The Hidden Tax

December 1st, 2009

By Brianna Aubin

purchasing powerImagine that there are 100 people in the economy, and each person is in possession of $10.  That would create an economy with a total M0 money supply of $1000 (M0 is the amount of hard currency and bank notes in circulation in an economy).  Now imagine that a money fairy swept over the populace of our thought experiment and magically doubled each person’s money supply, so that every person in the economy possessed $20 for a total M0 money supply of $2000.  At first, everybody would feel very rich, but before long, the prices of goods and services would go up to reflect the new money supply and the scenario would end with every person in the economy having exactly the same amount of purchasing power as they started with.

Now imagine a slightly different scenario.  Populate our thought experiment again with the exact same 100 people, each in possession of $10 for a total M0 money supply of $1000.  But this time, when the money fairly swoops overhead, instead of simply doubling everybody’s money supply she picks one lucky individual and gives the entire extra $1000 to him.  The M0 money supply is still $2000, but instead of its being distributed equally across the board you are left with one person holding $1010, and ninety-nine other people holding a mere $10. 

But just because the new money has been distributed unevenly doesn’t change the facts of reality.  The amount of money charged for a good or service is not assigned arbitrarily; it depends on that item’s value relative to other items and the amount of money in the market.  Prices will still rise to exactly the same levels that they did in the first scenario as the money starts to be put in circulation, because the same M0 money supply exists in both.  The only thing that has changed is your ability to pay for those goods and services has become much lower relative to the lucky individual who received a visit from the money fairy.

This process, stripped of its concealing terminology and financial wizardry, is exactly what happens to our country when the Federal Reserve increases the money supply.  The lucky individuals in such a case are the government and the banking cartel members.  The newly broke are you and me.

How does this process occur?  Simple… or at least, it’s simple once it’s been stripped of the piles of financial jargon designed to obscure the process.  The federal government issues Treasury bonds, which the Federal Reserve purchases with manufactured dollars.  The government then uses these dollars to pay for goods and services, thus sending them out into the economy.  As the dollars make their way through the system, the money supply inflates and prices rise… but not before the government has gotten theirs.

Under such a system, the government would theoretically never need to take taxes at all.  It could simply take the purchasing power of the nation through inflation of the currency.  The problem with this is, if there were no taxes taken as a pretend way to fund the government, the public would eventually catch on to what was happening and the entire house of paper dollars would collapse.  Therefore, under a country with a central bank at its disposal one of the main purposes served by taxation is to conceal the nature of the system from the populace.  It is no accident that the federal income tax was signed into being at the same time as the Federal Reserve; the actions of the former are a necessary disguise for the functions of the latter. 

But wait, I also said that the banks benefited from such a system.  How does that work?  Well, remember those Treasury bonds the Federal Reserve bought from the government?  These are considered to be financial assets, on the premise that they will collect interest and eventually be repaid in full to boot (the repaying in full part eventually becomes entirely theoretical) once the principal comes due.  This means that based on these assets, the Federal Reserve is able to print even more money, which go to the banks through the purchase by the Federal reserve of government securities.  This money is in turn used by the banks to create even more money through the fractional reserve system, thus flooding the world with dollars both real and imagined (mostly imagined).  This real and imaginary money is then loaned out to collect interest, which allows the banks to create a profit through nothing more than a magic printing press and a neat accounting trick.

In such a system, government dependency will quickly become inevitable (which, incidentally, is why a central bank is point five in the Communist Manifesto).  If the government is the lucky individual with a personal money fairy, whom no one else is allowed to emulate on pain of prosecution for counterfeiting, then the government is the institution that is best poised to purchase goods and services from the marketplace before the effects of that inflation are truly felt.  Who is the next best person?  Those who receive money from the government, whether that money is received in payment for goods and services or through welfare and spending projects such as Roosevelt’s Works Progress Administration or Obama’s American Recovery and Reinvestment Act.  Even better, due to the ossifying nature of government bureaucracy, once an individual has been taken into the fold it is highly unlikely that he or she will ever be kicked out.  Gain admission to the secret club and it doesn’t matter whether you are the owner of JP Morgan or a lowly government employee; you will receive a free ride forever after.

But do you want to know what the best part of all is?  Because almost nobody understands what is actually going on, the politicians can count on that ignorance to protect them even as the system fails over and over again.  Whenever the house of cards collapses, as it inevitably must, the vast majority of the people who suffer under the system will not understand what is truly being done to them.  They will see only the effects of the system, the rising prices and the falling wages, the increasing misery, poverty, and scarcity of resources.  They will not see the cause: the increase of the money supply through the magic money fairy called the Federal Reserve, which concentrates the purchasing power of the nation in the hands of the government and the central banks.  This means that the politicians can safely rely upon the populace to call for even more borrowing, lending, money printing and government spending to alleviate the poverty even as they suffer from poverty caused by the borrowing, lending, money printing and government spending that has already been performed.

In the end of course, nothing can perpetuate such a system indefinitely.  Even the banks and the government will eventually fall victim; what good is possession of a hundred million dollars if it cannot even buy a loaf of bread?  The question is, will we wake up to the hidden tax on our labor, resources, goods and services before it is too late?  Will we have the sense to unhitch the money supply from the power of the gun (aka government) while there is still time to do so?  Or will we, like ancient Rome before us, continue to debauch our currency until we have nothing left of our world but a spread of ruins and slaughter?

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3 Responses to “The Hidden Tax”

  1. Brian Bagent |

    Great article. Beardsley Ruml, head of the Federal Reserve under FDR, I believe, said way back then that income tax was an obsolete method for the government to obtain revenue precisely because of what you have illustrated here.

    We are nearing the end of the ride, I fear. It’s one thing for a nation like Argentina or Mexico to do their currency what they’ve done and continue to do. They have little influence on the world economy. When it happens to the dollar, then the yuan, yen, Deutsch Mark, Pound Sterling, Italian Lira, French Franc, and all of the rest will feel it at least as bad as we do.

    This won’t be like the 30s. The run on banks in 1929 was precipitated by a 25% deflation of the supply of currency (carried out by none other than the Federal Reserve). The depression that ensued was a direct result of that. There were other factors, to be sure, but it was principally what happened to our currency.

    No, this time, the supply of money has increased wildly. Not as wildly as some other countries, but the world does not depend on those other countries the way it depends on us.

    They’ve been lying for decades, aided and abetted by a bunch of braying jackasses on the lobotomy box that do not comprehend the difference between CPI and inflation/deflation.

  2. Brianna |

    “Deutsch Mark… Italian Lira, French Franc”

    I assume you mean Euro. Though of course, you are correct in every other respect, down to the Ruml quote which I am actually familiar with.

  3. Brian Bagent |

    Good call. I stand corrected.

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