Inflation and the Redistribution of Wealth

With the Fed announcing that it will continue to keep its foot on the accelerator at a pace of approximately $85 billion per month, I have been focusing on the effects of monetary inflation.  In my most recent post, I stressed the point that monetary inflation's most harmful effect is misallocating resources on a grand scale.  This includes discouraging the act of saving money.  This is what harms the overall economy the most, as it serves to eventually lower our standard of living.

Monetary inflation is immoral.  It is immoral because we are essentially forced to use U.S. dollars (or whatever currency your country uses if you live elsewhere).  If there were no legal tender laws and there were no taxes and regulations against gold and silver, then we wouldn't have much to complain about.  But the money we use is essentially forced on us and debasing it is the equivalent of theft, just the same as taxes.

Just as with taxes, inflation redistributes wealth.  It is not easy to track, but we can generally figure out who benefits and who loses.  The people who see the new money first are the ones who benefit at the expense of others.  But remember that everyone loses in terms of lost productivity and misallocated resources.

Typical beneficiaries, at least in the short term, of monetary inflation are bankers, investors, lobbyists, those in industries tied to the government such as "defense" contractors, those with government connections, and the politicians and bureaucrats themselves.  But there are also people who benefit just in certain areas.  For example, if monetary inflation drives real estate prices higher, then those who happen to be selling their house might benefit.

The people who lose in both the short term and the long term are generally those in the lower and middle classes with little in the way of connections.  They see the money last.  The problem here is that, while their income may eventually rise due to the inflation, it lags behind.  So they will already be paying a dollar more for a gallon of milk, along with just about everything else, before they see their income go up.  So most in the lower and middle class will lose out at the expense of those seeing the new money first, usually those connected to government.

Of course, the really bad thing about inflation is that most people do not know and do not understand what is happening to them.  This is going on in the U.S. right now.  Middle class America is struggling to pay the bills and can't figure out why.  Most do not understand just how much worse off they are because of the disastrous policies of the Fed and because of the huge government spending.

I think more Americans are sensing that they are being ripped off.  They just can't fully articulate it.  They sense that the government is making their lives harder, but they don't understand just how dramatic the situation is.  They don't fully understand just how much higher their standard of living could be if the government, particularly the federal government, were to shrink to a fraction of its current size and if the Fed stopped creating new money out of thin air.