Thursday, July 31, 2008

Inflation, the Hidden Tax

Inflation numbers released today (Thursday) evening are not comforting. The rate of inflation has one up again reaching 11.98%. Worse, food articles have become more expensive, causing discomfort to the poor and the middle class.
In his classic book, The Economic Consequences of the Peace (1920), John Maynard Keynes observed:
“Lenin (the founder of the former communist Soviet Union) was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose”.
Many people do not realize that inflation is with us, and it is an extremely destructive hidden tax, especially on the poor and middle classes. Inflation reduces the buying power of your money.
Inflation in fact is a transfer of money from the poor and the middle class to the rich. The transfer of wealth comes as savers and fixed-income families lose purchasing power, and big companies benefit from increased government spending and higher finished product prices. Savers and those living on fixed or low incomes are hardest hit as the cost of living rises. Low- and middle-incomes families suffer the most as they struggle to make ends meet while wealth is literally transferred from the middle class to the wealthy.
Can the economy prosper in times when the country as represented by the middle class gets poorer ? The answer is NO. Then, higher inflation should slowly translate into lower share prices.

This is the second of today's blog entries. The first entry is below: titled "Cycles of contraction and expansion".

1 comment:

Jagdish said...

I guess that the primary stock market trend determines the view. I remember that during good times in the 1990's, it was argued that stocks represent the best hedge against inflation and that inflation is good since comanies can make large profits (albeit in nominal terms). Therefore it was logical to say that inflation is good for the markets. Now that the markets are down, is the converse arguement true that high inflation is bad for stock prices. The answer is given by the primary trend in the stock market which is down. One can fit all sorts of arguements to the trend and justify it. Trade with the trend and you can win all arguements - that is the final message