Everybody was thrilled to get stimulus checks in the mail during the COVID-19 pandemic.
“It’s free money!” many exclaimed. But nothing in life is free. This includes “free” things handed out by the government.
So today, you’re paying for those stimmy checks and the government pandemic spending spree.
I’ve written that American consumers are paying more and getting less. Analysis bears this out.
According to estimates by Bloomberg Economics, US households will spend $5,200 more this year than they did last year on the same consumption basket.
That breaks down to $433 extra in expenditures every single month.
But you’re not getting any more for your money.
Inflation Is a Tax
Every dollar the government spends ultimately comes out of taxpayers’ pockets. Governments can pay for their expenditures in three ways.
The most honest way is through direct taxation. The government collects the amount it spends each year in taxes each year. But that’s not particularly popular with voters, and politicians are reluctant to push tax increases.
The second way is to borrow money. The government sells bonds to willing lenders to finance current spending. But in effect, this is still direct taxation. It merely pushes the taxes into the future. When those bonds have to be paid off, the taxpayer will foot the bill. This is much more convenient for politicians who have very short time horizons. By the time the bill comes due, they will likely be long gone. And if they’re still in office, they can always borrow more to pay off the current debt. As long as the taxpayer doesn’t feel the squeeze today, the politicians don’t have to worry about blowback.
But anybody who ever run up a credit card knows you can only borrow so much. That’s a problem for politicians who want to kick the can down the road. Eventually, they run out of road. In fact, we can see the barricades ahead. With a national debt of well over $30 trillion, there is no way the government can realistically pay it the national debt.
That leads to the third payment option – the inflation tax.
The US Treasury still sells bonds on the open market as it always has. But now, the Federal Reserve puts its thumb on the bond market, buying Treasuries and paying for them with money it creates out of thin air. This devalues the currency and effectively decreases your purchasing power.
Here’s how it works.
When the government collects taxes to pay for its spending, it literally takes your money and then gives it to somebody else. Your purchasing power is diminished because you have less money to spend. But the other person’s purchasing power goes up. They have more to spend From a macro perspective, it’s a wash. The amount of money in the system remains unchanged.
But when the government prints money and then gives it to somebody else to spend, your purchasing power hasn’t been diminished — at least not in dollar terms. You still have the same amount of money in your bank account. But now there is another person who has money who can now go out and spend it. That person can compete with you to buy stuff. It creates a bidding war for goods and services. There is now more money in the system chasing the same number of goods and services. Prices rise. Everything becomes more expensive.
In effect, instead of the government taking your money, the government takes the purchasing power of your money.
That’s a tax.
You’re paying that tax today – to the tune of $433 per month.
The Wrong Solution
There are a lot of people out there who think the best way to fight inflation is through more government programs and more government spending.
In a Wall Street Journal op-ed, President Biden claimed, “We can lower the cost of child and elder care to help parents get back to work.” Lowering the cost of childcare is code for government-subsidized childcare. He also alluded to the stalled “Build Back Better” bill, which is basically a $2.2 trillion spending plan. Biden wrote, “We can also reduce the cost of everyday goods by fixing broken supply chains, improving infrastructure…”
That sounds like spending a lot of money to me.
It should be clear to you that this won’t fix inflation. In fact, it will only make it worse by raising the inflation tax.
Again, and I can’t emphasize this enough, every dollar the government spends comes out of Americans’ pockets — out of your pocket.
If the federal government is going to spend more to fight inflation, it will either have to raise taxes (and not just on the “rich” — that won’t generate enough government revenue) or it will have to borrow more. That means the Federal Reserve will have to print more to monetize the debt. That means more inflation.
Maybe next year you can pay another extra $5,000 for the same cart of goods.