In a previous post we discussed one of the ways in which the government legally “steals” your money (via taxes). But unfortunately, taxes are only ONE of the ways that the government legally steals your money… There is also another, even MORE insidious way…
Inflation (The Hidden Tax)
That’s right, inflation. (Yawn….I know I know, I promised this would be “fun” and now I am boring you right off the bat with taxes and inflation! Even the *word* “inflation” sounds boring!) But trust me, inflation is not at all boring…. it is actually very, very interesting and downright SNEAKY and UNDERHANDED and SUSPICIOUS….all of the ingredients you need for a juicy, page-turning, conspiracy-theory-filled mystery novel!
Let’s begin with the widely held “acceptable” definition of inflation:
in·fla·tion/inˈflāSHən/
inflation: an increase in the prices of goods and services followed by a subsequent decline in purchasing power
That is the definition you will find if you Google “inflation definition”– Google, Investopedia, Wikipedia, Dictionary.com, Answers.com, and Merriam-Webster ALL agree on this definition.
To put it in non-economic-normal-people terms, this means that if a cup of coffee costs you $3 today but the same cup of coffee costs you $3.25 next year, you’ve just experienced an 8.3% inflation, and you’re probably feeling quite a bit poorer than you were last year. Which sucks.
Now, supposedly our wondrous central bank (ahem) works to maintain our inflation rate at around 2-3% per year, so you “supposedly” will not ever see prices rise by 8.3% in one year as they did in my example above.
But wait a minute…let’s look at a few basic staples of life and what they cost last year (2010) versus this year (2011):
- coffee, Robusta: up 30.8%
- coffee, other mild arabicas: up 24.08%
- heating oil: up 39.76%
- gasoline: up 40.58%
- coal: up 29.16%
- tea: up 7.44%
- corn: up 43.95%
- rice: up 18.39%
- wheat: up 16.28%
- oranges: up 14.14%
- soybeans: up 25.80%[1]
WOW! Those are some increases! And before you think I am only choosing examples that support my case and ignoring the rest…..the OVERALL commodity price index has risen 25.37%!
And yet, if you use the government’s “official” CPI inflation calculator, you will see that our government says that inflation is “only” 4% from 2010 – 2011. (You can also wade through the latest August 2011 CPI-U report here if you are a masochist and are interested).
So what’s the deal? Why is there such a huge discrepancy between the published commodities prices and the government’s “interpretation” of prices? Well, I promised you a little intrigue and if you’ve stuck with me so far you are about to be rewarded. I have two answers for you:
- You must read the free information posted at John Williams’ website, http://www.shadowstats.com/. (He also offers a paid subscription, but even his free reports are fantastic). I particularly recommend these two short papers:
To sum it up, though, for those of you who are time-constrained: Your government is lying to you.
This has happened in ever-increasing fashion with the CPI-U data since the early 80′s (when you were listening to Billy Idol & Madonna and not paying much attention to government inflation statistics), and has continued ever since.
As of 2004, John estimates that the government CPI-U is off by 7%, and I am sure that number has increased in the past several years.
John details all of the intrigue from past administrations above in his “Primer” paper, which I consider a must-read for everyone interested in improving their financial situation. It will really open your eyes and start your brain working and thinking critically again!
- The *cause* of inflation. The real, honest-to-God truth of what causes inflation is simple: an increase in the supply of money, and to be more precise: an increase in the supply of FIAT money (as historical “sound” or “real” money cannot be increased because there is a limited amount of it in the ground available for mining, i.e. gold and silver).
Which brings us to the true definition of inflation:
in·fla·tion/inˈflāSHən/
the loss of purchasing power caused by fiat money; the exact amount which people (you) lose in purchasing power is exactly the amount which is taken from you and transferred to your government by this process.[2]
So there you have it, inflation, yet another way in which your government legally “steals” your money. And inflation is the most insidious and unfair tax of all because it falls most heavily on those who are least able to pay: the small wage earner and those on fixed incomes. It punishes savers, the most productive members of society– those who produce more than they consume and save the difference– by eroding the value of their savings.
We’ll dig into the juicy history of it all in a future post, but for now I will leave you with this inflation lesson from DuckTales:
To your financial success,
– Kung Fu Girl
[1]http://www.indexmundi.com/commodities/
[2] Creature from Jekyll Island, page 164
About the Author:
Susan Fujii, aka kungfugirl, is an SEC Accredited Investor who believes that anyone can learn to be financially independent.
Susan has authored 199 posts on Kung Fu Finance, and you can connect with her on Google+.
Want to master your finances? Join us now.
Why don't you join our community on your journey to financial mastery.
Sign up below for the FREE Kung Fu Finance newsletter.
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/charts/metals/gold/t24_au_en_usoz_2.gif)
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/charts/metals/silver/t24_ag_en_usoz_2.gif)
{ 4 comments… read them below or add one }
Never thought inflation was related to the supply of FIAT money. So does deflation mean the decrease in the supply & does this ever happen?
Great question Jon! Yes, deflation is the opposite of inflation and does result from a decrease in the supply of fiat currency. The primary symptom of deflation is a reduction in the price levels for goods and services. The Fed fears deflation tremendously, and in fact will do just about *anything* to prevent it. You may have heard of “Helicopter Ben” Bernanke’s famous speech in which he promised to drop as much money as needed from a helicopter to thwart off deflation.
But is deflation really bad? On the one hand, if everything is cheaper and your currency buys more goods and services than it did before, you feel richer (not bad at all!).
However, deflation is bad for debtors (and as the United States is now one of the most heavily indebted nations in the world, you can see why they prefer modest inflation instead!). If you are a debtor, you feel the pain of deflation because your debt holds steady even though the price of your asset decreases (e.g. the housing market right now– many people are “underwater” and are feeling the pain of their crippling mortgages). Deflation can also spiral quickly into a full-blown depression because banks are likely to significantly cut back lending and other risky ventures.
Deflation also causes people to wait before spending, on the expectation that prices will be lower in the future, which in turn can be a self-fulfilling prophecy. If more people don’t spend “now”, demand decreases and that pushes prices even lower. Businesses then suffer as they have a hard time selling products, but workers usually don’t want to take a pay cut (who can blame them!) so business expenses increase relative to their revenues and they suffer even more. Therefore with no alternatives, businesses lay off workers, which furthers the recession/deflationary spiral…. Not a good situation.
In fact, the Great Depression of the 1930′s was a “deflationary” depression, and Ben Bernanke will do just about *anything* to avoid a repeat of that (including QE to infinity, and beyond!)
So neither inflation nor deflation are “great”…which is why I join with the Austrian economists in demanding a “sound money” system; NOT a fiat-backed currency.
Some seminal work on new monetary systems, complementary currency systems, in particular – http://www.lietaer.com/
Thank you Chait! I will check that out!
– KFG
{ 5 trackbacks }