How Inflationism Leads To “Inequality”

When speaking of morality, we shouldn’t be limited to the financial markets only, but we should also parse on the political economy.

In the US, the moralists in governments, academe and media complain alot about “inequality” or the seeming dearth of redistributive policies, thinking that talking nice and romanticizing about how a true-to-life Robin Hood could become a feasible elixir to perpetual prosperity.

For these people, the nightmare of USSR’s Lenin and Stalin, Cuba’s Castro, Mao, Cambodia’s Pol Pot and North Korea’s Kim has hardly sunk in.

In addition, it seems always ok to place the burden on somebody else except oneself. Their idea for redistribution has always been anchored on “take on somebody else’s property but not mine” syndrome.

Inequality And Inflationism

Yet what is NOT being discussed is how “inequality” has ever evolved.

How inflationism has been affecting the uneven redistribution of income through the politicization of the economic process from which the political “picking of winners” through bailouts, subsidies, behest loans, guarantees, market manipulations, deficit spending, war spending, and etc., has been influencing on such disparities.

And importantly, how inflationism, channelled through the bubble cycles, has dragged the rest of the society into a quagmire as a consequence of the bust, when only a privileged few benefits during a boom.

Doug Noland accurately describes today’s dynamics[1],

``The “inflationism” intellectual and policy doctrine was instrumental in forging a historic market distortion: the perception of mortgage Credit “moneyness.” Inflationism is the root cause of the recent crisis – and a rather lengthy list of debacles throughout history. Today, the same dangerous incongruity exits that throughout history has propped up inflationism when apparent failings should have led to this dogma’s collapse: Instead of inflationism being recognized as the problem – the force behind the boom and unavoidable bust - it is instead viewed as the solution. There is today virtually universal support for policies that would incite a rapid increase in stock market and real estate prices; rising employment, incomes and spending; and a brisk economic recovery. The common view today is that the greatest risk is to fail to inflate sufficiently.” (bold highlights mine)

And it is why looking for scapegoats- such as China to hold responsibility for the “industrial wreckages” and “lost jobs/high unemployment” due to “currency manipulation”, even if the US incurred trade deficits with more than 90 countries or a “multilateral trade deficit” to quote Morgan Stanley’s Stephen Roach[2], or blaming domestic profiteers-seems very appealing and a favourite past time for moralists.

The important point is that their preferred policy approach is to “blame somebody else and take away what they have”. Yet the same moralists forget that whether World War II or French Religious War, the “us against them mentality” has been a historical recipe for disaster.

The simple truth that can’t seemingly be absorbed is that what can’t be done through trade the alternative is likely to be worst- war. As Frederic Bastiat once wrote, ``When goods don't cross borders, armies will.”

Yet the belief that the United States is impervious as a military power is likely an issue of overconfidence. As we previously noted, the US has never been so dependent on foreign or imported oil which accounts for 2/3 of US oil consumption[3]. This should also reflect on her war machines. So energy will be an X factor in case of a full blown war.

Besides, wars have also continually evolved to reflect on societal changes that the wars of the 20^th century may not be the kind of war in the future. Today’s war has evolved to “terrorism” or urban guerrilla warfare. And most likely, given the energy constrains, the nuclear option looks likely more of a realistic risk.

The Rude Awakening

The seductive tale of inflationism is mainly due to the lack of direct connection between government action and its effects to the economy.

As Thomas DiLorenzo writes[4], The so-called inflation tax is pernicious not only because it is a hidden tax on privately-held wealth, but also because it leads to false perceptions of the cause of the inflation. Political demagoguery adds to the confusion, as politicians are naturally inclined to lie to the public and blame the inflation on greedy capitalists, farmers, mortgage bankers, and others in the private sector. The proposed solution is typically to place even more power in the hands of the inflation-generating governmental authorities.”

In short it takes quite some technical sophistication to understand the linkages which can’t be easily grasped by the masses.

Yet even sophisticated people seem to fall for the illusion of prosperity from inflationism or protectionism.

Figure 3: Heritage Foundation: The 2009 Index of Dependence on Government

Recent news from the US shows how nearly half of the people don’t pay taxes (see figure 6).

According to yahoo news[5], ``About 47 percent will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That's according to projections by the Tax Policy Center, a Washington research organization.”

This means:

One, more people are getting something for nothing. If the culture of dependency gets well entrenched, then taking away such privileges would redound to a political upheaval (secession, coup, civil war/revolution?). Overtime, the US seems more likely on path to a Greece drama.

Two, the burden of taxation will heftily increase for those paying for the privileges of the non-productive sector or for those getting something for nothing.

