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The best one-sentence description of inflation I've heard is: inflation is a hidden tax on savings. People who save money are hurt the most. It's as if the newl

The best one-sentence description of inflation I've heard is: inflation is a hidden tax on savings. People who save money are hurt the most. It's as if the newly printed money is generated by taking a bit from anyone according to how much cash he/she has stored away.

matzab 5y ago
inflation is a hidden tax on savings That's basically Germany's state motto.
forgetfulness 5y ago
The people hurt in most tangible ways are the ones who don't have the capacity to save; if you were spending all your salary each month, living hand to mouth, inflation now means fewer and less quality goods and services. And that can be eating less nutritious food, having to use more worn down clothes, having to postpone medical/veterinary expenses further, etc. Now, it happens that in the US the people working the least paid jobs have seen a wage increase, but that won't be necessarily the case and they aren't the only ones on a tight budget.
- kkoncevicius 5y ago
  The things is that markets adapt but lag behind. For a while the old prices are still in place while the money is being printed. Then, slowly, the market "notices" that the amount of money increased so the prices readjust. While the prices readjust - everything becomes more expensive. Your haircut is more expensive - so the hair stylists salary catches up. Your bread becomes more expensive so the farmers that produce flour also have their salaries catch up. Everything eventually catches up, except for the amounts of money that were allocated to savings.
  - jbluepolarbear 5y ago
    That’s not true at all. Salaries aren’t increasing at the same rate that food, goods, and services. Stuff gets more expensive at a greater rate than wages increase.
    - kkoncevicius 5y ago
      That's relative. If food gets more expensive - that money goes to someone, someone who is producing or selling food. Prices cannot increase without someone at the same time making more money.
      - jbluepolarbear 5y ago
        That money doesn’t go to the people that need it. It goes to fuel, shipping, taxes, etc. the person stalking the shelves gets nothing, the person that works at the gas station gets nothing, the person on fixed income gets nothing, and on and on. Inflation only helps the top and the bottom gets recked.
        kkoncevicius 5y ago
        I don't know, my hair stylist increased the price for a haircut 2 times during the past 2 years. She isn't rich by any means. People who work and can set their prices adjust fast. People who depends on salaries set by others lag behind, but eventually even the government wages catch up. What never catches up are the savings. If you had 10,000$ before inflation - that will be worth less after without any bouncing back. I don't think we disagree.
        jbluepolarbear 5y ago
        Your hair stylist isn’t making more net profit. Rent went up, supply cost went, utilities went up, frequency of patrons gone down. You should ask your hair stylist if the raised prices are keeping up with their rising costs to operate. And how much of that $10k will dwindle as your expenses go up and your income is no longer in surplus?
  - bigodbiel 5y ago
    And that’s how profit is made!
cobookman 5y ago
If the stock market and housing doesn't appreciate then inflation would harm us all. Couldn't the cost of living increase while investment vehicles stay flat caused by rising interest rates.
pdonis 5y ago
Exactly. If more economists acknowledged this obvious truth, it would be much easier to have saner policies in this area. One thing to add is that, in addition to being a tax on savings, inflation also leads to misallocation of resources, because the newly printed money is not distributed equally. (If it were, it would actually have little economic effect, because all prices, including wages, would rise by exactly the same fraction and everybody's behavior would be unchanged, other than the unavaoidable tax on savings.) So the money that is being taxed away from those with savings is being given to whoever is favored by the authority that is printing the money. That allows those favored parties to bid away resources from others even if those resources would be more productively employed elsewhere. And so we get, for example, huge swaths of commercial real estate built (because one of the favored parties is financial institutions who give loans on real estate) and sitting empty for years, while our infrastructure crumbles because there aren't enough construction resources available to fix it.
- imtringued 5y ago
  Enjoy your tax on savings. You will bark at the wrong tree for the rest of your life. Permanent money causes inflation because the physical world isn't permanent. It needs a constant energy input to keep running. This energy input is simply ignored. So it has to be modeled after the fact via inflation. A negative interest rate on cash makes money no longer permanent meaning money no longer has to be replicated endlessly to model energy losses or liquidity costs. Yes, nature is stealing your youth, it's clearly a tax on youth. Imagine if you could just simulate your age being 18 on your id and everyone thinking that you are 18 forever by legal decree. At some point people will notice your grey hair and the ruse is over. They get the silly idea of adjusting your age back to your real age. Money should age via negative interest rates to be consistent with the laws of thermodynamics.
  - pdonis 5y ago
    > Money should age via negative interest rates to be consistent with the laws of thermodynamics. This is nonsense on so many levels that I don't even know where to begin.
- 5y ago
wodenokoto 5y ago
