Thursday, 21 September 2017


The Inflation Tax

Posted by
July 20, 2017
in Blog

Can you name an official at a major central bank who expresses worries that inflation is now, or soon will be, too high?  Can you identify any financial publication–even the Wall Street Journal–that does not report that recent inflation data have been “disappointing?” To paraphrase former President Nixon, are we “all inflationists now?”

Twenty years ago it would have been unimaginable that any central banker or finance minister would have publicly voiced the view that “a little more inflation would be a good thing.” Now, they all do it. Without exception, every central bank in the world–with the full and open support of respective governments–is pursuing an objective of debasing the currency they issue. That is what inflation targeting means–deliberate erosion of the purchasing power of fiat currencies over time.

Decades ago, Milton Friedman called this the “Unlegislated Tax of Inflation.” Inflation is a tax because the holders of currency cannot avoid the erosion of the purchasing power of cash, while the issuers of currency–governments–are able to service and repay massive outstanding debts with forms of money that are not worth as much as when the debts were incurred. In a macro principles course, students are taught that during inflation, creditors lose and debtors gain. Holders of cash are creditors of governments–fiat currency is non-interest-bearing debt of the government. Since the issuers of fiat currencies are the biggest debtors of all, they stand to gain the most from shrinking the real value money. That is why they do it.

Even when pieces of gold and silver served the functions of money, kings and emperors sought to monopolize the issue of new coinage–they “authenticated” the coins with the rulers stamp or seal to certify that it was not “counterfeit.” Then, they collected and melted down older coins, added in a bit of lead or other metal, and re-stamped a new coin that contained less gold or silver. That is where the expression, “debasing the currency” came from. Falling purchasing power of money has been with us throughout recorded history, but now it has become an open and widely publicized objective of government to reduce the purchasing power of the money they issue and are responsible for “managing.”  Why?

Over the past several decades, governments have made ever-more generous promises of old-age pensions and other transfer payments, while continuing to incur fiscal deficits and rising outstanding debts. Tax collection systems simply cannot generate sufficient revenue to fulfill all the promises politicians make to people on the receiving end of “other peoples’ money.” Personal and business income taxes, tariffs and excise taxes, sales and value-added taxes, property and inheritance taxes–all have been increased and still cannot keep pace with the current spending and promises of future payments made by politicians. The last remaining alternative available–given the world-wide unsustainable and uncontrollable fiscal dynamics–is the monetary solution. That is, fulfill the promises made by politicians by paying out money that continuously buys less and less. That is the fate of all fiat monopoly currencies issued by governments.


  1. Leland B. Yeager July 23, 2017 11:02 AM

    In recent years I too have not seen any dissent among central bankers and journalists from a policy of aiming at chronic inflation of two percent or so. Arguments for such a policy do exist, but far from conclusive ones. The most prominent and therefore most disturbing one, quite fallacious, used to be that the zero lower bound makes chronic mild inflation necessary for effective monetary monetary policy. On the other hand, arguments, and good ones, I think, exist for a stable price level in the traditional sense. But the arguments are scarcely discussed any more these days; the goal of 2 percent inflation is taken as axiomatiic. Groupthink prevails.
    I hope you carry on challenging that groupthink.

  2. Leland B. Yeager July 21, 2017 11:08 AM

    21 July 2017
    Dear Mr. Jordan:
    You are so right. Every central banker and financial publication that I am aware of calls for chronic inflation of 2 percent or so and calls for efforts to push it up when it falls below. Sure, arguments exist for chronic mild inflation, but far from conclusive ones; and powerful arguments exist for a stable price level in the traditional sense of that term. I rarely see any of the arguments rehearsed.
    I conjecture that mere groupthink is at work.
    Please continue your efforts.

  3. Mike July 21, 2017 9:08 AM

    Does this imply that private money, such as Bitcoin, will come to rule the roost? Don't seem to be any technological reasons why that couldn't happen. Are we looking in the wrong direction?