed.
The tax code has its own tricks
Inflation isn’t the only way the government extracts wealth without officially increasing tax rates.
In the 1970s a pay raise that matched the CPI lifted families into higher brackets without any real increase in income. Congress thus could milk their milk cows for more taxes, without seeming to raise tax rates. Indexing of the brackets did begin in the 1980s, but it was indexing to the CPI, which we all know is bogus. In 2017 the Tax Cuts and Jobs Act switched the index to chained CPI, which usually rises more slowly than the unchained CPI. So that’s even worse.
Capital gains were never indexed. Buy a stock at $100 and sell at $200 in twenty years, after prices have doubled, and you are not only no richer, you are actually poorer. The Internal Revenue Code taxes the $100 of inflated gain, at up to 23.8 percent (including the Obamacare tax). That is $23.80 owed on a profit that does not exist. Let’s do this math another way. You tie up your $100 for twenty years, and after taxes, you get the real equivalent of only $88.10 at the end, a loss of 11.9%. The federal government took your profits and then some. Your state government likely takes some more. That sucks.
Of course you could just stick the $100 in a mattress. If prices doubled, their intentionally created inflation would cut your savings by 50%. So you are left with a choice of losing 50% or of losing 11.9%. So most people take the 11.9% loss and buy stocks. That demand bids stock prices up, and the IRS taxes the inflated nominal gain when you sell.
That’s what inflation does. The dollars that feed the voracious spending appetite of the politicians? They come from you.
No lobby for the price level
Why does such a horrible system survive? It bears repeating: inflation isn’t just happening. There are real people intentionally creating inflation. Why are we not pulling out pitchforks, torches and marching on the Federal Reserve?
It’s all about incentives.
Benefits of inflation go to the government and the people and private sector businesses that feed off the government trough. And those people notice and organize and lobby and bribe and connive and conspire, because it is worth it for them to do so.
But the costs of inflation spread across everyone else, who do not fight back. They don’t understand inflation, because they’ve been gaslighted by Keynesians for their lifetime. They don’t get taught what inflation truly is because the teachers have no clue. I mean NO clue.
A cost spread thin, and in a form few recognize and fewer can explain, doesn’t trigger a fight. It triggers complacency. No pitchforks come out.
After all, the only thing we can count on is Death and Taxes. And Inflation.
Every other tax has a lobby to oppose it because for every other tax you have to write a check or see it sucked out of your pay. But the price level just happens, so we are told. It’s inflation, so we are told. Nobody is responsible, so we are told. We are told that 2% is the target rate. What we aren’t told is that the target is 2% because that is what we fools will not only tolerate, but actually celebrate as an accomplishment.
Nobody in Washington has a reason to oppose a tax (inflation) that sends no bill and that most people don’t understand enough to place blame for. Inflation lets the politicians spend more and therefore have more power to do whatever it is they want to do. The big banks all win from inflation too. The Fed is deeply intertwined with the big banks. All the incentives of the people who choose whether to inflate or not inflate are aligned toward … inflation.
So there will always be a strong tendency to inflation (although it might get punctuated by brief periods of credit deflation as the Fed might lose control here and there).
The Federal Reserve and federal government are institutions that bleed you, both with declared taxation and taxation that comes in the form of inflation.
Where you can, opt out by owning things the printing press cannot make more of. A home with a long-term fixed-rate mortgage. Gold keeps pace with inflation (over the long term). The companies that produce gold profitably even at lower metals prices can be wicked profitable at higher metals prices. A kilowatt-hour of electricity is not diluted by the inflation.
That is why Crisis Investing focuses where it does. Premium subscribers see every position. I hope you join us.
Sincerely,
John Hunt, MD
Editor, Doug Casey’s Crisis Investing
Really good. I have tried many times to have this same discussion with my adult children but they are convinced higher prices are caused by greedy CEOs because that is what is being fed to them across most of social media
The silly Fed creates a dollar and right away the government wants 60% of it up front and another 30% of it in taxes. Poor man Joe gets the remaining dime that isn't worth a plug nickel after inflation.