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Why Do We Need Inflation?

Why Do We Need Inflation?

By Wednesday, 18 October 2017 01:04 PM Current | Bio | Archive

The answer would be not at all, if you would ask the average taxpayers and people living on fixed income. They certainly don’t benefit from a scheme which erodes their savings and increases their tax burden.

Yet, there are powerful forces aided and abetted by the public media. The question is why?

Here are some answers. First, one of the biggest beneficiaries of inflation is your government, including the Federal Reserve System. Inflation has two beneficial effects: First it steadily lowers the cost to repay billions of bonds issued by the government to cover the ever increasing public debt. For example: Assuming a 5 percent annual inflation, then the redemption price (in current dollars) at maturity for a 10 year bond amounts to only 60 cents for every original dollar the bond holder paid.

Secondly, inflation causes "bracket creep." What is meant by this is that since wages and salaries are typically adjusted for inflation, this will automatically put taxpayers into a higher tax bracket. Assuming a person who used to be in a 15 percent tax bracket received a $1000 raise. This now put this person into the 20 percent bracket. This means that instead of paying only 15 percent ($ 150) in extra taxes, he now has to pay 20 percent (200 dollars). Thus, the IRS collects fifty dollars extra on account of inflation. Example: If inflation increases by 3 percent, U.S. taxes will increase 3.5 percent. This is a good deal, don’t you think? Here is an extra tax never authorized by Congress.

Who else benefits from inflation? How about Wall Street? Here, four percent inflation will automatically inflate stock values since prices of company products and hence profit will on average be four percent higher. This increases the "price-earnings ratio" on which most stock prices are based, also by four percent. Hence, all stock brokers are feeling good.

Finally inflation will make all sales and marketing managers happy. Let’s assume there is 3 percent inflation with a corresponding increase in the price of goods sold by such managers. This will mean that, at the end of the year, their sales budget will exceed last year’s budget by at least 3 percent; hence they will get a bonus.

There is a correlation between Gross Domestic Product (GDP) figures and inflation. Such a prediction as given in my blog of January 5, 2027 entitled, "GDP provides valuable lessons in economics," certainly came true as the following tabulation shows:

The averages over seven years are: GDP increase equals 1.77 percent. Inflation increase equals 1.62 percent. Source: The Wall Street Journal. 

In conclusion. If you want inflation, first increase the Gross Domestic Product.

However, significantly increasing the GDP above the automatic increase of about 1.5 percent due to population increase is very difficult, since supply and demand is fairly balanced here in the US and in most industrial countries.

To increase the supply side of the GDP (industry) is hampered by the lack of significant new technologies (note, new smart cameras don’t employ enough people to make a difference). Governments tried over the past years to boost the demand side of GDP (consumers) by printing billions of new dollars. This too did not help since the majority of the new money went into asset purchases such as stocks, bonds and initial public offerings (IPO’s).

Hans Baumann is a licensed engineer in four states and a member of Sigma Xi, the Scientific Research Society. He is an adviser to the dean of the University of New Hampshire Business School. Dr. Baumann has published manuals on valves and was a contributor to many works including the "Instrument Engineers' Handbook" and the "Control Valves Handbook." He has also published several books on business management and German history, including "Hitler's Escape," which suggests that Adolf Hitler did not commit suicide and survived World War II. In his latest book, "Atomic Irony" he proves that the Hirshoma Atom Bomb contained captured German Uranium. For more of his reports, Go Here Now.

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Who benefits from inflation? How about Wall Street? Four percent inflation will automatically inflate stock values since prices of company products and hence profit will on average be four percent higher.
gdp, wall street
Wednesday, 18 October 2017 01:04 PM
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