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XMFRedwood (93.39)

More Inflation & Taxes From the Federal Reserve

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August 17, 2010 – Comments (7)

This news that the electronic printing press has been dusted off and is starting to hum should bring a queasy feeling to your stomach.  When investors buy government debt, they do so with dollars already in existence.  When the Fed buys government debt, it creates new dollars to do so.  An influx of new dollars decreases the value of existing dollars (including your wages, stocks, and other financial assets).  And because these new dollars are not distributed evenly through the society (they are spent by government), your financial wealth is reduced.  This is the worst kind of inflation. 

What happened this week is both inflation and a tax increase.  Yet no mainstream media report will discuss it in this fashion.  There is no uproar because this tax increase is 1) essentially invisible, 2) cloaked in “this will help the economy” language, and 3) people don’t fully understand it. 

It is obvious the Federal Reserve is creating inflation and taking your wealth, it’s just up to people to do something about it.  Ending the Fed would bring discipline back to the system but outside of this, one way to protect yourself is to purchase gold, silver, artwork, or other commodities whose supply is limited.

Andrew 

7 Comments – Post Your Own

#1) On August 17, 2010 at 2:42 PM, leohaas (92.46) wrote:

Not so sure I agree with you here.

Of course, if more money is printed, existing dollars will be worth less. But that is not the case here. The article you are referring to talks about "reinvesting" (OK, that is an interesting term) the proceeds from maturing mortgage-backed securities to buy Treasuries. In other words, no new money is printed.

This is not news at all. We have known about this since the most recent FED meeting, about a week ago.

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#2) On August 17, 2010 at 2:49 PM, chk999 (99.98) wrote:

one way to protect yourself is to purchase gold, silver, artwork, or other commodities whose supply is limited.

This only works as a way of preserving purchasing power during inflation. As investments, these all are terrible over any very long time period. 

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#3) On August 17, 2010 at 2:55 PM, XMFRedwood (93.39) wrote:

Hi leohass -  I know it has been telegraphed, but a separate decision was made to rev the tax machine up again.  It's a two-step process: first step is Fed gets proceeds... it can stop there. But it took the second step of putting it back into the economy.  If left alone, money would flow out of the economy and give a non-taxable bonus to holders of dollars.  

Either way, my argument is these moves are detrimental to dollar holders.  Thanks for the comment!  

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#4) On August 17, 2010 at 3:02 PM, XMFRedwood (93.39) wrote:

chk999 - Most very long time periods experience inflation, hence artwork should do well. Today's monetary system is also specifically designed to create inflation, creating even more reason to own tangible goods. 

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#5) On August 17, 2010 at 4:34 PM, 100ozRound (30.47) wrote:

I shall now embark on my new career as a painter.  Thanks for the heads-up!!

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#6) On August 17, 2010 at 4:42 PM, russiangambit (29.92) wrote:

OK, this is a pretty convoluted argument. Let's try making sense of it.

> When the Fed buys government debt, it creates new dollars to do so. 

Technically it creates bank reserves, not cash, which keep sitting on banks balance sheets and accrues interest.

What we perceive as inflation, i.e. price increases is a result of dollar devaluation against other currencies. If you haven't noticed, a whole host of countries is in recovery mode, while US still stagnates. So, booming eonomies have  trade surpluses, the purchasing power of their currency and economy increases, ours decreases.  Since we live in a global marketplace, prices of many commodities rise as a result when denominated in dollars, while price increases. 

The we have tremendous deflationary pressures within the US from debt deleveraging and lack of credit. There is a tag of war between imported inflation and domestic deflation. The end result is a widespread confusion as to what is going on.

But the only way we are going to have full blown inflation is only if we magically recover, i.e. labor market and economy recover.

Tax increases are deflationary and would work against inflation, if anything.

I think what youa re tryign to get to is that we are collectively getting robbed under the pretense of helping the economy and I agree with that. But we are not robbed through inflation. We are robbed through low itnerest rates . We cannot save and it is very hard to repay existing debts. On top of that dollar is losing its purchasing power in the global sense because our economy is bad.

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#7) On August 17, 2010 at 5:40 PM, SockMarket (83.95) wrote:

one way to protect yourself is to purchase gold, silver, artwork, or other commodities whose supply is limited.

while we are on the subject of taxes one should note that all of these are considered "art" and are subject to a 35% tax. I don't think you want to physically hold them. 

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