Monday, August 28, 2017

Taxes on Head Lice

It is claimed that the Inca levied a tax of head lice on towns that were unable to pay "tribute" in more liquid forms of wealth.

I wonder if the IRS would accept a pre-payment in the form of ripe pears shipped through the mail.  It is a pity I cannot grow durian.  I can pretty much guarantee that the "wealth" would be liquid after traveling through the US Postal system and exposure to August heat.

One scenario for hyperinflation in the US involves the departure of the baby-boomers from being net savers to being net consumers.  Instead of paying into 401-k plans they start withdrawing.  If they are lucky enough to have a pension then the trust must start liquidating assets to make payments.  In the realm of health insurance they go from drawing less than the premiums to being heavy consumers of medical care.

You might say, "ERJ, that has nothing to do with inflation."

The issue is that money is fungible.  The vast amounts of liquidity flowing into the capital markets means that the US government was able to borrow cheaply and expand services at very low cost.  The government used that money to live beyond its means.  One use of the  borrowed money is to pay the interest on money it borrowed in previous years.

As that vast flow slows and then reverses to an outflow, capital will become dearer.  In a normal economy the interest rate would go up and marginal investments would be starved for funding.  Unfortunately, rising interest rates would also put the government, and the Deep State that suckles on it, out of business.

Governments are much like a ratchet.  They expand enthusiastically but then resist reduction with all the tenacity of cellulite.  The clients of government largess scream when they are shorted what they consider to be their due.

Quantitative Easing is the practice of "printing" electronic money without an asset backing.  The academic mumbo-jumbo used to justify this practice is "If we print it, the assets will come."   The government continues to collect taxes for the sake of appearance and to keep the hoi polloi in their place.  Quantitative Easing creates inflation just a surely as printing paper money.

The organic capital markets, in turn, attempt to demand more return on their investments to compensate for the debasement of the currency.  So far they/we have not been successful.  The central banks have no limits on printing electronic money.  They do not have to engrave new plates with higher denominations nor do the run the risk of a shortage of paper.

The fear that the government will outlaw "cash" is short sighted.  They don't need to make it illegal because in a decade or so paying in "cash" will become impractical.  The government's status as a debtor and their control over the money supply guarantees inflation and, as long as $100 bill is the highest bill in circulation, rocketing prices will make cash impractical.

Meanwhile, some folks who are thinking ahead are packing their lifeboats.  Perhaps "ark" is a better term.  Noah's Ark allowed him, and his family, to weather the storm with virtually no interactions with outside forces.

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