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Is There a Positive Correlation Between Inflation and Income Inequality?

After reading an article I wrote in this blog post, one of my friends responded by saying:

“I think this is a bit inaccurate historically, Paul…there isnt positive correlation between inflation, or actions of the fed and income inequality.  If this was the case there would be linear growth over the past 100 years…but aggregate disparity was essentially as skewed in the 1900s when the rockefellers and industrial barons were in power as now.  The main problem as I see it is the uber-wealthy are reaping the systemic benefits provided by government services, shared by all Americans, which allow their success, without giving anything back.  Military protection, public infrastructure in roads, bridges, rail systems, public schools which provide an educated workforce, police, utilities, and a base humanitarian safety net are shared costs which allow everyone in the country the opportunity to find fortune. Massive deregulation and tax loopholes have allowed corporations and the 1% to shield their wealth and not give back to the very framework which allowed them to succeed.  It put clamps on SEC oversight allowing for unchecked credit default swaps, derivative speculation and other shadow banking shenanigans.  Probably more responsible for SFR bust/housing crisis than any other factor.”

Here is my response:

There is absolutely a positive correlation between inflation and income inequality. In fact, the last decade has seen a burgeoning surge in economics literature investigating the link between inflation and income inequality. Regardless of the mechanisms proposed, these papers came to the inevitable conclusion that the greater the inflation, the greater theincome disparity. It has been said that “inflation benefits the rich and prosecutes the poor”. Here is why:

The poor tend to be savers, and with inflation on the upward trend, the real value or purchasing power of their money decreases. The rich on the other hand tend to be more credit-worthy (having a higher credit rating) and have better access to financial instruments that hedge against inflation. Inflation in some ways is seen as a form of tax. When the government spends more than what is allocated originally in its budget, it will run a budget deficit. There are three ways to grapple with this budget deficit – one, raise the taxes, a politically unpopular move, two, borrowing from the public by issuing government bonds or three, print more money that leads to inflation. Inflation benefits the borrower or debtor because the latter repays the money they borrow in fixed amounts, and the value of the dollars they repay is less, which in other words depreciate the purchasing power of the debt. A major debtor in this case is a government running a budget deficit and resorting to printing money to repay the debt and depreciating its value. So, how does inflation affect income distribution?

Ales Bulir, wrote a paper entitled “Income inequality: Does inflation matter?” He simplified the economy to 2 types of workers – the “insider” and the “outsider”. The “insider” is considered one who works usually in a unionised sector with indexed wages that are pegged to costs of living or inflation. Hence, the insider is better protected from the effects of inflation or rise in costs. The outsider on the other hand, does not enjoy a similar level of protection in terms of wage remuneration characteristics. Generally, the result of inflation is the income disparity between insiders and outsiders.Governments may attempt to prevent outsiders from falling into poverty by enacting “tax-the-rich-and-give-to-the-poor” policies (or as you refer to them the “uber-wealthy”) but as Ales pointed out, this only serves to compound the problem by creating even higher prices and therefore lowering the purchasing power of the outsiders even more (taxing the ultra rich causes the people who own these corporations to simply raise their prices and/or lower wages, compounding the effects).Increasing money supply (the policies of the federal reserve) is equivalent to a tax that penalizes those who see the money last.

One of my favorite economists, Ludwig von Mises, the father of Austrian school, put it this way: a government issues only a certain amount of paper money to purchase certain commodities and services. Thus, the prices of certain services or commodities purchased by the government rise immediately whilst others remain unaltered. The direct beneficiaries of government purchases are in a better position to purchase more goods and services than they used to in the past, and this chain of sale and purchase of goods and services spreads out in a boom. However, the rise in prices of goods and services are not synchronous across the board; there are some sellers of goods and services who do not experience the same increase in prices of that they must purchase for their consumption. The losers are those who see the money last.The “outsiders” referred to earlier do not have the powerful lobbyists that the “insiders” have who make sure that this system is kept it in place by paying off members of our government.

The root of this problem is this corrupt system of  government in bed with corporations and banks. I find it fascinating that people love to hate the rich so much. It’s much easier than accepting that our government is in bed with them or learning about how the inflationary policies of the federal reserve are robbing the wealth of the American people. Its so much easier to just blame the rich. The federal reserve is nothing more than a banking cartel, who operates in secret and engages in counterfeiting. They act to protect their own interests (and the banking elite), instead of the interests of the American people. See my blog post on America as a corporatocracy here.

