Why Does the Fed Fear Deflation More than Inflation

Have you noticed that the Fed Chairman seems to be far more concerned about deflation than inflation? It's reflected in his public comments and in the policies being pursued by the Fed.

In a nutshell, when deflation is caused by corrections of bad investments made during a bubble (like the sub-prime mortgage loans and their related derivatives) it is manifested by bad loans that don't get repaid. Individuals and businesses take bankruptcy or they negotiate more favorable terms. Most of the lenders are banks and they don't get repaid. Never mind that the banks made a lot of those loans with artificial money created by the Fed or the fractional reserve banking system. The banks don't like to write off their loans.

In addition, deflation has the opposite effect of inflation. Whereas inflation is caused by an increase in the money supply, deflation reduces the money supply. The effect is to make it more expensive for banks to secure money with which to make loans.

in case you may have missed it, the Fed is owned by the banks. It's completely separate from the Federal government, despite the implication caused by the name "Federal Reserve Bank".

So it makes sense that the Fed is far more concerned about preventing deflation than about preventing the kind of inflation that is caused by an increase in the money supply and by the fractional reserve banking system.

Just my two cents.

Vern

A Cure for Inflation?

Have you noticed that we talk about an increase in the price of gold, silver and various foreign currencies, instead of talking about a decrease in the value of the U.S. dollar?

As of about 10:30 am (central time) in the U.S., on November 15th, the spot price of gold was $1,338. If you bought some gold at $1,000 an ounce, have you made a profit of $338 (33.8%) or has the value of the dollar decreased by about 25%? If you invested in Euro's at 1.20 per dollar and sold out when the Euro was at 1.40 per dollar, have you made a profit of 16.7% or did the dollar fall by about 14%?

If the increase in the relative value of gold or other currencies versus the dollar is actually a decline in the purchasing value of the dollar, why do we have to pay taxes on the alleged gains in the value of gold, silver or other currencies?

One of the diverse suggestions for a way to curb inflation is to permit people to use gold or silver as a substitute for the dollar, but without eliminating the dollar. This would require that we do not impose a tax on any increase in the value of the competing currency in relation to the dollar. Many people would continue to use dollars to conduct business, but an increasing number would choose either gold or silver to establish the price of various products or services. This would be particularly attractive for transactions (such as loans) that expose one of the parties to a potential loss because of a decline in the value of the currency. But this would also put a lot of pressure on the Federal Reserve to stop inflating the currency.

Of course, that's simply a lot of wishful thinking on my part because there is no way the political and banking establishment would allow us to use any competing substitute for the declining dollar.

Vern

See The Tax Reform Alternative
http://www.offshorepress.com/taxreform2010.html

An Introduction

Welcome to Jacobs' Tax Angles

I've created this blog to serve as a platform for some of my personal views about taxes, politics, economics and an assortment of related topics. 

By way of introduction, I'm a tax author, teacher and accountant with a primary focus on international tax law. 

As an author I write and self publish books, reports and a web site dealing with asset protection and taxes. I have a second web site that provides information for those who have an interest in my professional services. 

Unlike a great many tax professionals, I do not look forward to more tax laws and regulations which represent opportunities for more work. I would much prefer to eliminate the Federal income tax by repealing the 16th amendment to the Constitution and to repeal the Federal Reserve Act of 1913. Despite my seemingly bizarre political views, I'm a long time student of the U.S. tax system and am aware of the heavy handed penalties that can be imposed on those who deviate from compliance with the law.

I am not an advocate of an assortment of "tax protester" theories that have been summarily and repeatedly rejected by the U.S. courts. Instead, I assist taxpayers who wish to avoid problems with the IRS by complying with the tax law and I limit my somewhat controversial  opinions to the written word where I have at least a modicum of protection via the First Amendment. 

Vern Jacobs

www.vernonjacobs.com

www.offshorepress.com