A Benjamin Cole post
Okay, this will take some explaining, but deflation is a tax-dagger pointed right at the purses of the wealthy in developed nations.
It goes like this: In high-tax developed economies (i.e., the West and Japan), deflation results in explosions in cash in circulation. Evidently, people and businesses start to save in the form of cash, and then start doing transactions in cash to avoid the tax-man. Dealing in cash becomes socially acceptable.
The problem is people and businesses in the underground economy do not care about taxes. The state needs more money for welfare and warfare? Fine, let ‘em raise taxes!
And who pays income taxes? Who will be left operating legitimate aboveground businesses?
Cash Is King
We see now in the United States more than $4,200 in circulation per resident, and perhaps double that in Japan, the latter long in the throes of deflation, and where many businesses do not “take plastic.” In Europe, euros in circulation have exploded by 66% to €3,600 per resident since 2008 and deflation, despite a stagnant economy and population.
Academic economists have ignored the cash economy—one that cannot be measured, and which only indirectly contributes to official data. The official data is increasingly inaccurate, one might add.
Academics are left with the dubious stance that U.S. cash is offshore and in suitcases doing drug deals. Because they saw that in the movies?
And what explains the explosions of euros and yen in circulation?
So, we in the West we are heading towards deflationary bifurcated economies, one half aboveground, regulated, expensive and taxed, and one half untaxed, unregulated and less expensive.
Oh, guess which is the growing part of such economies?
Of course, disrespect for the law and state can be contagious; see Prohibition in the United States. Once cheating on taxes becomes a virtue…well, see Greece.
Maybe it is better to live with prosperity, an above ground economy and 3% inflation or so.