Please explain how printing money benifits rich

[Benaiah]

And hurts the poor. The market just jumped 300+ points because the Fed said that they will lower rates again. Ron Paul always says that the people who use the money first, benefit, while the poor suffer. I don't quite understand how this trickle down effect works. Can somebody explain or point me to a place that explains it.
Thanks

[Bradley in DC]

And hurts the poor. The market just jumped 300+ points because the Fed said that they will lower rates again. Ron Paul always says that the people who use the money first, benefit, while the poor suffer. I don't quite understand how this trickle down effect works. Can somebody explain or point me to a place that explains it.
Thanks

Hi Benaiah,

Good question. Suppose there are 100 ducats of currency out there and the government prints 100 more. Those well-connected special interests that get the "new" ducats first get the full value of the marginal increase of the money. As the money circulates, the value of the ducat then falls by half (assuming same demand, doubling of supply, price falls by half, right?).

Those that get the new money later or not at all find the value of their ducats losing half of their value with no additional benefit for them. In essence, this "inflation tax" is a transfer of wealth from the poor and middle class to the government and its special interests.

Overly simplified, but I hope this helps.

[theseus51]

Yeah, the banks and rich people use money by being able to borrow it at 4% interest. And they get to use it first. It's kind of like the last poster said, but I'll try use other things, to maybe explain it a different way.

Say there's 1 trillion in the economy, a hot dog is $1, John Doe owns $5,000. A new building is $1 million and a banker owns $10 million. The fed creates $100 billion in new money out of thin air.

Now the value of each dollar is worth 10% less, since there's so many more of them in circulation. But the tricky part is that this is not felt immediately. It takes like months or years to have the full effect. But bankers and people who borrow the money first at 4% get to use the money at the old value, buying goods at the cheaper price. Maybe 2 years later, prices will rise 10% to reflect the new money in circulation. But for now, the banker borrowed $1 million and bought a building at $1 million. John Doe buys a hot dog at $1.

A couple years later, as inflation takes effect, that building is worth $1.1 million, and the hot dog is $1.10. That's cause you need more of those dollars to buy the same goods (because each dollar is worth less than it used to be). But the banker only pays back at 4%, so he pays back $1.04 million, making him a nice profit. He got to use the newly created money first. Meanwhile John Doe still has his original $5,000 but hot dogs now cost more money. He loses out. He can buy less hot dogs with his existing money, cause that $5,000 has less purchasing power.

The only way rich people get cheap money, is by stealing wealth from lower and middle class people. That's the inflation tax. Since rich people get to use that new money cheaply. Governments also do this, printing money out of thin air to balance the budgets. It's the same as a tax hike, but more insidious because people don't see it.

[mordechai]

That is perhaps the best explanation of how the system works (in our modern world) I've ever heard, theseus

[kylejack]

Hi Benaiah,

Good question. Suppose there are 100 ducats of currency out there and the government prints 100 more. Those well-connected special interests that get the "new" ducats first get the full value of the marginal increase of the money. As the money circulates, the value of the ducat then falls by half (assuming same demand, doubling of supply, price falls by half, right?).

Those that get the new money later or not at all find the value of their ducats losing half of their value with no additional benefit for them. In essence, this "inflation tax" is a transfer of wealth from the poor and middle class to the government and its special interests.

Overly simplified, but I hope this helps.

There's another factor. Rich people are more likely to own 'stuff' (gold, silver, real estate, other hard investments and foreign currencies) and any time the currency gets inflated, that 'stuff' goes up in value against the dollar. Essentially, they're only losing ground on their dollar investments. The poor and the middle class, however, are less likely to own property and other hard investments. Poor people pay more for bread, milk, produce, housing, and everything else, and their wages rarely keep pace with inflation.

[fsk]

As a clarification of kylejack's point: The average joe has to keep 3-6 months' salary in cash so he can pay his rent, unexpected bills, etc.

A wealthy person can hold things like stock investments and real estate investments. These investments are hedged against inflation.

The average joe might have 50%-100% of his savings in cash. A wealthy person might have 1% or less of his savings in cash. Therefore, the "inflation tax" hits the average joe more than the wealthy person.

Also, suppose I buy a stock and inflation is 10%/year. The stock naturally goes up 10%/year for 7 years, doubling. When I sell, I owe capital gains on the increase that was merely compensation for inflation. I bought for $10k, sold for $20k, and I have a capital gain of $10k, but that $10k was merely compensation for inflation.

Wealthy people can use trusts to dodge income taxes. Setting up a trust costs $100k or more, so it's only practical if you have a lot of money.