You said the wealthy are “reaping the systemic benefits provided by government services.” Let’s be clear when you say “government services” you are really saying taxpayer money. The public infrastructure of the roads, bridges, rail systems etc is not paid for by state or federal taxes. Those are paid for by taxes on gasoline, so the rich aint getting a free ride (no pun intended) with these services. I wont get into the others for time sake here. But I will say the “humanitarian safety net” as you aptly put it, is nothing more than a giant ponzi scheme that only works because of coercion and theft and it is going bankrupt. Im not sure when using a third party (government) to impose your will on others became, “humanitarian,” but so be it.  Its also quite amusing to me that you described the theft and coercion of taxation as “shared costs.” That gave me a good chuckle :>)

Theft is defined as “the taking of another person’s property without that person’s permission or consent with the intent to deprive the rightful owner of it.” I never gave my consent for the government to take my money. Did you? Extortion is defined as “a criminal offence of unlawfully obtaining money, property, or services from a person, entity, or institution, through coercion.” We must pay this money or else we will eventually find a gun pointed at our heads and then we will be thrown in prison. Our government obtains money through theft, force and coercion – a criminal offense. We condone violence and coercion privately, but when it is done publicly, we call it “shared costs.” Bro, that is hysterical. Are you one of those people that calls water torture or water boarding “enhanced interrogation”? When exactly did stealing approximately 35-50% of peoples income become the “opportunity for everyone in the country to find fortune”.  I find it completely mind boggling that someone as intelligent and seemingly well informed as you, does not see the absurdity of this. Seems like taking half their shit would not be a source of opportunity, but hey, thats just me  :>P

I think it is important to establish that there is a big difference between people or corporations that are wealthy because they provide a valuable service or product, from those who are in bed with the government. Should someone like Mark Zuckerberg have to give back simply because he made millions from nothing? He provides a service that hundreds of millions of people use every day and now he should give back? Millionaires are that way for a reason – they already gave back. But the corporations that are in bed with the government that I mentioned above, the one’s who own and pick our presidential candidates, that is a different story. That is corporatism.

In terms of the derivative speculation…where do you think the banks got all that money from? When you have “easy credit” which is the policies of the Federal Reserve (holding interests rates at or just above 0 for several years to “stimulate the economy”) all of that money and easy credit always ends up in some kind of bubble, whether it be the stock market, real estate or in this case, it ends up in the real estate and derivative market. Once again, they create the problem and then we look to them to solve it.  How did they try and solve it after the great panic in 1907? They enacted the Federal Reserve system. Once again we can see that government intervention is a disaster. According to official Federal Reserve documentation its duties include conducting the nation’s monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions (“FRB: Mission”. Federalreserve.gov. November 6, 2009. Retrieved October 29, 2011). They were the one’s who were enacted to supervise the banks to supposedly PREVENT this! What a great job they did! Thats a good idea, put the banks in charge of themselves, yeah that will work! LOL. The only reason those risky assets were created by banks to begin with is because their “regulator” – the Federal Reserve – was ready to bail them out with overnight loans and printing-press money whenever they needed it.

You think de-regulation caused the SFR bust/housing crisis? The reason that the banks and lending institutions went apeshit had nothing to do with them not having enough regulations. Quite the opposite – it was government intervention – “we’ll pay you back” (via Fannie Mae, Freddie Mac and ultimately the Federal Reserve), that made them make so many bad loans and speculate in the derivative market. If you were investing your money and I told you that I would give you 100% of your money back if you lost it, you think you may take on slightly more risk? You bet your ass you would! Then if you lost it all by making very bad and risky investments, would I act all surprised? What if I then told you that instead of simply not giving you your money back next time so you would be more responsible, I was going to instead give you a bunch of “rules” to follow? Again, I have to just laugh at the absurdity of such a notion.  But I shouldnt laugh, because that is exactly what our government is now doing. More regulations. As my mortgage lendor so poignantly put it, “its like the inmates are running the prison” Nicole and I could not get a loan on a new home recently, even though our credit scores are better than 99% of the US population and we have never missed a payment in our entire lives. They would not count the $3000 rent per month we would be receiving on our current town home because  of “new regulations.”The people that caused the mess by interfering, are now interfering more. It is always the same story – government creates the problem and then government comes to the rescue to solve it. Look up “false flag operations” – they create a false threat and then use it to justify attacking other countries – google “Operation Northwoods” or “Bay of Tonkin.”

The solution to the investment example is simple: allow you to do what you want with you own money and not interfere by telling you that I would pay you back if you lost your money. This way, you will take on less risk, make better bets and generally speaking, be alot more careful with your money. You will stick with what you know. And if you lose some of it, no one comes to your rescue. That’s the free market my friend, government gets out of the way. And malinvestment and bad debt gets liquidated. The free market never had a chance to operate. If it did, they would never have been backed up by the government, aka you and i, the taxpayer and they NEVER would have been bailed out to the tune of trillions of dollars.

Capitalism is not bad, corporatism is…when they control the government and pick our presidents. It used to be against the law for a corporation to contribute to a political party. Now these corporations spend more on lobbyists than they pay in taxes!  Mussolini would be proud because that’s the loose definition of fascism.

One more caviat, the information you presented is the story almost verbatim given by Fox News and the majority of the mainstream media. I think you probably know that 6 corporations now control the entire mainstream media. You think these corporations, who’s advertisers now control our country because of this very system, are going to expose it?  There agenda is simple: serve corporate interests of advertisers, obtain high ratings and keep the status quo so they can continue to rake enormous profits at the expense of you and I. And the false story worked. Most Americans bought it hook, line and sinker. Not this one! That is why I am determined to research, research, research and then spread the word far and wide.

Please see my video: Believe in Yourself and See The Truth

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