We have been raised to believe that inflation is a natural phenomenon, but it is actually a hidden and regressive form of taxation. It is the government diverting resources from the people and spending them without their knowing it. Why do I say this? And is inflation bad or good?

First, a couple of basics. What is money, for example? Money is a store of value that makes it easy for people who provide various goods and services to do business with each other. The more fluid the process, the more goods and services there will be for everyone. The money must be of a generally recognized value and quality so that the negotiating parties do not have to negotiate over that part of the transaction. When money and goods are beyond the control of any one individual, the market will naturally assign values ​​to products based on what people want.

This is the most efficient form of market and will create the most value overall as people compete vigorously for wealth. But the economy is rarely allowed to operate this way. The government intervenes in the economy in many ways. To put a very simple form of intervention, governments take money from some people through taxes and give money to others through entitlement programs or just spending.

Every time the government takes money from successful people and gives it to less successful people or companies, it imposes two inefficiencies. It “punishes” successful actions by imposing costs on them, and “rewards” unsuccessful actions by subsidizing them. I use quotation marks because “punishment” and “reward” sound very intentional, whereas in reality most of the interesting features of government spending are in the area of ​​”unintended consequences.” But the economic effect is the same, so naturally taxing and spending creates factions of people who compete for government largesse or to avoid taxes. There are political consequences to all taxes and spending, and they provide some checks and balances on each other. It is the natural political give and take in a democracy.

But it is also natural for the governments they control to try to please as many people while offending as few as possible, and this is made easier if taxes can be hidden. Then the government can give to discrete subgroups, pleasing them, without the cost of alienating other groups. How can this be done?

When money is out of government control, the cost to government is relatively obvious because every dollar commanded by the government is a dollar taken from somewhere else, and factions compete for discrete funds. But what happens when the government is free to create money out of thin air? This is called “fiat” currency (as opposed to “commodity” currency). Fiat currency depends on the stability (to survive) and integrity (not to overprint) of the government that assigns value to it, while commodity currency depends on the underlying value or rarity of the product regardless of the government. People in the US now seem to regard fiat currency as a natural and permanent right of government, and a good thing, but historically it’s a fairly recent development (and one the Founding Fathers genuinely mistrusted).

Fiat currency allows for inflation, which is the creation of currency at a rate faster than the growth of the economy.

Let’s take a very simple example. If an island has $100 and $100 worth of goods, what if the people on the island learn to create $10 worth of goods, while the government prints an additional $10 worth of currency? Not a thing. The economy has grown and the currency has expanded in unison. Currency retains its family value, as do assets.

But what if the government prints an extra $100 and distributes it without a corresponding increase in the quantity of goods? This is inflation, an increase in money relative to existing assets. The price of all goods will eventually double to reflect the increase in money relative to goods.

The real question in this model is how money is distributed, since who receives it, or who gets it first (before prices reflect inflation), will undoubtedly redistribute real wealth. For example, what would happen if the government gave all the money to twenty percent of the people on the island who had shacks? In that case, the money would not only fail to increase the net wealth of the island, but would also effectively redistribute wealth from renters to owners. If the government could sufficiently hide the process, it could make landlords happy without actively antagonizing tenants. I hope that the parallels between this hypothetical island and the actions of the US government in recent years (for example) are obvious.

When the government runs a deficit, what it is doing by definition is spending money without first taxing anyone. It is printing money in stock and spending it. Because you are spending it in various ways, you are making the receiving classes (owners and selected welfare groups) happy. It is actively and completely redistributing income, but doing it in a way that very few people understand. People think that it is giving without receiving, but the government can never really do this. As it is a matter of spending without prior taxation, there is no political cost for taking the money and spending it, there is no counterweight to stop the government. The result is a naturally increasing tendency to inflate and spend.

Inflation and spending not only redistribute wealth in unexamined ways, they also distort the economy, increasingly “punishing” economically viable actions and “rewarding” economically unwise actions or conditions. It should come as no surprise that all currencies that have entered this unchecked inflationary spiral have perished, with dramatically negative consequences for the people and countries that owned the currency. Because the United States has begun this process, a spirit of self-preservation strongly suggests reducing its fiat currency holdings and increasing its consumer currency holdings.

Gold is the main form of commodity currency in the world.