The Hidden Tax of Inflation

On today’s show we’re talking about the hidden taxes that result from printing money.

Those who have studied history will know that any time you debase the currency by printing, it has the effect of destroying the fabric of a society. This has happened throughout history time and again. While the rate of inflation has been somewhat low over the past decade, we’ve been living with it. But we’ve also gone through two major movements that have caused a reduction in costs.

The first movement has been the technology revolution. If you think back to the 1980’s, even the most basic of personal computers was priced at $4,000. That was a huge sum of money at that time. It was the equivalent of two months of salary at that time. Today, you can buy a much more powerful computer for under $1,000. Each generation of technology innovation has in fact lowered the cost of many durable goods and lowered the cost of many capital expenses.

The second movement has been the globalization of manufacturing. In the 1970’s, most manufactured goods were sourced locally in the same country. China was still a captive economy. Japan was the first country to start exporting manufactured goods in a large way. Today, most of our consumer goods are made in low cost geographies in Asia. Manufacturing was outsourced to Japan until Japan was too expensive. Then manufacturing was moved to Taiwan until that was too expensive. Then manufacturing went to China in search of lower cost labor. With its vast population, China seemed like an infinite pool of low cost labor until costs in China went up. Manufacturers then went to Malaysia then Thailand and the Philippines and Vietnam and India. Today, Bangladesh supplies more than its fair share of clothing. We kept driving down manufacturing costs with access to lower cost labor. But eventually, that band-aid solution eventually runs out when there is no more cheap labour left to exploit. We are not there yet. There are a lot of people still earning a lower wage than in the west. But it will happen eventually.

When you have inflation, there are six hidden taxes. But these taxes don’t apply equally to everyone in the economy.

1) There is a transfer of wealth from the lender to the borrower.

2) Some Assembly Required

3) Government is the biggest borrower of all. See #1.

4) Capital Gains Tax on assets priced higher due to depreciating currency.

5) Understating CPI means less money for entitlement programs

6) Holding bonds on central bank balance sheet skews market forces for interest rates.