Inflationomics

Money Walks

I recently read a book called How Money Walks.  Its conclusion was that working wealth appears to move to better places, tax-wise.  To demonstrate this point, the author showed how the state of Florida attracted $86.4 billion between 1995 and 2010.  Arizona gained $24.5 billion, Texas 22.1 billion, North Carolina $21.6 billion, and Nevada gained $16 billion.  These were all states with relatively low tax extractions.

Not coincidentally, the states with high tax rates were the losers.  They were:  New York (lost $58.6 billion), California (lost $31.8 billion), Illinois (lost $26.1 billion), New Jersey (lost $18.5 billion), and Ohio (lost $17.1 billion).  The book went on in some detail about where the money went and where it came from.  (Money, of course, is just a medium of exchange for capital, which is what increases people’s productivity when it is invested in their jobs.)

In my opinion, the conclusion was rather common-sensical; i.e., money flows where it is treated better.  This phenomenon also occurs on an international basis, with low tax jurisdictions attracting capital and high tax jurisdictions losing money/capital.  Yet, taxes are just one element of a friendly environment for capital.  One must also consider how safe money is from things like nationalization of assets, civil forfeiture, exhorbitant legal fees/cost/judgments, and inflation.

Let’s consider inflation, for example.  A few years ago, the Zimbabwe stock exchange led the world in performance.  Did this attract more capital to Zimbabwe?  Of course not!  With record-breaking levels of inflation, the gains in stocks were mostly illusory.

Even Warren Buffett understood how devastating inflation could be, when he wrote an article entitled “How Inflation Swindles the Equity Investor” for Fortune magazine back in May of 1977.  He stated, “The inflation tax has a fantastic ability to consume capital.”  See Tap Dancing to Work, pg. 19.

In short, why would capital, which is often stated in terms of a currency, stay where it is likely to be consumed?  The short answer is, it won’t!  But what if the whole world, which is on a fiat currency standard, inflates its currencies in a race to the bottom via currency wars?

In my opinion, at some point, when faith is lost in the purchasing power of those currencies, a gradual, and then sudden, rush out of those currencies will occur.  We will see fantastic price rises in all things denominated in those inflated paper currencies.  Then, the search for a stable (non-inflatable) money will begin in earnest.  And when all else fails, who knows, maybe we’ll see how money walks away from fiat currencies and turns to the best money of all-time, precious metals.

Robert Jackson Smith

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