Trego's Mountain Ear

I ran across an interesting article at Brownstone Institute  – it uses some terms that aren’t usually part of my vocabulary, and my writing here is basically just to provide enough of a condensed version to get folks to click the link and read what Brownstone developed.  The article starts:

“According to economics textbooks, governments get their purchasing power by taking away currency from their populations and companies via taxation. In this textbook model, printing more currency with which to buy things and employ people is also a kind of taxation in which government can engage, because printing more money (all else fixed) increases the supply of money and thereby reduces the “price,” i.e., the purchasing power, of the currency already held by everyone else.

With no commensurate increase in the demand for money, the expansion in money supply created by American money-printing leads to all existing dollars buying fewer goods than before the money-printing. Nobody sends a bill: the tax just happens, with every clank of the government printing press. Doubling the amount of money in circulation via the printing press, and then giving the printed money to the government to buy stuff with, is basically the same as the government taxing half of private-sector income and buying stuff with it.

The implicit tax created by American money-printing can be avoided by simply not accepting dollars in exchange for labour and goods (and accepting instead, say, some other less-diluted currency, or goats. Or onions, for that matter). This is why runaway money-printing eventually leads to runaway inflation and an economic crash, as people flee from the inflated currency to avoid the implicit taxation.

Tributes to him who wields the mint

This implicit tax from money-printing is known in economics as a seigniorage tax, and it doesn’t apply only to a government’s citizens. In fact, if a lot of domestic currency is held abroad, then a lot of the seigniorage tax bill created by just printing money is paid by foreigners holding that currency.”

Seigniorage tax – well, seigniorage is the difference between the value of money and what it costs to produce it.  Basically, seigniorage got a lot bigger when the country dropped gold and silver coins.  Then, when the US dollar became the world’s reserve currency, our government could shift part of the seigniorage tax to other countries: the article lists them:

This is why inflation hasn’t hurt us too badly – the rest of the world is sharing the pain because they stock Yankee dollars without charging interest.  The problem with relying on this system to keep our economy afloat is in the article:

“US GDP is about $23 trillion per year in the period covered in our table, while total federal government spending is around $7 trillion per year. So, if we include the Eurodollar market, foreign tributes have been worth almost 8 percent of GDP per year, or 25 percent of US government spending per year. This means that the US economy would crash spectacularly next year if these tributes were to come to an end. Without the tributes, the US government would have to increase taxes by as much as 25 percent, or axe an amount of spending equivalent to the entire US military (plus change), or find another way to cut spending 25 percent.”

Earlier, the authors provide this perspective (reprinted):

“The implicit tax created by American money-printing can be avoided by simply not accepting dollars in exchange for labour and goods (and accepting instead, say, some other less-diluted currency, or goats. Or onions, for that matter). This is why runaway money-printing eventually leads to runaway inflation and an economic crash, as people flee from the inflated currency to avoid the implicit taxation.”

The article is worth reading.