Blair

The Final Market Bubble

On Feb 10 11:03 PM derryl wrote:

> Hyperinflation can be stunted by a value added tax (seekingalpha.com/symbo...)
> on everything. A 100% VAT would instantly double the price of everything
> so 1/2 of any money that is spent (rampant spending contributes to
> or causes price inflation, as our recent bubbles experience shows)
> would flow to Treasury, and Treasury could remove that money from
> the economy by using it to buy back its bonds from the Fed. Or Treasury
> could just lock it in a vault.
>
> There is no limit how high the VAT could be set. If it was 500%
> then a $1000 item would cost $6000 and pretty soon even a hyperinflationary
> spending mood would be cooled down because the government would suck
> so much money out of the economy every time anybody spent some money.
>
>
> In hyperinflation the velocity of money reaches warp speed as everyone
> tries to trade their cash for something they think will hold its
> value. So we bid up the prices of everything to get rid of all our
> money before it is worth less.
>
> But if Treasury takes a large slice of that money out of every transaction
> then after purchase #1 for $1000 (with a 100% VAT) the seller only
> has $500 to get rid of, and after purchase #2 for $500 the seller
> only has $250, etc. Pretty soon there is no longer 'too much money'
> in the system. It's a fast way to suck money out of a system where
> too much money is chasing too few goods.
>
> There ARE solutions to these monetary problems. We don't have to
> just sit back and allow arithmetic problems involving money to cause
> the world to end. The solutions would be politically difficult (a
> 500% VAT!!! Raise the guillotines!). Maybe Paul Volcker will be
> the guy who kills hyperinflation.

There is only one problem with this concept: There are such things as black markets. With such a large spread introduced by the VAT, there will be enough 'fat' to enable profitable VAT avoidance transactions. Mankind has always been inventive to avoid taxes and there is no reason to think this situation will be an exception.