In earlier posts, I have regarded inflation as counterfeiting conducted by the government. This is not hyperbole. It is merely calling an activity its proper name.
The Illegal Case
To understand this label, let us go over what happens when an ordinary criminal counterfeits money. Suppose these fake tokens are virtually indistinguishable from already circulating monetary units. The criminal and his associates are able to go to the market and buy goods and services at prevailing rates. These people benefit the most: they did not even have to part with anything of value to obtain these tokens.
Then, the sellers who received these fake monetary units are able to purchase goods and services at prevailing market rates. They do not benefit as much as the criminals for they had to first sell something of value. Nevertheless, they see a short term rise in their profits, as the criminals present demand in excess of what they had prior to the counterfeiting.
Soon, the fake tokens circulate in the neighborhood. The further you go from the criminals, the more diluted these increased profits become.
As the fake tokens spread throughout the economy, the effect on prices becomes apparent. We have more monetary tokens chasing the same supply of goods and services. Thus, the price levels increase. People geographically furthest from the counterfeiters receive the tokens last. They face increased prices before the tokens arrive in their neighborhoods. Consequently, they are hurt the most.
Effectively, anyone receiving the fake tokens after the price increases pays to those who received the tokens before the prices rose. This illicit counterfeiting has caused an implicit wealth transfer.
The Legal Case
Is the above not similar to what happens during inflation? The government spends in excess of its revenues and the central bank manipulates its databases to meet the shortfall. The central bank creates new reserves. This is counterfeit money in all but name. More monetary units than before will soon circulate in the economy, chasing the same amount of goods and services, thus, bidding up their prices.
Recipients government subsidies, contracts, projects, etc. will receive these new monetary units the soonest. These beneficiaries will be able to conduct economic activities before the price levels rise and, thus, benefit from the inflation.
New reserves created by central banks become part of the assets of commercial banks. More assets allow these commercial banks to lend more. Entities who are able to avail large, low-rate, long-duration loans are also able to benefit from inflation.
When prices rise, ordinary businesses, in response to growing input costs, are able to increase their selling prices, thus counteracting the adverse effects of inflation. However, large segments of the population are able to increase their incomes much later, if at all. Recipients of salary, pension, and other fixed income are the ones worst hit.
The main difference between the legal and illegal cases is the geographic factor of the illegal case. In the case of legal counterfeiting, physical proximity to the counterfeiter does not matter; instead the distance from the money printer in the fiat financial network does.
In both cases, wealth is being redistributed (without consent) from late receivers of new monetary units to the early ones. In both cases, the purchasing power of certain entities is getting stolen.
Arguably, legal counterfeiting is the more destructive form. Illegal operations are a rounding error compared to the legal ones. In the illegal case, the fake tokens may be detected and destroyed, and the criminals penalized. But in the legal counterfeiting scenario, the counterfeit money is, by decree, legal tender. And worst of all, the public has been propagandized not to view it as counterfeiting.
References
- Rothbard, Murray. What Has Government Done To Our Money? Chapter 2.