Sunday, November 11, 2012

Inflation: Stealing from the Poor for the Rich


Robin Hood and his Merry Men

In today’s complex economy it is useful for the ordinary citizen to understand a few simple principles about economics. That way, they can manage their own money better and also contribute their voice to policy making in their countries. This post is about inflation, its causes and ramifications and how it can be managed  in any country.

Money is a used for acquiring goods and services and when the price of goods and services rise we say that inflation is taking place. The price of something depends on many factors but two of the primary ones are 1. Demand and supply balance 2. Extent of Money Supply.  Both factors are easy to understand.

If a commodity becomes in short supply then its price tends to rise. If apple crops have been destroyed by untimely frost then apple prices will rise. If the demand for a product increases then too its price rises but if demand falls prices fall or crash. The balance of demand and supply is one of the factors that determines the price of any of the available goods or services.

Now let us understand Money supply. For example let us say any one country doubles its money printing and then distributes it by say doubling salaries. The price of everything in the country will tend to double because twice as much money will be available for acquiring the same amount of goods and services. There was a time when governments could not print money at their own sweet will. It was when money was minted in gold and silver, but the world went off the gold standard a long time ago and that is no longer an impediment to printing more money if the policy makers so decide. Paper is cheaply available. However, even now some countries cannot print their own money such as those in the Euro Zone, otherwise, Greece would have done it long ago to overcome its debt burden.

What would have happened if Greece printed a lot of money? There would be inflation but the pensioners would not have been able to object as readily as they do now when their pensions are being reduced. They would get the same pension but it would buy less because of inflation and the effect would be the same. Any debt that Greece had in its own currency would be paid back easily and the creditors would not be able to complain because no one says that more has to be paid back if prices rise. However, the portion of debt in dollars would increase because with inflation the price of the dollar as determined by the flexible exchange rate would also rise. In this respect, USA is sitting pretty with its debt because most of its debt is in dollars and if that country prints a lot of extra money to cover it, it will pay it back easily, However, that would also cause severe inflation with all the extra dollars floating around. Governments have nice names for printing excess money, perhaps so that people do not catch on. They have given it names like quantitative easing, debt or deficit monetization etc. (UPDATE JULY 2013 in purple color; the Americans seem to have read this note because ever since it was public they have begun to do that in installments. Their economy is being helped as a result and they may continue to do it until inflation becomes troublesome)

Governments get their money through various sources like taxes, selling state assets, debt etc. They draw up a budget to spend this money. Incase they spend more than their income, we have what is called a budget deficit. The deficit can easily be made up through quantitative easing i.e. printing more money and increasing money supply with the attendant consequence of inflation. In case, too much inflation takes place then controlling central banks tend to reduce money supply by various means such as increasing interest rates. The easiest way to curb inflation is to slash deficit budgets and increase interest rates until inflation is banished. In many developing countries the cause behind budget deficits is corruption because available money for budget is illegally misappropriated.

Whenever a question of reducing state budgets and deficits is considered, some economists immediately propose a reduction of subsidies that may be built into the system. Although certain subsidies may be undesirable, the worst time to reduce them is when inflation is already prevailing. It will simply increase inflation further for the most vulnerable sections of the country because the subsidies were introduced in the first palace because of such needs. It will particularly hurt the population hurting from inflation most increasing their misery.  One may wonder why economists suggest such solutions to politicians for their approval even though it may lead to less than humanitarian consequences? The reason could be because it is not the economists who have to win votes. Their emoluments and compensation is best protected if there is GDP growth in the economy and that is best ensured through quantitative easing, no matter if the bottom half or even 99 per cent of the population suffers. The proper way to reduce deficits in inflationary times is to cut down the non-subsidy expenditure. It brings down inflation quickly and when that is banished a government may consider reducing undesirable subsidies.

Some economists view inflation as a clever form of tax that gets money into the hands of governments cleverly without having to announce a tax increase. In the view of this blogger, if so, it is the most despicable form of tax because it taxes the poorest of the population, unlike Obama, who is trying to increase taxes for the richest Americans only who can easily afford it - persons making more than a quarter of a million a year. He is being given a hard time in the US congress because of it. Just shows how shameless some of the richest persons can be in protecting and increasing their wealth, aside from some exceptions like Warren Buffet.

What about the inflation caused by a demand and supply imbalance? Will inflation not take place even without increased money supply if some item is in short supply? In this case the price of that item will increase for sure but then the price of some other items will decrease if money in circulation remains the same and the overall rate of inflation across the board would not rise. Demand and supply imbalances, and rise in price of imported things, tends to increase the price of specific items but do not cause general inflation across the board.


If financial practices are designed within a country so that inflation is intentional, it is an unfair practice of governance that is also inhuman because it hurts the poorer sections of society most. If inflation within a country is not intentional but takes place inadvertently, it is a clear proof of mismanagement by government.

Ever since currency systems went off tangible things like gold or silver, it has become the responsibility of governments to manage production and distribution of their chosen currencies in a manner so that inflation or deflation does not take place except within a narrow band of one or two percent. Europe, Australia and USA has been very efficient at such management, but not countries of Latin America, Africa and Asia.

