Reply To: This is more of a general question but …

#18727
jmherbener
Participant

The wealth transfer from monetary inflation occurs regardless of whether or not the purchasing power of money overall changes, i.e., regardless of whether or not price inflation occurs. This is because, the first recipients of the new money bid prices of goods they buy higher than they would have been without their increased demand and thereby, deprive the least-eager buyers of the goods who have not received any new money of the goods they would have been able to buy otherwise.

The wider the demand for a given money, the less reduction in its purchasing power from a given increase in the stock of it. For example, suppose an additional $100 million in new money were created and spent by the Federal government in Washington, D.C., every month for the next ten years. Then the extra demand for goods by the residents of D.C. would lower the purchasing power of the dollar in D.C. As that happened, they would begin to spend the new money in other places where the purchasing power if the dollar hadn’t changed. The additional demands for other goods by other people who obtain the new money would bid prices up all throughout the country. Then Americans would begin to demand foreign goods to take advantage of their lower prices. If foreigners are willing to sell to Americans in dollars, then the prices of their goods would likewise be bid up to bring the purchasing power of the dollar in foreign countries into conformity with its purchasing power in America.

This process of wealth transfers via monetary inflation determines who in the private sector will be less well off when government officials are enriched, but the fact and extent of lower standards of living is determined by how many resources are drawn out of the private sector and into the government sector.

If the government levies a 10 percent tax on income so that, let’s say, 6 percent of society’s resources are controlled by government bureaucrats instead of entrepreneurs or if the government inflates the money stock so that 6 percent of society’s resources are controlled by government bureaucrats instead of entrepreneurs, then the reduction in standards of living in society will be the same. Whose standards of living fall and by what extent will be different in the two cases, but the overall effect will be the same.