Since the start of COVID, and even dating back to 2009, the Federal reserve has embarked on a record setting vomit of quantitative easing — simply printing money.
https://fred.stlouisfed.org/graph/graph-landing.php?g=xBBr&width=670&height=475
In the 1990s, the Fed created 1.5 trillion, then 4.8 trillion in the next ten years, 7.9 trillion to 2020, and then a whopping 3.5 trillion in the first ten months of 2020. They created more money in ten months than in the first 200 years since the dollar was created in 1792.
Right now, the Fed is claiming that inflation is below target. A more accurate claim is the the absurd way that CPI is measured is below 3%.
However, inflation is well above this tiny number, however you look at it.
Inflation is running rampant
The S&P 500 index is up nearly 100-fold in the past 30 years, or more than tripled since the start of 2010.
source: https://www.macrotrends.net/2324/sp-500-historical-chart-data
That’s a whopping 16% over 30 years, or 15% over the past 10 years. Not really in line with 3% inflation.
Housing prices have jumped rather more than the official inflation rate of less than 3%
Real inflation is far higher. For example, a Ford Taurus cost $18k in 1996 and $28k last year. But because of “hedonics” this isn’t counted as inflation.
Hedonics is the principle that the upgraded vehicle has more bells and whistles and that the higher price reflects added value, not inflation.
This is just one of the ways the BLS massages official inflation down.
There’s a long story behind the manipulation of inflation. Put simply, by lowering reported inflation, the government is able to reduce inflation indexed payments for social security and other required payments.
But there’s another reason the government loves inflation: Capital Gain Tax
Inflation leads to windfall capital gains taxes
In some countries with capital gains taxes, the disposal price is discounted by the CPI over the holding period. But not the US.
So when an asset (e.g. a share or home) doubles in price over 10 years (reflecting a realistic inflation rate of 7%) then the entire capital gain is taxable.
During periods of low inflation, this didn’t really matter because the gains were realistic profit.
However, since the massive changes to the way CPI is calculated, the Fed has been able to maintain low interest rates, print money and claim that there was no inflation, and therefore didn’t have to try to reduce it as happened in the early 1980s.
Source: https://stats.oecd.org/Index.aspx?DataSetCode=REVUSA#
With inflation going ballistic, these tax revenues are going to soar.
Sadly, for the people getting taxed, over half of their “profits” are simply inflation.
John Aldridge and Kyle Pomerleau wrote an excellent article on this at the Tax Foundation in 2013.
They demonstrated that around 200 and then again in 2006, 100% of the capital gains tax revenue was from inflation, not profits.
Source: https://taxfoundation.org/inflation-can-cause-infinite-effective-tax-rate-capital-gains/
This was back when inflation was relatively mild compared to what’s coming.
Right now, the consensus is for about 2.3% reported inflation per year, which is slightly higher than the past ten years. But we know very well that historically, real inflation has been 3-7% higher than reported inflation. Now that we have historic amounts of QE going on (and a lot more to come under Biden), there’s no knowing what the limit to inflation will be.
But as far as the treasury is concerned, the more inflation, the merrier.
P.