The reasons for economies or individual price of goods going up or down are complex and include vagaries of nature and even psychology. Governments cannot be held responsible for it all, however the production and distribution of money is the responsibility of government and they are supposed to do it in a manner so that overall inflation (or deflation as in Japan) does not take place. If they cannot, they have shirked their responsibility. If a nation is incompetent to do so they should revert to the gold standard. Countries that have deflation like Japan are fortunate because they can easily get out of any recession by increasing money supply, that is an easy process of printing money.

If one were to devise a very rough thumb rule for ascertaining the irresponsibility of government based on the rate of inflation then one might say very approximately that a government is irresponsible to the extent of ten times the rate of inflation or deflation as a percentage of expected responsibility level. Thus a one per cent inflation rate may imply a ten per cent irresponsibility of government managed financial systems. Ten per cent inflation therefore may indicate one hundred per cent irresponsibility ( unless it is a short term temporary blip). If it is still larger then the economic and financial system as well as the governance system that controls may be  collapsed, malfunctioning or dishonest. If such a collapse is not due to something as severe as a war, then those who managed the financial system must be regarded may be working against the interests of the people. The thumb rule here is highly approximate as a first attempt, but the message is clear. In future better ones along the same lines may emerge that include a few other indicators such as the exchange rate changes. A depreciation of currency is its effective devaluation and an indication that far more money is in circulation that warranted by the economic fundamentals.

At the present time, many countries are facing recession or slowing growth. One of the methods economists suggest and use to increase growth is to increase money supply. It may also increase inflation, but then, if the technique leads to an increase of income for all the citizens, they get compensated for the increased prices.

The present world economy has become such that even when growth takes place along with inflation then all citizens do not benefit equally. Unfortunately it is the rich who are benefiting most over the last decade as revealed by an increasing rich/poor ratios and the increasing ratio of the rich/poor incomes in most countries . In this scenario, the rich get compensated for any inflation that may be taking place whereas the effective income of the poor falls because of increased prices. In effect, such a monetary easing results in taking money out of the pocket of the poor and transferring it to the pocket of the rich. It is happening now in many countries that are suffering inflation. It is in effect stealing from the poor for the rich. Such an economy is called trickle-up capitalism. The author has written about it elsewhere if you search for it. Robin Hood is probably turning in his grave in Sherwood Forest because of this. He stole from the rich to give to the poor unlike some modern financial planners who are in effect doing the reverse while giving it fancy names like easing and covering it with intellectual sounding yet false arguments. There could be something noble about stealing from the rich, especially riches acquired unfairly and giving it to the poor. Wonder what the reverse is?

In India presently because of falling growth rate, industrialists are crying for a reduction of interest rates by the controlling bank so that growth rates are increased. They are barking up the wrong tree though. Interests are high because inflation is high and inflation is high because there is too much money in circulation because of deficit budgets. They should be crying out for a reduction of budget deficits and that  will eventually automatically lead to the controlling bank reducing interest rates when inflation falls. The interest rates should in fact be higher because high inflation is leading to a near disaster of the financial system. It may be mentioned that deficits covered by debt do not promote inflation although they create a burden for the future. it is deficits covered by quantitative easing that cause inflation.

This blogger is a simply an educated and concerned citizen of the world and presently very concerned about the greed of the grabbers that is pushing large sections of  world population into financially difficult situations.Read more about the modern exploitative practices in this small book:
http://www.amazon.com/Brief-Introduction-Economics-Greed-Exploitation/dp/1495448193

In India, this is the time of the annual festival of Diwali. It is a time of the year when people pray to Laxmi, the goddess of wealth. I hope she is pleased with the present article and that she brings prosperity into the lives of the genuinely needy and not the genuinely greedy of this world. A Happy Diwali to all readers of this blog.

Another version of this post is also posted at (Stealing from the poor and giving it the Rich -Inflation)  http://ezinearticles.com/?Stealing-From-the-Poor-and-Giving-It-to-the-Rich---Inflation&id=7375231

UPDATE JULY 2013: 

This author is pleased to note that as a result of the principles explained in this  note and mention of Japan, some six months ago, Japan began to pump money into its system and managed to get out of its decades long recession. The Prime Minister's party recently received a thumping victory. Best wishes to him. If he continues to follow it, the pumping of money should continue until inflation sets in, and best wishes to him also for restoring the lost historical national pride of Japan, that those who lose wars are made to do. Germany has already done it almost and it is high time Japan did it too. It is not that such simple principles are not known to economists of Japan, but knowledge is often held back due to vested interests. It gets implemented when made public.

UPDATE JULY 2014: 

The Americans overdid their Quantitative Easing program and ended up with huge food inflation. Read a report on that here
 http://www.breitbart.com/Big-Government/2014/05/24/U-S-Food-Inflation-Running-at-22

UPDATE

It is hoped that food inflation will end in India and the bread from the mouth of poor stop being stolen by 2015 due to a new Government in India that is receptive to change. The report will be published here 

UPDATE

Read about distribution of wealth in the world and how it is changing in recent years here http://someitemshave.blogspot.in/2014/05/how-wealth-of-world-is-distributed.html

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