Inflation! What is it and Why Should We Care?

Many of us have been complaining for the last year or more about the high price of food, fuel, and housing prices, if you are buying. There are many fingers being pointed by the media. The universities would have us think that prices are a simple problem, i.e., Price = Demand/Supply...or at least they did 40 years ago when inflation was setting out on a new voyage. In the economic laboratory it could be that simple. But in the “real world,” or at least the world we currently live in, there are many components that make the political economy more complex. Some of those aspects are the Federal Reserve, money inflation, monopoly, oligopoly, subsidies, and last but certainly not least, Wall Street, that contribute to increasing costs of living. Although it is important to understand all of those components, this article will focus on the basics of inflation.

What Is It?

To begin, let us start to answer this question relative to the current conditions. In the 21st century, inflation is commonly defined by popular media as soaring prices in fuel, food, and most consumer products and services. What they usually omit, among other things, is that the purchasing value of money decreases. In 2022 Americans witnessed one of the highest price level increases in recent history (+/- 8.2%). The chart below shows the cumulative inflation rate from 1983 to 2021.

Price Inflation vs Money Inflation (The Cantillon Effect)

The phenomenon of inflation can be more accurately defined as price inflation. In most cases in our modern political economy, price inflation occurs from something called the Cantillon Effect. The Cantillon Effect refers to the change in relative prices resulting from a change in money supply. The change in prices occurs because the change in money supply has a specific injection point and therefore a specific flow path through the economy. The first recipient of the new supply of money is in the convenient position of being able to spend extra dollars (the gift) before prices have increased. But whoever is last in line receives his share of new dollars after prices have increased. This is why when the Treasury’s deficit is monetized, inflation is referred to as a non-legislated tax, often called “the hidden tax.”

Why Should We Care?

In a word, RESPONSIBILITY. In another word, EDUCATION. As responsible citizens we should be educated to the effects of inflation and its consequences on our lives. Knowledge and understanding can make us better decision makers, voters, parents, teachers, consumers, merchants, and human beings. As a parent you owe it to your children to help them understand their environment and world. Without the understanding of inflation and the money system you could be leaving them at sea.

There is another reason why homeowners, especially in states with exorbitant real estate taxes, should understand the ramifications of higher inflation rates. We will explain that later in this article.

Inflation may be better defined by what it isn’t. It isn’t anything new. The well-known story in the Bible when Jesus identified Caesar’s denarius as tribute and not representative of anything Godly, is one of the early stories that gave generations a perspective on money, for those who could understand. When Jesus said, render to Caesar what is Caesar’s and to God what is God’s there were implications including to pay taxes with the current media and trade amongst yourselves in real goods. Our “civilization” may be beyond the practicality of bartering as a primary means of trade, but we have now seen the effects of a global fiat (declared) currency that commands humanity. The amount of law that has been written in order to promote and demote the dollar, protect certain trusts, and protect those who have access to the printing press at the expense of the disenfranchised is mind numbing.

Throughout the history of the United States and prior to that formation, fiat currency has been used to prosecute wars and advance agenda, from the Massachusetts Bay Colony for protections of the Massachusetts Bay Company, to the Continental for revolution, the Greenback for freedom and civility, and the National Bank and Federal Reserve notes which aided in the advancement of industry, technology, progressivism, more war, and higher standard of living; not to be confused with a higher quality of life. There are three ways in which governments fund their operations; taxes, bonds, and inflation (adding to the money supply). This is fundamental in understanding a government that favors its merchants/corporations and is always interested in expanding its jurisdiction.

According to Bill Gates, it only takes 2% of the population to feed the entire population of the United States. Sources indicate that this is accurate which implies that 98% of the population is availed the time to apply the constant updates, upgrades, and technological obsolescence to his operating system. We know technology can be a boon to humanity but not if technocracy is the ultimate goal and God – which if you have read or viewed any of the articles or videos about the Great Reset published by the World Economic Forum, this is the goal in what they are calling the fourth industrial revolution. For information on the Great Reset, you can follow this link: https://www.weforum.org/great-reset/. I would encourage the reader to enlist other sources to understand contrasting viewpoints.

The financialization of the United States has imposed many so-called business cycles that humble Americans have had to endure, especially farmers and labor who were made price takers. This is typical in command economics as opposed to prices based on demand. In the education systems and media of the United States, command economies are usually classified as communism, socialism, and fascism. The word that is often omitted in these categorizations is corporatism, which, when melded with government is a form of fascism.

As mentioned, the so-called business cycles in our early development can be arrayed on a timeline: 1792, 1819, 1837, 1857, 1869, 1873, 1884, 1893. Thereafter, there were panics and depressions in 1907, 1929, blips in 1987, and “bubbles” in 2002 and 2008, the latter causing the “Great Recession.” For the most part these are not organic events, but conditions contrived by the machinations of organized and consolidated capital.