The whole point of inflation is to keep people from storing money under the mattress. Savings are to be invested. If investments can’t beat inflation then you have a shrinking economy and no amount of deflation is going to get the wheels turning again. It’s not that Keynesian economists don’t understand that inflation is a tax on money, it’s that they see the purpose and reason for inflation from a completely different angle than, say, Austrian economists.
- kkoncevicius 5y ago
  Say we trade and I give you an apple. In return you give me a note saying "this note is a proof wodenokoto owns me one apple and can be exchange for one apple at any time". What good does making this note depreciate over time serve, except as a pressure for me to demand you return the apple as soon as possible? It acts as a mechanism which nudges me to lend less apples overall. If inflation is good, why not ramp it up to 200%? At that level it's clear that nobody would accept money and barter would take place instead. And my thinking goes that it is also bad at those lower percentages, except to a lesser degree. I don't see how it can suddenly turn to positive at, say 10%.
  - ska 5y ago
    > except as a pressure for me to demand you return the apple as soon as possible? What you describe is something like a promissory note, and doesn't really capture it. If you can trade that note to someone else for a box of framing nails, then you get to the crux of the issue. It's not pressure for you to ask for the the apple back soon, but to use it for something soon not just sit on it. The economists will tell you this pressure keeps the economy trucking along nicely. Of course, if it goes too far, you ruin peoples lives. Going to far in the other direction, also ruins lives.
  - imtringued 5y ago
    The apple spoils, you selfishly demand another apple. The apple orchard must keep growing forever to compensate for the spoiled apples. If the coupon spoiled via negative interest rates then the person who holds the coupon and is responsible for the storage costs is paying for the privilege of not worrying how to store an apple that is spoiling. Barter says you buy you sell. Money says you buy and buy or you sell and sell. Quite absurd isn't it? Replace apples with workers and the orchard with the economy.
deltarholamda 5y ago
You can think about it in reverse as well. A stable currency gives a clearer price signal. Inflation distorts that signal in opaque ways. Which is why monkeying with how inflation is calculated usually means chicanery and tomfoolery is afoot.
BenoitEssiambre 5y ago
This is mostly wrong. Inasmuch as there is a grain of truth, it might be that inflation is a tax on savings that are held as government paper. If inflation is predictable, private assets are not affected. Some times back, I tried to explain intuitively here: https://medium.com/@b.essiambre/the-world-deserves-a-pay-raise-302f25efd82a?source=friends_link&sk=cb180b2cf186b263b6c6c70ad29bc36e https://medium.com/@b.essiambre/the-world-deserves-a-pay-rai...
randomsilence 5y ago
It is not only a tax on savings but also on wages. >If inflation were allowed to run a bit higher, it could deliver a long-overdue win for young people who have had to face a combination of stagnant wages and rising housing costs. That's a bold statement. Why should the adjustment be proportionally more when there is more inflation? Isn't it more likely that pay is merely adjusted to the previous level and the time of increased inflation just reduces the net income even more?
sleepingadmin 5y ago
>The best one-sentence description of inflation I've heard is: inflation is a hidden tax on savings. People who save money are hurt the most. It's as if the newly printed money is generated by taking a bit from anyone according to how much cash he/she has stored away. Who are the people who save money? Or rather, more specifically are either holding cash or in bonds whose real-yields are very negative? Tourists, downpayments, and retirees. Flipside, who is benefiting the most right now? People who are leveraged the most. Jeff Bezos and amazon isn't building all these warehouses out of pocket. These are all being financed and amortized for 25 years at tremendously low rates with real yields in the negatives. Or rather Jeff Bezos is being paid HUGE money to take on debt. Retirees are getting poorer by the day giving their money to Bezos. High inflation disproportionally benefits the ultra rich by huge degrees.
- kkoncevicius 5y ago
  Everyone is quick to talk bad about the "ultra rich". Ultra rich have means, they are intelligent, they have advisors, and they know how to adapt. If economy turned towards deflation those ultra-rich would liquidize their assets, store money, and benefit from that instead. When two opposing processes can benefit the rich I would say it's not in the process but in how you react to the undergoing changes and how you adapt.
  - sirspacey 5y ago
    Yes and no. It slows the pace of expansion, but it doesn’t not necessarily mean they liquidate. I’ve yet to meet a billionaire who wants their net worth driven by the bond market.
- imtringued 5y ago
  The ultra rich have more of everything. They have more money, more stocks, more land, more intellectual property, more monopolies more of absolutely everything. Meanwhile most people keep their savings inside their body as human capital. Most people make a living by utilizing this human capital. If inflation gets them a job it is worth it.
napoleon_thepig 5y ago
This assumes that the only possible cause of inflation is fiscal deficit monetization. This is just wrong. You could have scenarios where the central bank does not change policy but money supply increases because banks are lending more money and therefore using the discount window more. Also people could expect more inflation in the future, so they try to get rid of cash faster to buy goods. This increase in money velocity will also increase inflation.
dandanua 5y ago
It's a tax on cash savings. It's what poor people hold. Rich people save in other ways. They also use huge loans. So that inflation can be advantageous for them.
- imtringued 5y ago
  If poor people hold cash why are they mad? Aren't they rich if they have all the money? sarcasm...

