Keep up the great work.

“Printing is the invisible tax and borrowing is the differed taxation that they hope to either repay in devaluated currency or not at all. That is the100% flat tax rate.”

I totally agree with you.I should have mention that historically some time with Government Bonds you may have very little or no valuation at maturity.

If we think that Inflation is a tax that would be like a 100% devaluation or taxation.

The politically connected people and organizations who get the newly printed money first, get the privilege of using that money at a pre-dilution level of value. To use your lemonade analogy, they get to drink their fill of lemonade before the dilution takes place.

The effect over time is that value, whether in savings or assets, migrates from the poor and middle classes to the politically well connected people and organizations through this politicized monetary racket. Whoever gets to spend newly printed money first, gets more value per dollar than the guy who gets to spend that money down the road. This is because it takes time for the effects of dilution to take place.< \blockquote>

I would guess that you allude to projected balance of trade issues and flows of specie. These are non issues when you don’t have governments arbitrarily valuing currencies against one another, leading to the fruition of Gresham’s Law. Your second point of no gold available is historically attributable to governmental bimetallism and legalized counterfeiting of the banks via fractional reserve. Fixing the ratios between Au and Ag may seem to streamline commerce and tax collection for the government technocrat, but it creates the same problems of any governmental price fixing, an over abundance of the overvalued good, and a scarcity of the undervalued good.

In the free market in money proposed, sellers would be free to accept only specie for their wares, or currencies and electronic funds fully backed by specie and reputable money changers. The argument of fear from which your statement appears to be sourced does not advance the goal of a stable and sound money.

Then employers eventually have to pay higher salaries for the same work.

Presto – higher salaries push incomes into higher tax brackets! (But they never raised your taxes…)

Printing is the invisible tax and borrowing is the differed taxation that they hope to either repay in devaluated currency or not at all. That is the100% flat tax rate.
So, why do so many people provide the Government with money by buying negative return government bonds? (It this not a tax?)

Because in very bad times in most country the perception is that they are safe. It’s better to have a devaluated currency then losing everything.

That is the rational of people investing in 2 years government bonds at 2.37 % minus taxation when the money is devaluating at a official forecast rate of 5.7% in august 2008.

Those bonds are safe to the extent that you will get you a devaluated currency maturity. They are basically guarantied buy the tax payers and the money supply increase; (which also guaranties its devaluation.)

No one but the Government can borrow this way. They borrow at 2% collect taxes on that 2% and managed to have a 9.4 trillion debt. If they had to borrow at free market rates and pay an honest positive real return based on the real inflation rate this charade would end very fast. (In time it will anyway, you can’t be irresponsible and defy gravity for very long)

In such a context often pension fund, financial Institutions, Individuals etc are indirectly left with little alternative but to subsidize the monster.

In reality we are being mislead,the government does not have an income problem it has a major spending addiction.

Also in a classical liberalism society there will be no institutionalization of any government services and so after a period of evaluation and re-analysis if it is determined that the best means is something other than a government service then those taxes will be rescinded and the service will be provided through contracts made in the free market process.

Only an ego-driven interventionist could object to this!

The general approach largely failed in the 16th and 17th centuries because bullion inflation from Spanish possessions eroded Crown revenues. It was the opposite of the Crown being able to rebuild its holdings through inflation – it didn’t have that mechanism available. The Dissolution of the Monasteries only gave Henry VIII a one off cash gain, because he had to sell off most of the assets to the elite to keep them on side; they ended up with the revenue streams instead of the Crown.

This is how monarchies operate, or at least how the more successful ones operated once upon a time.

I recommend an article on LRC entitled Roundheads, Whigs, and Decivilization: A Hoppean Analysis of Stuart England, by Jason Jewell.

It discusses the largely private, self-sustaining economy of the English monarchy, which ended with the arrival of Cromwell’s Commonwealth.

“The English over time had developed the quite sensible belief that under normal circumstances the king was to “live of his own” – that is to say, provide for expenses of government from his own pocket. Taxes, with the exception of customs duties, were only to be levied in extraordinary conditions such as war. Thus, the summoning of Parliament traditionally had been received throughout the realm with trepidation and suspicion, because it was perceived to have few other functions than that of raising taxes. One of the reasons the reign of Elizabeth I was considered a Golden Age is that Parliament was rarely summoned.”

http://www.lewrockwell.com/orig6/jewell1.html

Somewhat similarly, having taxes in a fiat currency economy spreads a need for it through all parts of the economy. Without that, people could start opting out of using it; they would probably switch to a hard currency rather than revert to barter, but even barter would be better than trading for the hyper-inflated cash you would get without taxes supporting the fiat currency. For the government, how much they take in cash depends on how much inflation they are willing to tolerate, after considering all its side effects.

A small (minarchist?) government could get away without any formal tax structure at all, apart maybe from duties to offset the effects of market imperfections spilling over from other countries, by getting revenues from a portfolio of revenue yielding assets and being willing to take payment in its own currency. As such a portfolio tends to erode over time, it would be necessary to top it up from time to time – but it’s quite practical to do that using new issues of fiat currency, then either putting up with the inflation or gradually redeeming the issue with a sinking fund approach. Effectively, this is how the Dutch set up their Culture System to exploit the East Indies. It’s still ripping off the public, but to a much smaller extent as there are real investments and there is only the opportunity cost of crowding out real people and the wealth transfer involved in making real investments but paying for it with fiat currency (that last only happens much at set up time, if you prevent further inflation with the sinking fund approach – with that, you spread the risk onto the public and only do a little continuing wealth transfer).

“…time preference is a subordinate factor compared with the productivity of investment in determining the rate of interest, since it operates only by way of determining the rate of saving and the rate of capital accumulation, and hence the productivity of investment.”

Good job!

“Time preference determines the amount that people will save while productivity determines how much they will invest and therefore the interest rate.”

My position was that marginal productivity (the expected yield from new investment) and time preference jointly determine the natural interest rate and the natural level of investment.

Once you understand that the government can print all the money they “need” to fund socialist programs or war, one then has to wonder why we have an income tax.

The income tax serves as a means by which to contract the money supply and a means by which to manipulate the citizenry. Period. That is a stark realization.

“If a counterfeiter is passing bad bills, most of us have the tendency to want to bring him to justice. But if the counterfeiter offers to share his funny money, quite a large number of people would rather participate than shut down the operation.”

And people think they’re sticking it to the government when they participate when they’re actually sticking it to themselves.

Alex, Off the subject, didn’t we have a discussion a while back about whether marginal productivity causes interest rates? If so, I’m ready to reconsider. I’ve been reading Hayek’s Pure Theory and he says marginal productivity is the major determinant of interest rates. Time preference determines the amount that people will save while productivity determines how much they will invest and therefore the interest rate.

The “middle class” was established and large long before the gold standard was abandoned.

In the 35 years since the last vestiges of the gold standard was abolished, the “middle class” has shrunk.

The only thing the fiat dollar has accomplished is to make the boom-bust cycles truly huge in magnitude.