Economic mistakes we can easily make

In our state and country we seem to take some things as foregone conclusions.  Housing prices will always on the average go up, and property taxes are a part of owning property.  I think that both of these are dangerous notions that don’t just result in less liberty, they are less liberty.  I’ll start with the results I have observed.

I really think that the “Real estate value only goes up” myth has two results (I won’t speak of the purposes as that could prove to be an unneeded diversion). 1. It makes people feel better about inflation destroying every other means of storing wealth (at least you can still try to store wealth in your house until the gains get taxed away). 2. It creates a constant implicit rise in taxes for cities.  Many residents won’t dispute the increased appraisal because if you tell someone their house is more valuable and they will want to believe it.  They will often accept the tax increase by way of increased property valuation because they believe they are benefiting from it.

The fallacy I wish to discuss today is that inflation is not seen as the great destroyer of wealth.  We hold onto real estate because it is one of the only forms of wealth storage that does not get destroyed by inflation.  I would like to address inflation by comparing money to stock in a company.  Money is very similar to a company’s stock.  Ideally there is an unchanging amount of it, that way when you have one share you know exactly how much of an interest you have in the company.

Lets take this example and assume that I have a company and there are 50,000 shares of stock in my company.  I have an investor and I sell them 10,000 shares of my company in exchange for their investment money.  They now have a 20% interest in my company.  Assume that I have more investors and they each want 10,000 shares.  At this rate I can only do that 4 more times and then I may have a job, but no company as I will have sold all of it.  What do I do if I want to sell 50,000 shares and I still want to own half of my company?  If I took the route of inflation I could double the number of shares (printing is cheap anyway).  Now I have 100,000 shares and I can sell off four more blocks of 10,000 without giving away more than 50% of my company.

On the surface that sounds like a great idea, but you’re probably looking at that saying that it should be securities fraud (I hope).  You can see that I now have more of my company, but what is not always seen is that I have robbed the first investor of a full half of his investment!  Whereas before he had bought 10% of my company he still has the same number of shares, but now only owns 5%.  A theft of the sneakiest variety as he still looks at his 10k shares and believes he has everything he paid for.

Lets take this example and apply it to our money.  When we consistently keep putting more money into circulation it is like printing off more shares in a corporation.  Money does not have implicit value.  It only has value as the commodity that we reckon exchange with.  When you buy a car you are not spending $30,000 on a car.  You are exchanging $30k/<total money supply> for that car.  When the total money supply sharply increases prices will follow starting at the first places where that money comes into the economy.  Consider the prices found in industries that benefit from government deficit spending such as defense.  Once everything evens out after the supply has inflated (assuming other market forces have not impacted prices through he supply chain) the car will now cost <new supply of money> * $30k / <original supply of money>.  Whatever you do the car will cost more money.  Not because it is more valuable, but because the money has become less valuable.

One disclaimer.  I know that the matter is more complex than a simple proportion as I have presented above.  However, the example still illustrates the principle in a way that is none the less true.  There is a certain amount of irreducible complexity that is inherent in these problems.

The real key to this is that many people today look at a little bit of inflation as a necessary evil (I’ll deal with why deflation isn’t so scary as some would have us believe in another post).  It’s not.  Without inflation saving for retirement would be much easier.  I posit that more people would have an incentive to save for their retirement if their savings wasn’t constantly losing relative value every year.  There would also be less of a push for risky investments that try to outrun inflation where people end up losing their retirements.  Without inflation it might become feasible for many people to plan for their own retirements without depending on social security or other government programs.  (Programs that require inflation to remain in operation)

It’s a very neat trick that is played.  Take from people the resources needed to take care of themselves through explicit taxes (income/property/usage fees/etc…) and implicit taxes (inflation).  Then turn around and give the resources back and take credit for being the benefactor and not the robber.

As I run for State Legislature I go because I believe we can all do a better job of taking care of ourselves and each other than any government ever can.

408 Responses to “Economic mistakes we can easily make”

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