You may be asking, “so, what is the current level of inflation”? One of the answers is, “it depends on who you ask.” One of the methods for calculating the inflation rate today is the Consumer Price Index –All Urban Consumers (CPI-U) – which is compiled by the Bureau of Labor Statistics (BLS). BLS uses a c. 1982 base for ease of thought, where the BLS set the index to an average for the period from 1982 through 1984 (inclusive) equal to 100. This “ease of thought” may be better expressed as normalization, or as some heterodoxy economists may put it, “a new normal.”

Referring back to the bar chart showing the CPI from 1983 to 2021, we can use it to illustrate an example. Using 1983 as the base and rounding it to 100, we can see that the rounded data point in 2002 (180) indicates an 80% inflation rate since 1983. Using the point in 2021 (271) indicates a  171% rate increase since 1983. The commonly quoted inflation rate of say 3% is actually the change in the Consumer Price Index from a year earlier. By looking at the change in the Consumer Price Index we can calculate what cost an average of $1 in 1983 would cost us about $1.80 in 2002, and $2.71 in 2021. 

Thirty [or more] years ago, Congress introduced “indexation” into the personal income tax code. Inflation had been raising taxes by stealth. It did so in many ways, one example was by eroding the value of the standard deduction and personal exemptions and by pushing more income into higher brackets. So, Congress enacted rules that would automatically increase the standard deduction and personal exemptions and raise and widen tax brackets enough to offset inflation. Those changes put an end to “bracket creep;” the name tax analysts had given to the steady increase in tax burdens resulting from inflation. Henceforth, Congress decided, if members wanted to raise taxes, they would have to vote to raise them.

But protecting the poor from inflation was another matter. Supplemental Security Income (SSI) pays [or did pay] monthly benefits of $733 to single persons and $1,100 to couples who have little or no income and few assets. The benefit amounts, like those for current Social Security beneficiaries, have been adjusted for inflation. But other provisions, which serve to limit access to the program, have been adjusted little or not at all. As a result, inflation has denied access to SSI benefits to people who would have been poor enough to qualify for them in the past.

When Congress enacted SSI, it wanted to confine benefits to those who were demonstrably poor. It also wanted to spare administrators the cumbersome and costly job of keeping track of small earnings and scraps of other income. So, it stipulated that benefits should be reduced by one dollar for every two dollars of earnings over $65 a month and dollar-for-dollar if other income exceeded $20 per month. [At this time, we are not sure if] these amounts have ever been changed. Meanwhile, the price level has risen nearly four-fold. Had these exclusions been adjusted for inflation, the exclusions would be $242 a month in earnings and $74 a month of income from other sources.

Restoring access to SSI benefits to conditions that the United States was able to afford in 1974 would mean that more people would qualify for benefits. That would raise public spending. But protecting Social Security beneficiaries from inflation also costs money. So, if it is a good thing to protect from inflation people who pay taxes and people who qualify for Social Security, why is it not an equally good thing to protect the poor from economic losses because of inflation?

Here’s where the real world meets the virtual and political worlds, which can be confusing due to the cosmetics used by the government. Our “progressive” government has made significant changes to CPI to advance its agenda. Starting in 1983, the government removed housing prices and “owner’s equivalent rent” was used instead. In 1998, hedonics was introduced to estimate a product’s value as technology advances. And in 1999, the idea of product substitutions was introduced to the index.

1. Substitution. If steak becomes more expensive, and you buy hamburger instead, then the Bureau of Labor Statistics (BLS) reasons your cost of beef has stayed the same – no inflation!

2. Hedonics. If the 2021 model of automobile costs more than the 2020 model, but it also comes with more standard equipment, the BLS reasons you’re still getting the same value for your money – no inflation!

3. Geometric weighting. If the price of something goes up, the BLS simply makes it count for less in the CPI relative to everything else. If the price comes down, it counts for more.

There are economists who estimate that if we calculated inflation today the same way we did during Carter’s administration, CPI would be much higher than what is reported in the 21^st century.

The 21^st Century Homeowner

I mentioned another reason why we should care to know and understand inflation. The following text is a prime example of what happened in New Jersey and other states using the same formula and practice that affected most, if not all, homeowners in those states.

In 1971 under President Nixon, the United States government removed the gold standard which, among other things, eliminated the redemption of currency in gold. You can see from the graph below what this did for the supply of money. The money “managers” were licking their chops. A bank’s hard tangible assets to back up money stock and reserve requirements are a discussion for another issue, but this event gave more substance to a term called “moral hazard,” which was at one time often used by the Federal Reserve in relation to printing or digitizing money at will. Below is a chart showing the increase in currency when we decided that we did not have to redeem Federal Reserve notes in gold. This was known among economists as “The Nixon Shock.”

In terms of economic health, additional amounts of printed, digitized money or credit added to a market, or an economy do not necessarily add value, or a corresponding amount of value, especially in our highly litigious, academic, administrative, and financial society. In addition to this fact, I have never read anything by an academic or commercial economist that included the prosperity of time and peace in their assessments of the economy.

