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Five Reasons Why the U.S. Government Benefits from Creating Inflation

By: Steve Johnson

9/15/2009 - 43 Comments

There are so many benefits for governments to create inflation, that the temptation to inflate is very difficult to resist as history shows that many governments have chosen inflation.

The current U.S. Government’s monetary policy is just that; inflationary - a massive increase in the supply of dollars.

The Chairman of the Federal Reserve, Ben Bernanke has increased the level of inflation by trillions of dollars in the wake of the economic crisis.  The reason for boom-bust cycles are primarily from inflationary policies of previous politicians, but no politicians wants to tell the truth and stop printing money.

Inflation is disastrous for the people, but the temptation to inflation and keep the party going is just too hard to resist.  Perhaps the biggest reason governments get away with inflation is that the effects of inflation are slow to be seen.  For example, the current CPI (Consumer price index) shows that inflation is currently under control, while the government is busy printing and spending new money. 

Here are the top five reasons that the U.S. government benefits from inflation.

1. They get to spend the money first, delivering services without raising taxes.

The biggest beneficiary of inflation is the one that spend the money first, because the each time the money is spend is loses value and is not able to buy as many goods.  The government has the opportunity to be the first one to spend the money that therefore can purchase the largest around of goods or services. 

2. Debts are wiped out and the U.S. Government is the biggest debtor

Inflation caused the value of dollars to decrease, which reduces the value savings and debts. If you have a lot of debts then inflation is a good thing because it can wipe them out. The bad news is that if also wipes out your savings. 

As your earnings increase in an inflationary economy, your loan payments become a smaller percent of your income.  The U.S. government is the largest debtor nation in the world. Inflation reduces their payments on those debts.  Of course foreign nations that have borrowed us money don’t like getting paid back dollars that are worth less value but this is how inflation benefits the government.

3. GDP appears to increase

The GDP is an important number because it is used to determine when a nation is in a recession and is a progress report to the rest of the world. As a debtor nation, we need to show our foreign lenders that we are making money so they can be confident that we will repay our loans.

Inflation allows the government to claim that their policies are creating economic growth, even while the real economy is losing wealth.

4. Tax revenues increase

The governments only source of income is taxes. Inflation helps to increase incomes, pushing people into higher tax brackets and allowing the government to collect a higher percentage of your income in income taxes.  Inflation also pushes up asset prices, which result in an increase in capital gains taxes and sales tax.

5. There is no one to stop them

They are in complete control of how much money they want to create. Ben Bernanke has said many times that he will create an unlimited amount of new money whenever he needs to.

Without a restrainer like a gold link, the government does not have to live within a fixed around of money.  Unlike anyone else, they can create as much money as they want to.

Rising Prices

Rising prices always result from inflation and with the massive inflation that the U.S. government is currently creating; the prices of goods are going to skyrocket in the near future.

The only question is how long will it take for the new money to push up prices or create the next bubble.  The government has been inflating since Nixon removed the Gold link to the dollar in 1971, but at a faster and faster rate.  Each round of inflation creates more economic problems and the reaction is to create more inflation to solve the problems created by previous injection of inflation. 

This is beginning to spiral out of control as each injection of new money has to be much larger than the previous, which soon results in hyperinflation.  The path to hyperinflation is short.  We are perhaps only one or two more injections of new money away from seeing inflation that is out of control.

The last round of inflation by Bush-Greenspan created the housing bubble that pushed housing prices up by 100-200% until they started collapsing in 2006.  That injection of trillions of dollars of new money pushed up the GDP for nearly eight years, creating the illusion of wealth and fooling a lot of people into spend money that they didn't really have.  The bankruptcies are still being counted.

This time the Obama-Bernanke round of inflation is likely push up the GDP for a much shorter time period and they are already claiming their policies saved the economy from a depression.   Just today Bernanke said that the worst U.S. recession since the Great Depression was probably over.  He is crasy to say that, because he has only succeeded in creating a much larger recession down the road.

Each time that new money has been injected into the economy it has created even bigger problems down the road and this time is not going to be any different.  The foreign borrowers are starting to realize that we are not going to be able to pay them back in real dollars.   The dollar is sinking fast and gold is already over $1000/ounce.  

If foreign investors continue to support the dollar and the U.S. spending, than perhaps the politicians will keep the party going a little longer, but eventually it’s going to end very badly and the U.S. government and its people are going to have to deal with out of control spending and very high inflation

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