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Is Tyler Right About Defending Against an Inflation Tax?

Summary:
In a post talking about Libra, Tyler Cowen makes this argument: Let’s say the core rate of inflation in a country is eight percent, which is about the current rate of price inflation in Myanmar.  It is still not the case that an unbanked farmer holds currency for the entire year (he is more likely to buy land or animals as a means of large-scale saving).  I am not sure what monetary velocity is for this group of people (readers?), but say currency turns over four times a year on average.  That is in essence a two percent tax on currency holdings, not an eight percent tax.  I don’t think that individuals will switch monies for such a small gain, noting that decreasing their demand for money (i.e., increasing currency velocity) is another possible response.

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In a post talking about Libra, Tyler Cowen makes this argument:

Let’s say the core rate of inflation in a country is eight percent, which is about the current rate of price inflation in Myanmar.  It is still not the case that an unbanked farmer holds currency for the entire year (he is more likely to buy land or animals as a means of large-scale saving).  I am not sure what monetary velocity is for this group of people (readers?), but say currency turns over four times a year on average.  That is in essence a two percent tax on currency holdings, not an eight percent tax.  I don’t think that individuals will switch monies for such a small gain, noting that decreasing their demand for money (i.e., increasing currency velocity) is another possible response.

I’m pretty sure the part I put in bold is wrong, do you folks agree?

For example, suppose every 6 months my number and I swap houses. We didn’t just cut the property tax rate in half.

I think what Tyler is trying to say, is something like, “The fraction of your wealth that you lose to currency debasement, can be reduced by reducing the fraction of your portfolio consisting of currency.”

But even so, I think it’s really misleading to write the statement that Tyler wrote. I mean, you could say the federal gas tax right now is “in essence” much lower than the official value, because people drive less when gas is taxed. We don’t normally talk like that.

Robert Murphy
Christian, Austrian economist, and libertarian theorist. Research Prof at Texas Tech and author of *Choice*. Paul Krugman's worst nightmare.

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