It was late in the 20^th century as our economy moved into the digital age, that monies were poured into technology. In the early aughts, the United States of America was still enjoying the fruits of the technology boom. Although these investments yielded improvements and efficiencies in our world, the law of diminishing returns applied a ceiling to the real profits. This was realized in 2000 with the bursting of the“dot.com” bubble. But this boom, along with sub-prime lending, helped create high prices in real estate and housing, eventually known as the housing bubble that burst around 2007 and 2008, leading to the Great Recession. The details of this recession are somewhat complex. For the purposes of this pamphlet, I will explain some of the high level events that led to vastly increased property values; values that states and municipalities intended to capitalize on before this particular bubble broke.

New Jersey – A Fiat Standard for Blue States

In New Jersey, each county has a state constitutional obligation to oversee its taxing districts. The Division of Taxation can order a municipality to perform a revaluation. The goal is statewide uniformity every ten years, which, in this taxpayer’s opinion, is a little bit rapid, but reflects the government’s propensity to leverage inflation and therefore use predatory taxation methods.  The revaluation process measures the disparity between assessed value and ‘true value.’ A ratio of 85 percent or lower generally denotes noncompliance, which makes the timing of these revaluations relevant. That stipulation dictates unilateral revaluations, which are induced by spikes in the market. Here are a few examples. In 2005 Boonton, NJ had planned for a revaluation after acknowledging that there was a real estate market “boom.” In 2007, at the height of the real-estate bubble, Robbinsville, NJ performed a revaluation but provided for a 15% tolerance in assessments as conceded by the assessor’s office, “since all appraisals/assessments are an opinion of value.” That same year the property which I owned went from an assessed value of $111,600 to $222,300; essentially doubling.

During this period a lot of towns were going through the same process. Homeowners were vocal and organized against the drastic change, to little avail. Tax officials and politicians sold it as “not everyone is affected” due to rate variations. In other words, tax rates went down as values and levies remained constant or increased, of course this was only in the short term. As the notoriously high tax problem was acknowledged by various commissions and organizations, politicians, and a bygone media that had more independence a decade ago, much has been written since, but little has been done to reset property taxes to pre-bubble levels. As in several states and towns across the country, this prompted many homeowners to “walk away” from their upside down properties. The town in which I was raised experienced an unprecedented 60 to 70 vacant homes for ten years or so, with values maintained through political means and insulated from true market value and demand.

Unfortunately for New Jersey homeowners, this cycle continues as towns like the borough of South River was ordered to commence a property tax revaluation in 2016; a year within the short recovery period. This is a major part of the pressure that makes up the vise. The other part of that vise can be exemplified by the tax-lien system which came under scrutiny that same year.

Each of New Jersey’s 565 municipalities is required to conduct a sale at least once every year to recoup money owed for delinquent property taxes and other municipal fees, including unpaid water and sewer bills. Towns recoup at least $100 million worth of unpaid debt each year from these sales. On a per­capita basis, New Jersey sells more liens than any other state, with 146,000 sold in 2014 alone, based on data from the National Tax Lien Association. Once a lien is sold, even minor debts can snowball because of the interest investors and municipalities can collect. Those rates can go as high as 18 percent, an outrageous and outdated ceiling that was set in New Jersey in 1979, during a period when interest rates were well above what they are today. If the debts aren’t paid off within two years, the lienholder can foreclose on the property, though tax­lien experts say the process rarely reaches that point.

A federal investigation of the tax­lien industry resulted in criminal charges against 21 individuals and companies accused of collusive bidding at municipal auctions in New Jersey between 1998 and 2009. The case, which led to 15 guilty pleas and one conviction at trial, triggered a class­action lawsuit against 20 defendants that was settled for $9.5 million.

In 2011, New Jersey officials granted a foreign­owned company and its partner a virtual monopoly over the state’s lucrative online tax­lien sale program. The firms have used that exclusive status to secure approximately 90 no­bid contracts with cities and towns across the state. This deal led to allegations of insider trade, no­bid contracts, and questionable relationships between local tax collectors and private vendors. An investigation revealed that the company was not paying New Jersey taxes.

For more on this story go to: http://vineland.dj/1SZf8ZN

New Jersey does provide some tax-saving programs for seniors 65 and older who fit other criteria, and veterans. One of them is the NJ Saver Rebate Program also knows as the Property Tax Rebate Program. All of them are designed to help protect those homeowners and tenants from the inflationary bubbles. Others must concede to this form of command economics or relocate. In the 21^st century, the state of New Jersey has generally been managed by the Democratic Party and former Goldman Sachs employees, e.g., Jon Corzine. As another former Goldman Sachs financier and the current governor of New Jersey, Phil Murphy has proclaimed, “if you’re a one-issue voter and tax rate is your issue...we’re probably not your state.”

Understanding inflation and the measurements may or may not assuage some of our agitation. It’s not intuitive, nor mainstream, but less money in the market will provide less opportunity for the “money managers” to keep moving the goal posts. As a result, a more sustainable and stable economy will prevail...with less chaos.

Where to Find More Information

You can learn more about the history of the inflationary process and the boom/bust economy by reading my books found on www.centristsledger.com