On inflation


Yesterday morning I was reading an old article by Joseph T. Salerno, which was published in the Austrian Economics Newsletter in 1987. The following passage on inflation struck me as a worth reproducing:

[I]f an additional quantity of Fed notes is printed up and spent by government on various goods and services, an excess supply of money will temporarily be created in the economy. The initial recipients of the new money will quickly get rid of the excess cash simply by increasing their own spending on goods; those who eagerly receive the new money as payments in the second or later rounds of spending will do likewise, in the process bidding up the prices of goods, reducing the purchasing power of the dollar, and, consequently, increasing the quantities of dollars that each individual desires to keep on hand to meet expected future payments or for other purposes. In summary, any excess supply of fiat money does not go out of existence, but is spent and respent and continually passed on like a "hot potato" throughout the economy until the surplus money is finally and fully absorbed by the resulting increase in general prices and in desired dollar holding.

The important thing to note here is that inflation – by which I mean an increase in the money supply – does not affect everyone equally. On the contrary, it benefits those closest to the pump, while penalizing those further away. The powerful and the politically connected – like banks, the public sector, and government contractors – get the new money first, before it has driven up prices, and therefore benefit from it. By the time it reaches the average taxpayer, prices have adjusted, and their incomes and savings are worth less than they were before.

This is why, in a sense, inflation is the most insidious and cowardly tax there is. It silently redistributes wealth from the ordinary citizen to the elite, without most people having a clue what is happening. Sadly, I suspect that's one of the reasons why politicians all-too-often favour it.