matzab 5y ago

inflation is a hidden tax on savings That's basically Germany's state motto.

forgetfulness 5y ago

The people hurt in most tangible ways are the ones who don't have the capacity to save; if you were spending all your salary each month, living hand to mouth, inflation now means fewer and less quality goods and services. And that can be eating less nutritious food, having to use more worn down clothes, having to postpone medical/veterinary expenses further, etc. Now, it happens that in the US the people working the least paid jobs have seen a wage increase, but that won't be necessarily the case and they aren't the only ones on a tight budget.

kkoncevicius 5y ago
The things is that markets adapt but lag behind. For a while the old prices are still in place while the money is being printed. Then, slowly, the market "notices" that the amount of money increased so the prices readjust. While the prices readjust - everything becomes more expensive. Your haircut is more expensive - so the hair stylists salary catches up. Your bread becomes more expensive so the farmers that produce flour also have their salaries catch up. Everything eventually catches up, except for the amounts of money that were allocated to savings.
- jbluepolarbear 5y ago
  That’s not true at all. Salaries aren’t increasing at the same rate that food, goods, and services. Stuff gets more expensive at a greater rate than wages increase.
  - kkoncevicius 5y ago
    That's relative. If food gets more expensive - that money goes to someone, someone who is producing or selling food. Prices cannot increase without someone at the same time making more money.
    - jbluepolarbear 5y ago
      That money doesn’t go to the people that need it. It goes to fuel, shipping, taxes, etc. the person stalking the shelves gets nothing, the person that works at the gas station gets nothing, the person on fixed income gets nothing, and on and on. Inflation only helps the top and the bottom gets recked.
      - kkoncevicius 5y ago
        I don't know, my hair stylist increased the price for a haircut 2 times during the past 2 years. She isn't rich by any means. People who work and can set their prices adjust fast. People who depends on salaries set by others lag behind, but eventually even the government wages catch up. What never catches up are the savings. If you had 10,000$ before inflation - that will be worth less after without any bouncing back. I don't think we disagree.
        jbluepolarbear 5y ago
        Your hair stylist isn’t making more net profit. Rent went up, supply cost went, utilities went up, frequency of patrons gone down. You should ask your hair stylist if the raised prices are keeping up with their rising costs to operate. And how much of that $10k will dwindle as your expenses go up and your income is no longer in surplus?
- bigodbiel 5y ago
  And that’s how profit is made!