Three, this would only translate to further losses in productivity and possibly a shift away of capital to other countries with lesser tax burden.

Fourth, this only implies of the accelerating growth prospects in government spending.

Such degree of welfarism is simply unsustainable. If social security is deemed as unsustainable where the worker to beneficiary ratio is now 3.3 to 1, then how much more the burden of taxation where nearly are half of the population are beneficiaries?

As Milton Friedman[6] once wrote, ``Raise taxes by enough to eliminate the existing deficit and spending will go up to restore the tolerable deficit.” In short, the root of the problem is unsustainable government spending.

Fifth, given the prospects of the lack of savings and taxes to bridge finance the humongous growth of welfarism, inflationism is the most likely option.

Sixth this isn’t a problem confined to the US but to developing countries (figure 4).

Figure 4: Bank Of International Settlements: The future of public debt: prospects and implications

The BIS notes[7] that fiscal problems faced by developed nations “are bigger than suggested by official debt figures” with “public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population”.

It also sees sovereign debts are likely to suffer from higher spreads as markets face up to the risks of greater deficits and higher burden from interest payments, which will likely “drive down capital accumulation, productivity growth and long-term potential growth”.

Importantly, the “looming long-term fiscal imbalances pose significant risk to the prospects for future monetary stability. We describe two channels through which unstable debt dynamics could lead to higher inflation: direct debt monetisation, and the temptation to reduce the real value of government debt through higher inflation. Given the current institutional setting of monetary policy, both risks are clearly limited, at least for now.” (emphasis added)

Let me make a guess, developed countries will run out of ammunition or magic (Philosopher’s stone of turning lead to gold) once the next crisis resurfaces.

This means likely a back-to-back crisis which entails a bubble bust plus sovereign defaults as Harvard’s Carmen Reinhart[8] and Ken Rogoff has observed from previous experiences, ``historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we’re in for a period where that kind of scenario is very likely. I don’t think a repeat of the fall of 2008 is at stake here, where it looks like the world is going to end”.

Or an even worst outcome would be a hyperinflation crisis-our Mises moment.

At the end of the day, the moralists will face a rude awakening from the laws of nature.

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[1] Noland, Doug, Money Good; PrudentBear.com

[2] Roach, Stephen, Blaming China will not solve America’s problem, Financial Times

[3] See The Delusion Of The Mercantilist Miracle

[4] DiLorenzo, Thomas; The Subjectivist Roots of James Buchanan's Economics, Mises.org

[5] Yahoo.news, Nearly half of US households escape fed income tax

[6] Friedman, Milton, What Every American Wants, Wall Street Journal

[7] S. Cecchetti M S Mohanty and F Zampolli, The future of public debt: prospects and implications, Bank of International Settlements

[8] see Does Rising US Treasury Yields Today Suggest Sovereign Debt Concerns Or Remergent Inflation?

Politics: It’s Not About Jobs But About Income or Value Producing Opportunities

Speaking about the controversial political issue on employment or jobs, I’d like to share my experience.

Technically I am jobless; that’s because I don’t have an employer who pays me in salary. I also don’t run a formal business or enterprise, so I am not a business person.

Yet to survive, my livelihood depends on a mishmash of several accrued tasks; particularly free lance sales agent work for clients who trades the Philippine equity market, my own personal investments or trades, provides consultancy work for a broker firm via newsletters and doing this blog (where I earn a smidgen from sponsored ads).

In other words, while I am technically unemployed (if measured in wages), I have many jobs.

So the issue isn’t the lack of jobs- that’s because basically everyone can find something to do (like me)-but one of income or the willingness of someone to pay for service rendered and whose payment is acceptable to those providing the labor.

And here we find GMU's Professor Don Boudreaux arguments fundamentally valid and applicable, (bold highlights mine)

``The reason you refuse my offer of a (full-time!) job is because what you really want is not the opportunity to toil for someone else but, rather, the income that you can earn by toiling.

``No matter how prestigious the job, few of us are willing to toil unless we're paid to do so.

``The reverse, of course, isn't true. Nearly all of us are willing to be paid without having to toil for it.

``Only a moment of reflection is necessary to make clear that no society can survive if significant numbers of its denizens try living without working -- without producing. So the reverse course of action -- being paid without working -- is impossible to generalize. It's impossible to establish such a course of action as a general policy open to all.”

My comment:

Put differently, the politically colored issue of unemployment or the lack of jobs is essentially a diversion to promote entitlement "free lunch" privileges by means of interventionism.

Yet, interventionism precludes the elementary societal function that requires that we have to provide or produce what the markets needs or wants for us to be able to consume and survive.