[jon_perez]

The Fed printing money does not benefit the rich. At what point do you consider someone to be 'rich' or 'poor' anyway? Is a person earning 100K/year rich? What about 50K/year? The state of being rich or poor has nothing to do with where you are in the gravy train that [supposedly] emanates from the Fed. (Although I guess you could say that the Fed printing money benefits the ULTRA-rich at the expense of both the rich and poor :D )

The real accusation is that the Fed has inordinate power over the US money supply and that those who have access to it tend to be the ones who benefit first from the money it creates. Because the money the Fed creates are just tokens to represent wealth and not the actual wealth, if the Fed creates too much of it, it will dilute the value of the existing money pool. The ones who get these money first get to spend it before the dilution spreads through the economy though. Or so goes the conspiratorial view (which certainly has some justification)...

The mainstream view is that the Fed is expected to create money responsibly, not too much that inflation and a decline in so-called purchasing power (a very fluid measure) results and not too little that there is not enough 'lubricant' to keep the gears of economy from working.

Because the Fed can both create and destroy money, the argument goes that if they see inflation coming about, they will raise interest rates and try to bring down the growth of the money supply to tame inflation. This is the essence of Friedman 'monetarist' thinking which most current central banks [claim to] adhere to.

Before Friedman came along, governments and central banks subscribed to Keynesian thinking which stated that it was ok for governments to incur deficits and for the central bank to finance it by printing more fiat money as long as nearly full employment could be sustained. The stagflation of the 70s put a monkey wrench in that view and then Friedman came along and [supposedly] explained why and how to get out of that rut.

[Chester Copperpot]

The Fed printing money does not benefit the rich. At what point do you consider someone to be 'rich' or 'poor' anyway? Is a person earning 100K/year rich? What about 50K/year? The state of being rich or poor has nothing to do with where you are in the gravy train that [supposedly] emanates from the Fed. (Although I guess you could say that the Fed printing money benefits the ULTRA-rich at the expense of both the rich and poor :D )

The real accusation is that the Fed has inordinate power over the US money supply and that those who have access to it tend to be the ones who benefit first from the money it creates. Because the money the Fed creates are just tokens to represent wealth and not the actual wealth, if the Fed creates too much of it, it will dilute the value of the existing money pool. The ones who get these money first get to spend it before the dilution spreads through the economy though. Or so goes the conspiratorial view (which certainly has some justification)...

The mainstream view is that the Fed is expected to create money responsibly, not too much that inflation and a decline in so-called purchasing power (a very fluid measure) results and not too little that there is not enough 'lubricant' to keep the gears of economy from working.

Because the Fed can both create and destroy money, the argument goes that if they see inflation coming about, they will raise interest rates and try to bring down the growth of the money supply to tame inflation. This is the essence of Friedman 'monetarist' thinking which most current central banks [claim to] adhere to.

Before Friedman came along, governments and central banks subscribed to Keynesian thinking which stated that it was ok for governments to incur deficits and for the central bank to finance it by printing more fiat money as long as nearly full employment could be sustained. The stagflation of the 70s put a monkey wrench in that view and then Friedman came along and [supposedly] explained why and how to get out of that rut.

You dont understand the process because otherwise you wouldny say what you say... Either that or youve got some sort of vested interest in the federal reserve or the current banking system

FYI: The Genie is out of the bottle; its not goin back in.

[jon_perez]

You dont understand the process because otherwise you wouldny say what you say... Either that or youve got some sort of vested interest in the federal reserve or the current banking system

FYI: The Genie is out of the bottle; its not goin back in.I think you just read the first sentence and completely ignored the rest...

[Chester Copperpot]

I think you just read the first sentence and completely ignored the rest...

Thats all I needed to read to know that you dont understand the debt monetization process of the federal reserve...

Give it up dude.. RP people KNOW about the issues.. And thats how it is.. The Ron Paul Revolution is a growing mass of people capable of Critical Thinking...

You wont be able to win.

[Bradley in DC]

I think you just read the first sentence and completely ignored the rest...

We've been reading all of your posts calling Dr. Paul's views "dastardly" and "conspiratorial" etc and know trolls when we see them. You either don't understand these issues or you're only here to lie about them.

[jon_perez]

All I can say is that I feel sad when I see the level of intelligence and lack of open-mindedness that some of the RP supporters here on this forum exhibit.

The dialog has pretty much degenerated into an us-vs.-them mentality.

[Bradley in DC]

All I can say is that I feel sad when I see the level of intelligence and lack of open-mindedness that some of the RP supporters here on this forum exhibit.

The dialog has pretty much degenerated into an us-vs.-them mentality.

There is no us-vs-them, there is however a need to call out trolls.

Regarding the level of intelligence, you've never responded to the the book citations in defense of my arguments nor refuted any of my schooling you in elementary economics and how the real world works (banks lend as well as take deposits, etc.) and offer only inane posts exhibiting no understanding of basic economics or history and cite only shallow web postings of uneducated bloggers in your own defense.

[jon_perez]

There is no us-vs-themYou, fsk and nexalacer have proven that there absolutely is.