Does government cause inflation?

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Although the politicians may say otherwise, many believe the government benefits from inflation and has had policies encourage rising prices since the early 1900s when the Fed came into existence.

Inflation hurts normal people by increasing the gap between income and costs such as food, housing, gasoline and natural gas. Inflation makes it nearly impossible to save, because it makes savings worth less and less.

So, why would the government intentionally encourage practices that increase the level of inflation?

Peter Schiff has a few answers for the government’s infatuation with inflation in his book, “Crash Proof.” It’s easily one of the most important books you should read if you want to see a realistic view of economics, the government, and what’s in store for the future. Schiff is one of the few economists/investors who predicted our current recession before it was popular to do so. He’s also one of the few investors and economists that I trust, because he doesn’t take on irrational optimism or pessimism — he looks only at the undeniable economic facts.

Inflation makes easy for government to pay debt.

One of the primary reasons there is inflation: paying off the national debt is easier. Think of it this way, the money borrowed is being paid back with money that is worth less. The national debt was borrowed when the dollar had more value and is now being paid back with dollars that actually have a lower value. This is the essence of the benefit to the government of a devalued dollar. While this may seem like taking a huge gamble, and many see this strategy as one leading to eventual economic doom, it has been the underlying philosophy of the government for decades. Print more money, devaluing it, in order to pay off debts with nearly worthless money.

Several more advantages to the government become apparent once this is understood. Social services are easier to finance, benefiting politicians who don’t want to anger voters by cutting or dropping services.

Moderate inflation is associated with economic growth.

Inflation also gives the appearance of economic growth. Charts showing strong economic growth over the decades give the false impression that the economy is healthy and booming. Economic “growth” doesn’t necessarily mean economic health. People believed that they were building wealth when real estate prices soared. The disastrous results of the real estate boom are now being suffered by many. Those assets are now devalued along with the dollar; inflation booms end in deflation busts.

Increase Taxes for Most People with inflation.

Another benefit to the government during inflationary times is increased tax revenues. Soaring property values brought in higher local tax revenues, increasing prices increase gross sales tax receipts, and increases in income generate more income tax revenue. While government benefits, working people rarely do during times of inflation.

Inflation can be tricky to track. The core inflation rate, the ones the Fed uses to make economic decisions, purposely excludes food and fuel from the index. The reasoning is these two commodities are volatile in value and frequently dependent on factors other than economic policy, such as weather. Although this exclusion makes some sense, looking at the long-term trends in food and fuel costs gives a clearer indication of actual inflation. Once again, working families are the ones who suffer as the cost of fuel and food rise much faster than incomes. In the end, the government supports inflation not because it helps us, but because it helps them. It makes the national debt easier to pay off by screwing over lenders. It makes the economy look like it’s growing while it’s actually being undermined. It helps the government collect extra tax revenue without actually needing to pass new taxes.

Check out here to learn more about how much inflation is really being created, how it hurts us, and how you can prepare.

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