Again Professor Boudreaux,(bold highlights mine)

``By speaking incessantly about "jobs" we lose sight of the above realities. What each person ultimately wants is not a job. What each person wants is income -- the ability to consume -- that enables ready access to a rich, and hopefully growing, array of goods and services.

``And in a society that affords widespread prosperity, income is attainable for each willing worker not by merely producing, but by producing goods and services that other people value.

``Rather than speak of "jobs," therefore, I wish that people who discuss economics would speak instead of "value-producing opportunities."

``Such a term is unquestionably awkward. But the clarity of thought that would be promoted by replacing "job" with "value-producing opportunity" would more than offset the cumbersome terminology.

``This change in word usage would make clearer that what people seek are not opportunities to toil. It would indicate more directly that what people want is maximum possible opportunities to produce value, for only by producing something that other people value will those other people pay a worker handsomely for his or her toiling.

``Substituting "value-producing opportunity" would also help expose the flaws in policies such as protectionism and government make-work programs. Such policies can indeed transfer wealth from society at large to people whose jobs exist only because government relieves them of the need to participate fairly in the market process. But such "jobs" clearly are not "value-producing opportunities" -- for the amount of value that such workers produce is less than they are paid.

``And no society can long survive by institutionalizing such unproductive policies on a widespread scale.”

My comment

As a final thought, interventionism via inflationism that essentially redirects resources from what is required by the market aimed at promoting the interest of a politically vested few leads NOT to more “value producing opportunity” or job based INCOME but LESS. That's because governments essentially don't create wealth, they can only tax and redistribute.

Yet we can’t expect an economy to become wealthy by simply having everyone to dig holes and fill them. Unfortunately, politicians, academic dogmatists and mainstream media tells us otherwise.

It's odd how deception can be construed and imbued as the truth.

Why Free Lunch Policies Sells

Free lunch programs are usually best sellers. Why? Because interest groups benefit from it.

In the case of the US, according to mint.com, 47% have ZERO income tax liability in 2009 while 27% will shoulder the burden for the redistribution.

While it is easy to see the numbers and think about noble goals, what is usually missed is that taxes have been punishing the most productive economic agents whom contributes to the gist of the nation's economic growth...to the benefit of the non-productive actors.

Such redistribution leaves a big segment of the population dependent on welfare and vulnerable to scheming political actors.


As Dr Richard Ebeling recently wrote,

``a number of economists, such as Nobel Laureate, James Buchanan, have taught us that the actual politics of government intervention and redistribution has little to do with high-minded notions concerning some hypothetical "public good" or "general interest." The reality of democratic politics is that politicians want campaign contributions and votes to be elected and reelected, and they offer in exchange other people's money. Those who supply those campaign contributions and votes want the money of those others, which they are not able to honestly earn through the free play of open competition in the market place.

``The bias in the democratic process toward political plunder is due to what is called a “concentration of benefits and a diffusion of burdens” that results from various government interventions.

Typhoon Onyok's Aftermath: Charity Is The Province of the Marketplace

This cordial comment from Dave Llorito of World Bank practically captures how the local community has responded to the recent calamity brought about by typhoon Ondoy,

``Despite the difficulties, the response to the crisis was immediate and heartwarming. Government, in particular the National Disaster Coordinating Council, immediately mobilized its rescue teams. Citizens’ groups, media organizations, civil society, universities, church organizations, and private business—organized through text messages and social media websites like Facebook and Twitter—responded by organizing their own volunteer teams to rescue trapped victims or bring food, water, clothes, medicine, and blankets. Help from the international community also poured in." (bold emphasis mine)

So have the entrepreneurs been "greedy" as earlier depicted by media and politicians? The answer is clearly no.

Remember it is in the vested interest of the private sector to be charitable.

This is not only due to self esteem or social purposes but for sustaining the economic environment.

Think of it, if retail store ABC's customer base have been blighted by the recent mass flooding, where a massive dislocation- population loss through death or permanent relocation to other places- would translate to an economic loss for the store, then, it would be in the interest of owners of store ABC to "charitably" or voluntarily provide assistance of various kind to the neighborhood in order to prevent such dislocation from worsening, or as a consequence from indifference, risks economic losses.

Hence, such acts of charity is of mutual benefit.

Moreover, charity is the province of the marketplace. That's because markets produce and provides the goods and services required by society to operate on. Whereas government essentially don't produce goods or services but generates revenues by picking on somebody else's pocket.

As Murray Rothbard wrote, ``it is hardly “charity” to take wealth by force and hand it over to someone else. Indeed, this is the direct opposite of charity, which can only be an unbought, voluntary act of grace."

Hence acts of government to redistribute reflects on politics and not of charity.