cobookman 5y ago

If the stock market and housing doesn't appreciate then inflation would harm us all. Couldn't the cost of living increase while investment vehicles stay flat caused by rising interest rates.

pdonis 5y ago

Exactly. If more economists acknowledged this obvious truth, it would be much easier to have saner policies in this area. One thing to add is that, in addition to being a tax on savings, inflation also leads to misallocation of resources, because the newly printed money is not distributed equally. (If it were, it would actually have little economic effect, because all prices, including wages, would rise by exactly the same fraction and everybody's behavior would be unchanged, other than the unavaoidable tax on savings.) So the money that is being taxed away from those with savings is being given to whoever is favored by the authority that is printing the money. That allows those favored parties to bid away resources from others even if those resources would be more productively employed elsewhere. And so we get, for example, huge swaths of commercial real estate built (because one of the favored parties is financial institutions who give loans on real estate) and sitting empty for years, while our infrastructure crumbles because there aren't enough construction resources available to fix it.

imtringued 5y ago
Enjoy your tax on savings. You will bark at the wrong tree for the rest of your life. Permanent money causes inflation because the physical world isn't permanent. It needs a constant energy input to keep running. This energy input is simply ignored. So it has to be modeled after the fact via inflation. A negative interest rate on cash makes money no longer permanent meaning money no longer has to be replicated endlessly to model energy losses or liquidity costs. Yes, nature is stealing your youth, it's clearly a tax on youth. Imagine if you could just simulate your age being 18 on your id and everyone thinking that you are 18 forever by legal decree. At some point people will notice your grey hair and the ruse is over. They get the silly idea of adjusting your age back to your real age. Money should age via negative interest rates to be consistent with the laws of thermodynamics.
- pdonis 5y ago
  > Money should age via negative interest rates to be consistent with the laws of thermodynamics. This is nonsense on so many levels that I don't even know where to begin.
5y ago

wodenokoto 5y ago

The whole point of inflation is to keep people from storing money under the mattress. Savings are to be invested. If investments can’t beat inflation then you have a shrinking economy and no amount of deflation is going to get the wheels turning again. It’s not that Keynesian economists don’t understand that inflation is a tax on money, it’s that they see the purpose and reason for inflation from a completely different angle than, say, Austrian economists.

kkoncevicius 5y ago
Say we trade and I give you an apple. In return you give me a note saying "this note is a proof wodenokoto owns me one apple and can be exchange for one apple at any time". What good does making this note depreciate over time serve, except as a pressure for me to demand you return the apple as soon as possible? It acts as a mechanism which nudges me to lend less apples overall. If inflation is good, why not ramp it up to 200%? At that level it's clear that nobody would accept money and barter would take place instead. And my thinking goes that it is also bad at those lower percentages, except to a lesser degree. I don't see how it can suddenly turn to positive at, say 10%.
- ska 5y ago
  > except as a pressure for me to demand you return the apple as soon as possible? What you describe is something like a promissory note, and doesn't really capture it. If you can trade that note to someone else for a box of framing nails, then you get to the crux of the issue. It's not pressure for you to ask for the the apple back soon, but to use it for something soon not just sit on it. The economists will tell you this pressure keeps the economy trucking along nicely. Of course, if it goes too far, you ruin peoples lives. Going to far in the other direction, also ruins lives.
- imtringued 5y ago
  The apple spoils, you selfishly demand another apple. The apple orchard must keep growing forever to compensate for the spoiled apples. If the coupon spoiled via negative interest rates then the person who holds the coupon and is responsible for the storage costs is paying for the privilege of not worrying how to store an apple that is spoiling. Barter says you buy you sell. Money says you buy and buy or you sell and sell. Quite absurd isn't it? Replace apples with workers and the orchard with the economy.

