Why Politicians Love Inflation

Within the business world there is lots of talk about how we are seeing price inflation in a lot of different commodities.  Recently General Mills, Kraft Foods, Domino's Pizza, and United Technologies said that they will be increasing the prices for their products (http://online.wsj.com/article/SB10001424052702304741404575564400940917746.html).  So I think the question on a lot of peoples minds is...why print more money if it causes prices to rise?  Who benefits from this?

The government loves inflation because over time peoples income goes up with inflation pushing them into higher tax brackets, this means more tax revenue for the government.  But the main reason that government loves inflation is because politicians like to continue to expand government programs yet they lack the spine to raise taxes in order to pay for it.  Why be truthful to the American people about having to raise taxes when you have a Federal Reserve who can print the extra money needed?  This is exactly what they do.  Since the Federal Reserve was created in 1913, we have had a steady decline in the value of the dollar.   Inflation is a hidden tax, plain and simple.  This is a tax that the politicians know they can get away with.  It is no coincidence that public education teaches very little about Finance and nothing about how the Federal Reserve works.  If we were all to learn about how the value of our money is being destroyed we would put an end to it.  They must keep us distracted with T.V shows, Football, Movies, Pornography, going to bars, buying new cars, ect. If they can keep us distracted with materialistic items, and also keep the political focus on Republicans blaming Democrats and vice versa, then they can continue to get away with this 100 yr heist that has done nothing but cause us to work harder and harder for less pay. 

Why do you think back in the early to mid 1900's families were able to make it on just one income?  Is it because evil Capitalists don't pay their workers enough?  Well if this was the case then the average profit margin for corporations should have gone up dramatically over the last 60 years or so.  For those who don't know, a profit margin in plain English means the amount of profit a company makes per dollar of sales.  So if greedy corporations were just trying to keep more profits for themselves instead of paying their employees more, then obviously profit margins for corporations should be going up dramatically in the last 60 years.  But this just isn't the case.  According to the Commerce Department, the average corporate profit margin ratio in 1940 was about 27%, in the year 2000 the average ratio was 29%.  For the 60 years between 1940 - 2000 the ratio stayed between 25-33%.  In my opinion this data proves that  corporations are no more greedy in the year 2000 than they were in 1940.  Yet it is nearly impossible to survive on only one income these days.  The reason that it takes two incomes is because the value of our dollar has been slowly eroded due to the expansion of the money supply. But to be fair, families these days do buy a lot more items that they don't really need...does everyone in the family really need a cell phone?  Do we need a T.V. in every room of the house?  Do we really need a 30k dollar car when a car for 8k would do just fine?  So in all fairness, most Americans can definitely live cheaper.  But even going without these luxuries it is still pretty much impossible to pay for the necessities on just one income. 

Keynesian Economists argue that a devaluation of the dollar is not the cause of needing two incomes to make ends meet.  They claim if you look at the Consumer Price Index (CPI) that incomes have pretty much gone up right along with inflation.  But then we need to look at who calculates the CPI, and what metrics are they using.  The Bureau of Labor Statistics computes the CPI.  And yes, the Bureau of Labor Statistics is a government organization.  The CPI is used to determine how much of an increase Grandma is going to get on her Social Security check.  If the CPI shows we are having say 3% inflation, then next year Grandma is going to get 3% more from her Social Security.  The U.S. government also issues Treasury bonds that are inflation protected.  These are called TIPS (Treasury Inflation Protected Securities).  Here's how these work.  If the CPI shows we are having 3% higher inflation than we were last year, then your Treasury Inflation Protected Security bond will pay you 3% higher interest that year.  So as you can see, the government has an incentive to make the CPI look like it isn't increasing as much as it really is.  If they can manipulate the CPI then they can save billions in interest payments on TIPS and making sure Grandma doesn't get nearly has high an increase in her Social Security payments.  This is exactly what they do.  Sickening isn't it?

The CPI tracks the prices of a fixed basket of goods bought by a typical consumer.  So you would assume that the items always stay the same, such as the average home price, average rent, average car payment, average cost of meat, milk, wheat, corn ect.  Well the government likes to manipulate these items to make sure the CPI stays as low as possible.  For instance, once the values of homes started to rise in the early to mid 2000's, the CPI stopped using the value of real estate since prices were skyrocketing.  What they did instead was replace it with owner equivalent rent.  They used the average price of renting an apartment/home instead.  During this time people were leaving apartments in droves to buy homes.  So the average cost of renting went down since most people were buying.  So while home prices were going up, the CPI actually showed a decline in the area of real estate.  They use the same techniques when it comes to food.  If meat for instance is showing a huge rise in price, they will give more weighting to chicken if it hasn't risen as much as meat has.  Remember back when gas stations had an attendant who pumped your gas, washed your windshield, and checked your oil for free?  Well services like these that have been cut are not taken into account in the CPI as well.  There are other techniques such as geometric weighting, hedonics, and other gimmicks the government uses as well.

People need to wake up to the fact that inflation is not a good thing.  It causes us to work harder and longer hours just to maintain the same standard of living.  It is just like a tax.  We need to have some honest discussion on whether or not the Federal Reserve is an institution for the people, or is it an institution for the government to silently raise taxes.  I believe that raising taxes is the way to enslave the general population.  We are halfway to Serfdom, but there still is a chance to turn this around.  Lets just hope people wake up.