Partners in Fleecing the Middle Class
Editors Note: The following was an instant mesage exchange between myself and Scott Reamer.
John: Inflation transfers wealth from creditors to debtors? Then why is the gap between the poor (debtors) and rich (creditors) as wide as ever and widening?
Scott:: The wealth transfer happens via the government so there is massive waste in the process - rent seeking industries (construction, military, agriculture, etc.) government cronies, etc. all get rich off the process. So in that wealth transfer from creditor to debtor, the poor debtors get very little and skim goes to government cronies.
John: Yes, but, creditors tend to own assets, and assets get bid up in nominal price with monetary inflation. That is the great tax but it is on the poor, not the rich. Creditors are paid back with inflated dollars which is a negative, but the wealth that appreciates far outweighs this. That is the great travesty of the Fed and all central banks. The fed is owned by seven banks, whose board of directors and owners are rich people.
Scott: Yes but depending on how much monetary inflation takes place the real wealth effect might be negligible or even negative ...i.e. the paper assets might not keep up with inflation and therefore those owning paper assets are still worse off. The major point is that the transfer itself benefits no one in the end except government. It is a transfer from creditor to debtor but the government skims too much via inefficiency and their buddies' pocketbooks (rent seeking industries) so that everyone loses.
John: Monetary inflation is wind at the back of corps and rich. Believe me, if inflation hurt the rich (creditors) we wouldn't have it. They are extremely scared about deflation (the rich). That is when their paper assets go down big.
Scott: "the Fed is owned by seven banks, whose board of directors and owners are rich people"...this is in fact the major reason I think they don't go out and drop money from helicopters. In the end they are not going to destroy the very cartelizing mechanism that keeps them in power and wealth. That's why I think we get deflation before hyperinflation...because the Fed isn't going to drop money from helicopters and EVEN IF THEY DID people have to accept that debt and I believe the evidence points to a debt contraction here - the end of the debt bubble.
John: Creditors (rich) own debt. If the Fed allowed deflation, that debt would default. It would be worth zero. I don't think they will let that happen - rather get paid back in worthless dollars? But we are talking about extreme scenario where all goes wrong; "they" don't look at that.
Scott: Government is the biggest debtor: they won't let the government collapse...it is there source of control and power.
John: Rich lend to the government, but rich control the government.
Scott: Agreed 100%
John: Slow monetary inflation over long periods bids up paper assets and makes rich richer; it makes income worth less and less which poor depend on so they get poorer
Scott: Partners in fleecing the middle class.
John: But slow monetary inflation has a consequence - it builds debt and more debt
Scott: Yes all monetary inflation has a consequence
John: To some point of no return. So the "scheme" the rich use, slow monetary inflation, eventually will kill them when we have debt correction (end of credit bubble).
Scott: And distorts production methods, capital markets, and consumer preferences.
John: Yes - the distortions "correct", the more government / rich put off correction, the worse it will be when it happens. But this is why the middle class (debtors) become poor over time...even though they pay back debt with inflated dollars (good), they lose as their income is worth less and less until they are no longer middle class
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