Page 21 - PowerPoint Presentation

> Inflation – the most sinister tax of all

We need governments to keep inflation at bay

In economics, inflation is a rise in the general level of prices of goods and services in an

economy over a period of time.

When the general price level rises, each unit of currency buys fewer goods and services.

In modern days inflation is a major weapon used by central bankers to fight economic

fluctuations in the short run.

Governments rarely seem to anticipate anything. The economic well-being of a taxpayer is

sometimes seemed to be the least worry of the average policy maker. Politicians always
appear surprised by economic downturns and “sudden” contractions in aggregate supply or

demand in the market.

Once deep in debt with massive unemployment, the ability to tax is limited. In most
scenarios, governments running massive deficits and holding a huge national debt, have

little or no option but to borrow money in the open markets. In such cases, the action taken

is always a money emission to bring short term contractions back to the natural rate of
output.

Governments have a monopoly on printing money, legally anyway, and doing so does not

need to relate to any commodity. Central banks turn to money printing as a solution to
economic turmoil.

Money printing is an attractive and cheap method to manipulate aggregate demand curves.
No minister for finance would resist it at almost any opportunity!