This is going to be a semi-short post. I will be shifting gears a little bit to talk about Cantillion effects. This is named after Richard Cantillion which is when purchasing power is being transferred from those with old money to those with new money. This can also be loosely translated as "How inflation enriches the elite".
When we think of inflation, we think about increasing the monetary supply. While there are other definitions of inflation, this is the one that I am going to use to explain Cantillion effects. And this definition that doesn't sound too bad...in theory.
For example, If we all earned the $50K as a universal basic income and the government decided to inject say 1 trillion dollars into the economy, then that means we all have our salaries increase. But what would this practice solve? Yes our salaries went up, but so did the price of everything that we spend money on. So nothing would change. We all get more money in the check but the prices of all goods and services would cancel the increase.
We have undergone inflation in just about every single part of the world. So is the hypothetical situation that I described actually happening?
No. Our salaries are rising but no where near the same rate as our goods and our services. Why isn't inflation working the way it should work?
The reason is simple; When the monetary supply is increased, the new money doesn't directly drop into our bank accounts nor does it fall from the sky. Instead, the money is given to select members of the elite to spend on FIRST before the new money trickles down to the layman which takes quite some time due to bureaucracy. It is difficult for salaried workers to get raises on their salaries. Think about how difficult it would be to get a 2% raise from your boss every year to adjust for inflation. Because if you can't pull that off, then you will lose the battle with inflation.
During this cyclistic process, the prices of the goods and services used by the layman has already risen. By the time the new money does reach the layman, the money supply has probably increased multiple times. So salaried workers are facing an impossible task.
This practice only benefits those who got the new money first, they enjoyed the additional funds and purchasing power to buy assets on the cheap while everyone else has to work harder and incur more risk to acquire the same asset. This is one way how the rich become richer and the poor become poorer. Murray Rothbard makes a similar sediment in his book "What has the Government Done to Our Money", when he says,
Inflation, then, confers no general social benefit; instead, it redistributes the wealth in favor of the firstcomers and at the expense of the laggards in the race. And inflation is, in effect, a race—to see who can get the new money earliest. The latecomers—the ones stuck with the loss—are often called the “fixed income groups.” Ministers, teachers, people on salaries, lag notoriously behind other groups in acquiring the new money. Particular sufferers will be those depending on fixed money contracts—contracts made in the days before the inflationary rise in prices.
Wealth is the key word here. Wealth in this case, does not mean money, as money does not have any intrinsic value. Real wealth comes from the things that we buy with money such as houses, land, and natural resources. Inflation is a mechanism to allow firstcomers of new money such as the government, to outbid private parties to the aforementioned assets like natural resources.
Inflation is a form of taxation, since the government can create new money out of thin air and use it to bid away resources from private individuals, who are barred by heavy penalty from similar “counterfeiting.” Inflation therefore makes a pleasant substitute for taxation for the government officials and their favored groups, and it is a subtle substitute which the general public can easily — and can be encouraged to — overlook. The government can also pin the blame for the rising prices, which are the inevitable consequence of inflation, upon the general public or some disliked segments of the public, e.g., business, speculators, foreigners. Rothbard, "America’s Great Depression".
Through the Cantillion effects, we can see that inflation is theft; a hidden tax that most people cannot see.
I tried to explain this simply and in a way that I can understand it as well. Feel free to add your comments and correct me if I am incorrect somewhere. I hope you all have learned something from this piece. I will be covering this topic again in the future.