Allow me to skip the second and third lectures of that unknown economist I mentioned in my previous post. The reason why I am jumping into his fourth lecture is due to taskmaster4450’s recently published article about the possibility for cryptocurrency to end taxation.
Though I dream to see such an event happening in the near future, my reservation is due to the absence of precedence in history. It’s more likely just changing the guards on the palace, and then the old ways will return to normal. I am a little bit skeptical to see governments giving up on their power monopoly over the people. Nevertheless, we can argue that our era is different because we have revolutionary technology on our side.
The particular statement that reminds me of that forgotten lecturer is when it was mentioned in the above article about the methods governments finance their operation: via debts and taxes.
I assume that it is now popularly recognized that the current taxation system is getting worse. Its continuous increase means a greater financial burden on the part of the taxpayers. But the way it is done is not widely known, not only because of the invisible character of the methodology but also because there is an ongoing heated debate about the subject. There is no consensus on whether such a method is really beneficial or not to the economy.
Perhaps, you are still puzzled about what specific government method I am referring to. In the third lecture, that overlooked economist identified interventionism as a tool of socialism. Here in the fourth lecture, the second tool that he mentioned is inflation. In this article, I just want to share the first three sub-topics that the ignored economist explained. I will not include his discussion on labor unions and full employment.
The Solution to Government’s Financial Problem
The two methods that this economist named as means to solve the government's financial problems are taxation and printing fiat money. Regardless of whether you believe taxation is theft or not, the position this economist is adopting is that such a method is a legitimate way to finance government operations. However, a good politician knows that proposing to increase taxes is detrimental to his career, and that is why instead of direct taxation, a better way is to just produce more fiat currency.
Directly taxing the people, at least they are aware of the deduction in their salary and they can adjust their expenses to a new financial situation brought about by new taxes. And another advantage of direct tax compared to printing paper money is that the price of goods and services is not affected. The only negative repercussion of such an act is the increase in buying power for the government and less on the part of private citizens.
Unfortunately, this is not the case when a government decides to print fiat money. It is actually also a tax, but people do not see it for it is done indirectly. And it also does not affect anyone's political career.
What's destructive in this form of indirect taxation is that since people do not see any reduction in their income (in fact, during inflation the nominal value of someone's income actually increases, though the real value is declining), they think that they can still buy the same amount of goods that they previously buy when the quantity of money is not yet increased. They do not realize that the purchasing power of their money has been reduced since the certain consequence of printing more money is a price increase in products and services. And since the prices of products and services have already increased as a result of additional money, those who receive the same amount of salary when the new money was not yet introduced will suffer. And since most people do not know how their money lost its value, they simply consider it as something natural.
Most Affected Sectors
The fact is, price increases and the loss of purchasing power are not natural. It is an inescapable outcome of the government's act of printing fiat money to address its financial problems. So, the financial burden is transferred from the government to the citizens without them knowing it.
The problem here is the way the government obtains money. Due to the preference of the government to use printed money rather than direct tax, some people will have a greater advantage than others. Those who receive the new money earlier are in a better position than those who receive it late. This reminds me of Ron Paul's words about “speculators, bureaucrats, and the special interests favored by the government” (Pillars of Prosperity, 2008, p.110) as early beneficiaries. The sufferers are the laborers and savers. Among them are the teachers and ministers (p.61).
Duration
Our disregarded economist narrated examples in the past to demonstrate the catastrophic end of increasing inflation. He mentioned the experience of the Roman Empire, the Han Dynasty, and Germany. He thinks that inflation will stay "as long as people are convinced that the government, sooner or later, . . . will stop printing money..." (pp.63-64). When people do not believe this anymore, then they will realize that prices will continue to increase. As a response, they will start "buying at any price, causing prices to go up to such heights that the monetary system breaks down" (ibid. p. 64).
Under an inflationary monetary system, becoming a debtor is considered wise. Anyone who understands the system could take advantage of it and could utilize it to attain easy wealth. Another feature of the inflationary policy is the perception of the government's power. It is looked upon by the people as all-powerful. People ask the government to take care of them for with an unlimited supply of money, the government can do anything.
To correct the wasteful spending of the government, that forgotten economist believed in returning to the gold standard. I think it is at this point that those of us in cryptocurrency are divided about whether such a solution is really sound or not. Anyway, for him, the gold standard is a form of protection from the extravagant government. One great advantage of it is that "the quantity of money under the gold standard is independent of the policies of governments and political parties" (p.65).
Our unpopular economist concluded his lecture by emphasizing that inflation is a monetary policy and can be changed. And the only way to change it is for the intellectuals to do their role in shaping public opinion. Once the public is informed about inflation's disastrous results, he was confident that politicians will abandon this monetary policy.
Note:
Certain numbers of paragraphs in this article are first published nine years ago under a different title. I rewrote it to fit our current context both on Hive and CENT. Moreover, I also think that it is obvious by now that I hesitate to mention the name of that unknown economist. I consider it more of an obstacle rather an aid in an age that which both Paul Krugman and Joseph Stiglitz are considered the authority in the current economic landscape. Let the reader decide not on the basis of the popularity of the name, but on the substance of the content whether the argument is sound or not.