deltarholamda 5y ago

You can think about it in reverse as well. A stable currency gives a clearer price signal. Inflation distorts that signal in opaque ways. Which is why monkeying with how inflation is calculated usually means chicanery and tomfoolery is afoot.

BenoitEssiambre 5y ago

This is mostly wrong. Inasmuch as there is a grain of truth, it might be that inflation is a tax on savings that are held as government paper. If inflation is predictable, private assets are not affected. Some times back, I tried to explain intuitively here: https://medium.com/@b.essiambre/the-world-deserves-a-pay-raise-302f25efd82a?source=friends_link&sk=cb180b2cf186b263b6c6c70ad29bc36e https://medium.com/@b.essiambre/the-world-deserves-a-pay-rai...

randomsilence 5y ago

It is not only a tax on savings but also on wages. >If inflation were allowed to run a bit higher, it could deliver a long-overdue win for young people who have had to face a combination of stagnant wages and rising housing costs. That's a bold statement. Why should the adjustment be proportionally more when there is more inflation? Isn't it more likely that pay is merely adjusted to the previous level and the time of increased inflation just reduces the net income even more?

sleepingadmin 5y ago

>The best one-sentence description of inflation I've heard is: inflation is a hidden tax on savings. People who save money are hurt the most. It's as if the newly printed money is generated by taking a bit from anyone according to how much cash he/she has stored away. Who are the people who save money? Or rather, more specifically are either holding cash or in bonds whose real-yields are very negative? Tourists, downpayments, and retirees. Flipside, who is benefiting the most right now? People who are leveraged the most. Jeff Bezos and amazon isn't building all these warehouses out of pocket. These are all being financed and amortized for 25 years at tremendously low rates with real yields in the negatives. Or rather Jeff Bezos is being paid HUGE money to take on debt. Retirees are getting poorer by the day giving their money to Bezos. High inflation disproportionally benefits the ultra rich by huge degrees.

kkoncevicius 5y ago
Everyone is quick to talk bad about the "ultra rich". Ultra rich have means, they are intelligent, they have advisors, and they know how to adapt. If economy turned towards deflation those ultra-rich would liquidize their assets, store money, and benefit from that instead. When two opposing processes can benefit the rich I would say it's not in the process but in how you react to the undergoing changes and how you adapt.
- sirspacey 5y ago
  Yes and no. It slows the pace of expansion, but it doesn’t not necessarily mean they liquidate. I’ve yet to meet a billionaire who wants their net worth driven by the bond market.
imtringued 5y ago
The ultra rich have more of everything. They have more money, more stocks, more land, more intellectual property, more monopolies more of absolutely everything. Meanwhile most people keep their savings inside their body as human capital. Most people make a living by utilizing this human capital. If inflation gets them a job it is worth it.

napoleon_thepig 5y ago

This assumes that the only possible cause of inflation is fiscal deficit monetization. This is just wrong. You could have scenarios where the central bank does not change policy but money supply increases because banks are lending more money and therefore using the discount window more. Also people could expect more inflation in the future, so they try to get rid of cash faster to buy goods. This increase in money velocity will also increase inflation.

dandanua 5y ago

It's a tax on cash savings. It's what poor people hold. Rich people save in other ways. They also use huge loans. So that inflation can be advantageous for them.

imtringued 5y ago
If poor people hold cash why are they mad? Aren't they rich if they have all the money? sarcasm...