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Who is penalized by unanticipated inflation (Losers)? Lenders- dollars paid by debtors are worth less after inflation than when they were lent. Investors- pay taxes on returns that may only reflect inflation, but they concert also pay a privileged rate (the capital gains tax rate is 20 percent; not the 33% top income bracket) Holders of cash (those living on concert fixed incomes)- inflation erodes the value of a dollar over time. (But who uses cash? The mafia, terrorists, drug dealers, and Republicans but for concert quite different reasons. Most others use credit cards or checks that occasionally get floated. Inflation distorts relative prices. Is the inflation general or specific? This also leads to menu-costs- the reprinting of prices. But societies have addressed this problem. Lastly, inflation creates some uncertainty in decision-making — investments and retirements. Who benefits from unanticipated inflation (winners)? Borrowers- anyone who owes money, which is the vast majority of Americans, benefits because they are paying off loans in devalued dollars.
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