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Tuesday, July 14, 2009

They All Promise No New Taxes

They all promise they will not raise the taxes on middle income people. Obama and Bush made the promise and both seemingly kept to their promise. Unfortunately, they, along with Congress, have already given us a long term tax increase, while taking credit for not raising taxes.

How did they do it? How will they continue to do it? They do it by sneaking it in on us.

Whenever the government wishes to fund a program for which they have no money, they simply turn to the U.S. Treasury and Federal Reserve to create this needed money. Most of it is electronic money, but spendable, none the less. This will increase the money supply (think of typical supply & demand principles). Since the U.S. Dollar is no longer linked to a finite good, such as gold, the U.S. Dollar is only worth what other entities are willing to pay for it, in comparison to other currencies (such as the Yen or the Euro). When the money supply is increased, it becomes more abundant, lowering it's value.

So, you may be wondering what this has to do with taxes? Very simply, since the government is creating dollars based on nothing and increasing the money supply, the value of the U.S. Dollar will drop over time. When the money is created, they sell Treasury Securities for the initial amount. This is how the government borrows the money. Once the money is placed into the banking system, the funds are multiplied exponentially through the factoring system, as outlined by the Federal Reserve Bank of Chicago's Publication "Modern Money Mechanics" (no longer in print).

Basically, the goods or services that $100 will buy today will cost $110 on a future date. This is what we call inflation. Hypothetically speaking, if you have $10,000 in the bank today, it will be worth much less in the coming months and years, because of the increase in the money supply. Now, take a moment to think about the TRILLIONS of U.S. Dollars that are being created to fund new programs, for which we do not have tax dollars support.

A second event is also occurring. Since the U.S. Dollar is losing credibility (dropping in value), the interest paid on these Treasury Securities will have to be increased, in order to entice investors to continue purchasing these notes. Unfortunately, this will also drive the consumer interest rates up for mortgages, vehicle loans, business loans, credit cards etc.

So now we are losing buying power on two fronts. The money supply is being increased, making the money we have worth less (meaning we cannot buy as much stuff), and we will pay more to service our debt due to increased interest rates (just to keep the stuff we have). How much buying power will we lose? It is hard to say. Currency investors (many outside of the United States) and the actions of the U.S. Government will determine the value of the dollar and interest rates. Projections are difficult, considering the staggering and unprecedented amount of money creation occurring.

Hopefully, you can now see my point. Normally, it is perceived that when the government needs money for a program, they raise it through taxes. Since raising taxes is currently considered political suicide, they create the money from nothing, and the average citizen funds the program through money degradation and higher interest rates.

So the next time you hear a politician saying they will not raise taxes, think about the other alternative (and damaging) ways they will fund their programs. Maybe the best answer is to not create new vast and expensive programs?

1 comment:

  1. John when will you realize all politicians are evil, no matter what party they are from. A straight sales tax with no income tax allowed is the only way to go. Just remeber to keep it Green. Ken