How the Feds Make Some People “Artificially” Rich

February 1, 2012

The following was written by Sam Paul, a student at New Saint Andrews College.

The Occupy Wall Street movement has it all wrong. By targeting corporate America, they let the real culprits slide. The federal government, through inflation, and the consequent income distribution that follows, has thrown an inordinate amount of economic support for a minute percentage of the American populace.

Put bluntly, the federal government transfers wealth from the not-as-successful to the already-successful. The process by which this inequality comes about follows a few steps.

1. Overspending

Government spending, in 2010, reached $6 trillion, though the total amount of money acquired through taxes that year was only $2.1 trillion (US Budget Historical Tables, published by the US Government, and also The same sources predict that 2012 will see spending of $6.3 trillion, despite the austerity that our politicians on both sides of the aisle are promising. Obviously, the deficit has to be accounted for somehow.

2. Borrowed Funds

In order to compensate for the extra spending, the government borrows from vendors and other beneficiaries. These on-budget deficits require the US Treasury to borrow money by selling Treasury bills, notes, bonds, and savings bonds to the public (The Bureau of the Public Debt’s Office of Public Debt Accounting). Competitive interest rates allow the public to see these as investment opportunities. (Note: Far better investment opportunities exist. Click here.)

When investors choose to redeem the securities, the government obviously has no choice but to honor the agreement. And this is where the endless cycle begins. “The Federal Reserve in turn monetizes the debt by buying Treasury securities in the marketplace. It pays for those securities by creating bank reserves–money–from nothing, or as John Maynard Keynes suggested, by performing the ‘miracle … of turning stone into bread.’” (Sheldon Richman, Foundation for Economic Education)

Considering legal tender laws, which obligate citizens to recognize the currency chosen by the government, and our fiat-money system, where the currency isn’t backed by anything other than government promise, this system shouldn’t surprise many of us. This is true inflation.

3. Uneven Entry of Funds Into the Market

People instinctively know that inflation is harmful, but few really understand why. After all, if the printing of more un-backed money raised prices across the board evenly and without predisposition, then inflation would be little more than an inconvenience. We’d have to gradually add more zeros to the end of our purchases, but since we’d be making more and saving more, it wouldn’t really impact anything—if the prices were raised equally. Ludwig von Misis made this point in his lecture, “The Non-Neutrality of Money”.

This, however, isn’t the case. In reality, inflation is harmful because the extra money enters the market at certain points. With the extra cash, the government pays specific contractors and welfare-state beneficiaries (Sheldon Richman, Foundation for Economic Education). As a result, these organizations and corporations have been given increased spending power that didn’t previously exist.

Ludwig von Misis explains:

“But even in the end the different commodities are not affected to the same extent. The process of progressive depreciation has changed the income and the wealth of the different social groups. As long as this depreciation is still going on, as long as the additional quantity of money has not yet exhausted all its possibilities of influencing prices, as long as there are still prices left unchanged at all or not yet changed to the extent that they will be, there are in the community some groups favored and some at a disadvantage…. As long as the inflation is in progress, there is a perpetual shift in income and wealth from some social group, to other social groups.”

The side effect of government overspending and inflation is an artificially engineered creation of buying power, market share, and ultimately, wealth. We might label it as a government redistribution of wealth. But since the currency and subsequent economic influence didn’t exist before, the process is one step closer to ultimate government influence: It’s an unsustainable government creation of wealth.

And this is the injustice. The uneven entry of magically created funds into the market is the root of the harmful effects of inflation. It’s the means with which government can continue to operate despite a multi-trillion dollar deficit.

Surprisingly, this is also the one actual injustice that the Occupiers of Wall Street have blunderingly and misguidedly stumbled upon. They just don’t know it.

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