By SD Contributor AGXIIK:
Inflation as we know it is well embedded in this country with annual increases for the last ten years of 8-10%. The Fed will never reveal the truth, necessarily, as the average person would revolt at that thought. With 48 million people on food stamps, able to buy free food with SNAP and EBT cards, they won’t complain until the buying capacity of these cards is insufficient to buy even the basics. The middle class is so hammered and dispirited at their plight, they have yet to complain, choosing instead to reelect one of the people chiefly responsible for this problem. They probably still think he will produce a miracle to stem inflation. The knowledgeable wealthy can work around inflation of 8% by investing in assets that beat inflation (like gold and silver).
The reason we have yet to see the really heavy foot of inflation is the velocity of money. It is as low as it has been in the last century, even lower than during the Great Depression. When the movement of the $5 trillion plus involved starts in earnest, the inflation will be undeniable and massive. This is when the people and businesses begin to lose confidence in their stale and static accounts stuffed with FIAT and begin to spend it in an attempt to front run the inflationary effects they see.
ZIRP also forces people and companies to pursue risky assets, creating bubbles. Bubbles create a perception of inflation that causes these same groups to spend their money in an attempt to gain yield in a ZIRP world. This never works to their benefits as bubbles are just the trap set by the smart money as they leave the room to count their gains at the expense of the average person.
The best thing about inflation as far as the government is concerned, is inflation will debase the national debt. The Fed will inflate its way out of debt. With interest rates offered at less than 1.8% for the standard 10 year note, inflation erodes the principal by 50% in less than 9 years. The rule of 72 says that the value of monetary assets increase or decrease by the inflation rate divided into 72. 9% inflation reduces the value of principal by 50% in 10 years. With the Fed, 10 years is a short time period. Government thinks in decades so the erosionary effect of inflation works to its advantage. Besides which, a good portion of that interest paid to the recipient is taxable, maybe as high as 35%, so the treasury receives 1/3 of their funds back during the 10 years that is the life span of that 10 year note. During this time we are all forced into higher tax brackets, brackets that are falling along with the availability of deductions we commonly used to reduce our taxes.
Another factor that many fail to see in inflation is the taxable income of people and companies rises in relation to inflation, pushing these two groups, people and companies, closer to that magic max tax bracket of 35-39% This rotates more money to the government.
The Alternative Minimum Tax is a classic example. It was first used to capture the very wealthy high income earners and now, with inflation, even people of modest means find themselves in the AMT trap. Income taxes within the AMT disallows many deductions thereby forcing a person making as little at $50,000 today to pay considerable higher taxes. Inflation is the reason this trap has been sprung decade over decade.
The government has done nothing to mitigate this tax format.
The government loves inflation as it debases debt, allows the government to spend more, and thus to buy more votes, give away more and extract more taxes from the people. It is the most insidious TAX and even a mild modest inflation rate of 8% makes government ecstatic. It makes the people the government represents poorer by 8% a year. Hyperinflation may not be in the cards but inflation of 10% destroys the middle class.
But we already knew that.