Inflation is the state taking from people who cannot defend their balance sheet. By Kevin Warsh, soon to be the chair of the US Federal Reserve.
Inflation is “the most regressive tax that anyone in Washington could come up with,” Kevin Warsh has said.
“If you were trying to do the most harm to the least well off among us, inflation would be the way to do it.”
Inflation is the state taking from people who cannot defend their balance sheet. That is the deepest truth.
The wealthy do not experience inflation as pure loss because they own claims on the things being repriced. Equities, real estate, businesses, commodities, private assets, debt structures, tax shelters. Their balance sheets can absorb monetary decay because assets float upward with the regime.
The poor and lower middle class live in cash flow, not asset flow. They hold wages, checking accounts, fixed benefits, rent obligations, grocery bills, insurance bills, medical bills, gas bills, and debt payments. Inflation hits them before they can reposition. It raises the price of survival faster than income can renegotiate.
That is why inflation is more vicious than an explicit tax. A tax at least has a name, a rate, a vote, a bill, an author. Inflation arrives as weather. Nobody takes responsibility. The grocery store looks guilty. The landlord looks guilty. The gas station looks guilty. The insurer looks guilty. The real extraction is upstream: too many claims created against too little real capacity, then the weakest households forced to absorb the mismatch.
The state loves inflation because it lowers the real value of debt without admitting default. Corporations can love it when pricing power protects margins. Asset owners can survive it when nominal values rise. Debtors can benefit if their income keeps moving. But households without assets, bargaining power, or balance sheet depth get crushed. They pay the inflation tax in dignity, choices, health, family formation, and time.
The moral violence is that inflation destroys the meaning of work. People do the same job, earn more nominal dollars, and still lose ground. That breaks the covenant. Work stops feeling like progress and starts feeling like running in place while the floor moves backward.
Deep down, inflation is political failure converted into household punishment.
Governments overpromise. Central banks accommodate. Deficits expand. Debt gets defended. Asset prices get protected. Then ordinary people are told to blame prices.
Warsh is right on the core point. Inflation is the cleanest way for a debt regime to make the least powerful people fund the system without ever sending them an invoice.
Comments:
Wage earners see the symptoms but not the causes. …
The Cantillon effect distilled. Proximity to money creation determines who profits and who pays. That’s not a bug, it’s the design.
Nearly every government around the world has unusually high amounts of debt at the moment.
- If interest rates rise, they will have great difficulty paying their interest bill on that debt.
- If interest rates don’t rise, the rate of money manufacture will accelerate and eventually (five to ten years?) we will end up at hyperinflation.
The governments will choose inflation as the least painful path, at least initially. The only time they didn’t choose inflation was in 1929, when they were still new to the game of currencies that are somewhat detached from gold — and that choice led to the Great Depression. So inflation it will be.
Eventually, the currencies, like all paper currencies in history, will become too debased and will have to be replaced.
Meanwhile, it is so clear that those with assets will do well, and those who live by selling their labor will see their living standards continue to fall.
With high inflation coming, logically the optimal response is to borrow as much money as possible and buy assets with it. Inflation and artificially low interest rates will ensure the interest on the debt is lower than the rise in asset prices. But of course, a big market crash makes that risky.