First off, it may actually be easier to explain things in the same island economy…without money. What if there was no money? What if everyone either made apples or gadgets…and just traded? How would that look? Also, here’s another island example you might use:
You have to remember…why are the prices going up? You have to think of dollars as a commodity, just like anything else. Because that’s what they are. The only difference is, we don’t consume them…we just trade them. When you recognize this, you realize that prices are nothing more than a ratio…the ratio of the value of the dollar, to the value of whatever you’re looking at.
Let’s say we’re on an island economy where there is only 1,000 dollar bills, and the people trade using those dollars. That is their entire money supply. Let’s also say there are 100 widgets on the island and the price of a widget is $4. This means that with the current number of dollars, and the current number of widgets, the value of dollars to widgets is 4:1. Each widget is worth $4, and each dollar is worth one-fourth of a widget.
Now suppose someone finds a genie lamp and the magical creature grants him one wish…and he wishes for a box of widgets. (Not a very imaginative fellow). The box that appears is filled with 100 widgets. Now the economy has 200 widgets. But the number of dollars has not changed. This means, as the widgets make their way into the economy, they will begin to trade at half the price…in essence, they are more plentiful…so their value is decreased. By the same token, let’s say the man wished for a case of dollars instead. And it had $1000 in it. In the same way, the dollar is worth less…because there is more of it. With $2,000 in the economy and still only 100 widgets, this means that widgets will eventually trade at $8.
See? The price went up…because the value of the dollar went down. Before, when the dollar was more rare (and therefore more valuable), it only took $4 to buy a widget. Now, each dollar is worth half as much. So it takes double the number of dollars to buy the same thing.
Now here’s where the tax comes in…
The guy who wishes for the case of dollars…Let’s call him “Ben”. By being granted a case of dollars without really doing anything, Ben has basically created dollars out of nothing. He has inflated the money supply. Those dollars do not represent any sort of work or effort on the part of anyone in the economy. It didn’t take Ben any time or labor or resources to get those dollars…so there is no real-world value there..that is, those dollars do not represent any work that took place in the real world. They came out of nowhere. So Ben is able to go into the economy and buy things…things that did take real-world effort, time, and resources…but he didn’t produce anything of his own to trade. He got the dollars out of nothing.
So Ben goes into the economy and buys some widgets. The problem is, those widgets didn’t come from nowhere. They actually did take time, effort and resources. In effect, Ben is getting something for nothing. Some people call this “stealing.”
But he’s not really stealing, is he? After all, he paid the price those sellers were asking for. They had an item, they offered to sell it at a certain price and Ben accepted. Voluntary exchange. That’s free market capitalism, right? How is he stealing? He got something, they got something.
Not at all. Remember the price increase we mentioned earlier? The minute the genie conjured the case of dollars, the real value of each dollar went down. There were now twice as many dollars. But of course, when Ben “created” the new dollars, prices hadn’t changed to reflect that yet. He was able to buy anything in the economy at it’s original price. He was able to take real goods, that took real-world effort, at a price that was much lower than it should have been…by creating dollars out of nothing. In effect, he “stole” half the wealth of everyone else who had dollars.
This is exactly what happens when America’s Ben (Bernanke) pushes a button and cranks up the printing press. Everyone who gets the newly printed dollars first gets the benefit of essentially getting something, created out of nothing. They are able to go into the real world economy and buy anything they want, at prices that are much lower than the real value…prices that do not yet reflect the devalued dollar. And who gets those newly printed dollars first? The government. Big corporate banks. And their big corporate friends. They benefit at the expense of everyone else in the economy.
Don’t forget these are all the same cartel of guys.[1]
Imagine if an old man on the island economy decided to save some of his money for a rainy day. He saved up $16. As the new genie money was spent into the system, the prices of everything in the economy would eventually double. Now, when the old man tries to go and spend his savings, he finds it only buys half as much stuff. Before, he could buy four widgets with his savings…now he can only buy two. Where did his money go? Well, his dollars are all still there. But his purchasing power has been stolen. And purchasing power is everything. It doesn’t matter how many dollars you have…what matters is how much you can buy with them.
Inflation (i.e. money printing) steals the purchasing power of everyday citizens and transfers it to the elites in banking and government. It is a hidden tax that is not voted on, not ratified, and not even recognized by the majority of the public. The picture of pickpocket-Uncle Sam is no joke. That’s quite accurately what inflation is…
[1] What did Hank Paulson do before he was made Secretary of the Treasury? Oh nothing…he was just CEO of a little company called Goldman Sachs. How about the current Treasury Secretary, Tim Geithner. Oh he was just the president of the Federal Reserve Bank of New York (yes, a private (read, non-governmental)) bank. Joshua B. Bolten, was a former Goldman executive before he was made President Bush’s chief of staff. Stephen Friedman, a former chairman of Goldman was chairman of the New York Fed until he resigned last year–He remained on the board of Goldman even as he was supposedly regulating Goldman. In 2008, as part of its bailout, the government put Edward M. Liddy, then a Goldman director, in charge of A.I.G. (a company that owed Goldman a shitload of money). Who is president of the New York Fed now? William C. Dudley…the chief economist for Goldman Sachs since 1986, William C. Dudley. The list goes on and on.