04 February 2008

The Road to Poverty – Part V

(Part I, Part II, Part III , Part IV)

It doesn’t happen right away, of course. Recall that the people at the beginning of the exchange process (in this case people in the education and construction related businesses) receive the full value of the dollars presently on the market. That is, despite new printed money being on the market, due to the fact that the market has not yet realized that there are, again, more dollars floating about, is still treating these new dollars as if they are worth $.70. So those people at the beginning of the exchange process are still getting $.70 for each dollar they spend. By the time the market realizes what has happened and that money ends up in the hands of those people at the end of the exchange process, those dollars are only worth $.50. Now, that $500.00 received by the beneficiaries of the War on Destitution is worth only $250.00. (And that $250.00 will buy less because everyone else increased prices to recoup some of the loss in the value of their dollars.)

The city fathers (a miracle!) realize that right now might not be a good time for another “loan”. But they still need to increase the benefits distributed to the poor. They have no choice but to raise these additional funds through an increase in taxes. Clearly, the people who need to be taxed, or at least taxed at the highest rates) are those at the beginning of the exchange process. After all, when the money was inflated they still received the full (i.e., un-inflated) value of their dollars. Those people closer and closer to the end of the exchange process will pay less and less in taxes. Those at the bottom will pay none. (This, by the way, is about the only consideration which comes close to justifying a progressive income tax.)

Sadly, and thanks to the last round of inflation, the ranks of the poor are about to increase. You remember why, I hope. That means that there will be more beneficiaries of the War on Destitution, which means that the War on Destitution is going to need more money. Gee, I wonder where that will come from. More taxes? Another “loan”?

Now, in our country, there are several things that offset some of the effects of inflation. The biggest of them is just the sheer size of our economy. Those inflated dollars can be absorbed a bit because as our production of goods and services increase there are more places for those inflated dollars to go. So although our money is no longer related to gold, it is still somewhat related to things of tangible values, such as automobiles, television sets, computers and the like. If these things increase there are more things to which those dollars can be related for value. So our situation is not as obviously dire as it is in our thought experiment here. Yet.

We have been lulled into complacency by at least two things. First, there seems to be this idea that because nothing bad has happened yet, something bad is not likely to happen. I wonder if this sort of thinking is rooted in ignorance of the fact that inflating money supply is not a new way for governments to conduct business. Inflating money supply has been around for as long as there have been governments. Sooner or later it will come to an end. It always does. The second thing, I think, is ignorance of the fact that this is how the federal reserve system works and how, ironically, this system increases poverty and concentrates more and more wealth in the hands of those at the beginning of the exchange process.

The foregoing has been only an approximation of how the federal reserve system works. For fuller explanations, have a look at the two video reports, here). They are about an hour apiece, so quite a time commitment. But they are very much worth it.

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James Frank Solís
Former soldier (USA). Graduate-level educated. Married 26 years. Texas ex-patriate. Ruling elder in the Presbyterian Church in America.
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