And let's not forget that you get paid in the deflating currency and that where you are invested may become irrelevant. You must first clothe, house and feed yourself and you must do it all in the currency in which you are earning and which buys less of those things every day. When creditors are hurt by inflation, they jack up the lending rate. Soon, nobody can afford to buy on credit because the interest rate gets very high. Since inflation discourages investment, job creation slows. As the labour supply outstrips labour demand, wages fall. So, wages never keep pace with inflation. If you were fortunate enough to keep all of your past savings in commodities, you will quickly drain that reserve just to live. Here's where I disagree slightly. Since wages almost never keep pace with inflation, savings kept in hard currency will be depleted quickly in order to live. Although, you make an excellent point - there is such a thing as biflation when the price of some things is inflated in dollar terms and other things experience deflation. Inflation is a horrible thing for everyone except government.
inflation is most clearly theft when your country has alternative minimum taxes and progressive tax rates. So even if you were just moving decimals around... the tax man will big taking a higher percentage of your hard earned wages.
Imagine 10% inflation with a 50% top rate of tax. You make 10%, breaking even on the year, and pay 50% on that. So you just got taxed 5% of your assets despite making no money in real terms. Now imagine 50% inflation with a 50% tax rate - minus 25% per annum real after-tax returns, and that's if you manage to make 50% nominal returns per annum to keep up with the inflation rate, good luck with that!
I bet the DUMBocrats would "love" this : Cut Govt. Spending by 45-50% NOW. (Yes, it will "hurt" a little at first) Lower the top tax bracket to 20%
Zboy, Angrycat, This just went from a good thread to a great thread. I like both of your explanations. I completely understand and agree that inflation kills those on a fixed income, and destroys the incentive to save. ("Save" being used in the common sense, like putting money into a savings account or store dollar bills under my mattress) But how does inflation stymie investment? If we have some extra money, wouldn't we want to invest it so we get a return to help fight the depreciation in value of our cash? Let's say I have a simple ditch digging operation, and I've done well so I have $1 million in the bank. We'' say that million will hire 50 ditch diggers for one year, but next year after 10% inflation, those workers will cost me $1.1m for a year. Wouldn't I have an incentive to invest my money in a backhoe right now, rather than wait a year until the price of the backhoe goes up and I was also hit with the higher wages for my workers? Obviously I'm missing something in my cozy little world view; the stagflation years prove that. What did the people with money do with it back then?
Yes, but it depends on what you're investing in, and whether the rate of return on whatever investment you choose is greater than the rate of inflation. As I mentioned previously, if you were invested in the broad stock market from 1965-1982, in nominal terms you made no money at the end of that period (since the markets ended where they started), but in real terms you lost a ton of money due to inflation. The same has happened to those broadly invested in stocks from 2000-now, which have gone nowhere in nominal terms, but lost a lot of money in inflation adjusted terms. And as previously described, inflation punishes lenders and creditors, so the more inflation there is, the less incentive there is to lend, or it compels lenders to only lend at very high rates of interest to protect themselves. It is true that you definitely want to invest your money in something other than fiat currency to beat inflation, but the trick is always figuring out which investments will beat inflation at which times. As has been pointed out before, there have been inflationary periods during which gold, oil and stocks have in fact considerably underperformed relative to inflation. That is the trick for us as investors, to accurately identify what type of inflationary environment we're in and position ourselves accordingly in the correct asset classes, which vary depending on the scope and shape of the inflationary environment. Some naively put it into stocks, which got them killed. Some who were smart went into commodities and PM's, and did well. Again, it all depends on what kind of inflationary and economic environment it is. Which is where the trick lies to successfully navigating it as an investor.
I thought this thread was about a millionaire tax? You said to do the opposite of it to juice your local economy. However the opposite of the millionaire tax is not what you suggested. The opposite of the millionaire tax is a strict reduction in the INCOME TAXES of those making over a million. You suggested reducing the taxes that would effect nearly 100% of the population, with those making less than 100k being the largest beneficiaryâs.
"Save" does NOT mean stuffing dollar bills under a mattress. That is not the common usage of "save" - remember back to your economics class. Saving and investing are synonymous. When people save, they either put the money in the bank (which the bank then lends out) or they invest in something else - like stocks. Now, imagine a world of hyperinflation. Say, 15% per year - which is much lower than a lot of places with hyper-inflation. How many investments return 15% per year? Not many. Thus, as inflation rises, fewer and fewer investments are able to outpace and eventually even keep pace with inflation. If your investment grows at 12% (already a high growth rate) in the presence of 15% annual inflation, you're losing money. You don't want to invest. Instead, you want to buy and hoard goods that you need to live. As for your ditch digging operation...your example has little to do with inflation. If one backhoe can replace a lot of expensive labour, then you need to buy one ASAP. However, if the rate of return on your ditch digging business is expected to fall below expected inflation, you don't buy the backhoe. You buy commodities and close down your business.