PROBLEM
Economist Sean Flynn, PhD defines inflation like this:
Inflation measures how prices in the economy increase over time. This topic is crucial because high rates of inflation usually accompany huge economic problems, including deep recessions and countries defaulting on their debts.[1]
According to the U.S. Bureau of Labor Statistics, the United States’ overall inflation rate in 2021, was 7%.[2] In a 12 January 2022 article on the Investopedia.com website, Jason Fernando said:
Too much inflation is generally considered bad for an economy, while too little inflation is also considered harmful. Many economists advocate for a middle-ground of low to moderate inflation, of around 2% per year.[3]
Inflation works like a regressive tax. It has an unfair impact on the poor. Loosing 7% of their purchasing power hurts the poor person worse than it hurts the rich because a larger part of the lower- income person’s money is spent on goods and services.[4]
In the last 100 years, quite a few national governments have lost control of inflation. The resulting “hyperinflation” has ruined their economies, and it has posed an existential threat to the affected countries’ stability.
Examples include: Austria (1922), Bolivia (1985), Brazil (1985-94), China (1943-45, 1947-49), France (1795-96), Germany (1920-23), Greece (1941-46), Hungary (1945-46), Malaya (1942-45), North Korea (2009-11), Peru (1980’s-1991), Poland (1923 and 1989-90), Philippines (1944), Soviet Union (1917-24), Venezuela (2016-present), Yugoslavia (1989 and 1992-94), and Zimbabwe (intermittently 1980-2008).[5]
Definitions of hyperinflation vary. One good one follows:
The International Accounting
Standards Board has
issued guidance on accounting rules in a hyperinflationary environment. It does
not establish an absolute rule on when hyperinflation arises, but instead lists
factors that indicate the existence of hyperinflation:
The general population prefers to keep its
wealth in non-monetary assets* or in a relatively stable foreign currency.
Amounts of local currency held are immediately invested to maintain purchasing
power;
The general population regards monetary
amounts not in terms of the local currency but in terms of a relatively stable
foreign currency. Prices may be quoted in that currency;
Sales and purchases on credit take place at
prices that compensate for the expected loss of purchasing power during the
credit period, even if the period is short;
Interest rates, wages, and prices are linked
to a price index; and
The cumulative inflation rate over three
years approaches, or exceeds, 100%.[6]
* I read “non-monetary assets” as precious metals, commodities, and so forth.
I know from personal experience what it is like to be “retired on a fixed income,” during a period of high inflation. The yearly cost of living increases provided by my retirement plan and Social Security are not keeping pace with inflation. The money I get this year will not buy as much as last year’s money did.
ANALYSIS
It is beyond the scope of this work to provide a detailed explanation of inflation and its outcomes. What follows will be a brief examination of the subject.
Inflation occurs in several ways. These include (but are not limited to):
Inflation results when demand exceeds the productive capacity of an economy. It is caused by an increase in the money supply and “easy credit,” which stimulates demand. Prices increase when an economy’s ability to produce goods and services cannot keep pace with demand. When more money is available, consumers think they can spend more, which stimulates demand. The resulting scarcity leads to higher prices (inflation).[7]
Increasing costs to producers may also force them to raise the price of the goods and services that they sell. When the money supply is increased the stimulated demand for finished products creates more demand for the things needed to produce those products, and the higher demand for raw materials may cause their price to go up.[8] The cost of producing goods and services may also be increased by energy prices and government regulatory activities.
The results of inflation are interconnected. Example:
The cost of housing in the U.S. has recently gone up dramatically. Builders are charging more for new homes because it costs more to build them. Rather than pay more for a new home, buyers are purchasing existing homes. The increased demand for existing homes is causing their price to increase. Consequently, some would be buyers are choosing to rent their homes, rather than buy them. The result has been a shortage of rental properties, and rents are going up. As the value of real property increases, County Assessors are raising its assessed valuation. The resulting increase in property taxes is causing mortgage companies to raise house payments (so there will be enough money in escrow to pay for property taxes). Landlords are raising rents even more to be able to pay their mortgage payments. Therefore, more and more poor people are finding they can’t afford housing, and homelessness is increasing.
If there is an expectation that current or future inflation rates will drive up the cost of living, people may demand higher wages to maintain their standard of living. Higher wages often cause increased prices. A “wage-price spiral” may result in which higher wages drive higher prices, that drive higher wages, resulting in still higher prices, and so on.[9]
Excessive government spending increases the money supply in the economy, and it is the prime mover that causes inflation. Money becomes less valuable, and consumers need more and more money to buy the same goods and services.[10]
Until 1971, U.S. currency was backed by gold and other precious metals. Speculators and foreign governments were abusing the system by draining the U.S. gold reserves with excessive demands to exchange their dollars for gold. Consequently, President Nixon took us off the “gold standard.” His action is understandable in context, but other national governments followed suit. The currencies of the world became “fiat currencies.” The American dollar is now backed by nothing but the “good faith and credit” of the United States government. The currencies of other nations are valued in terms of their exchange rate for U.S. dollars and each other. Today, money has value only because people believe it has value.
Under
the gold standard, the amount of money that governments could print was
somewhat limited by the amount of gold and other precious metals they possessed
to back it up. When currency was
converted to fiat money, that restraint was removed, and no meaningful restraints
were adopted to keep governments from printing as much money as they wanted.
In American government, an intended restraint is the so-called “debt ceiling,” which has proved to be a movable goal post. All the big spenders have to do is threaten a federal government shutdown, and the fiscal conservatives cave in. Then they all “reach across the aisle” and raise the debt ceiling.
Over the last 50 years, the American federal government has consistently spent more money than it receives in revenue, resulting in cumulative budget deficits. These deficits have accumulated a national debt that is approaching $30 trillion.
Flynn plainly attributes the root cause of inflation to bad government policies.[11] Fernando goes into more detail:
An increase in the supply of money is the root of inflation, though this can play out through different mechanisms in the economy. Money supply can be increased by the monetary authorities either by printing and giving away more money to the individuals, by legally devaluing (reducing the value of) the legal tender currency, more (most commonly) by loaning new money into existence as reserve account credits through the banking system by purchasing government bonds from banks on the secondary market.
In all such cases of money supply increase, the money loses its purchasing power.[12]
Low-moderate inflation may have some economic benefits. For a thorough, if somewhat confusing explanation of inflation please refer to: https://www.britannica.com/topic/inflation-economics When the rate of inflation becomes too great, however, every source I read said it was harmful.
I will use a few practical, real-life antidotes to illustrate the point that, longitudinally, inflation is eating away at the value of money to an unacceptable degree. When I was in high school, I worked in a supermarket bagging groceries and carrying them out to customer’s cars. I made $1.10 an hour. People are demanding $15.00 an hour for entry-level jobs now. At that time, a loaf of bread sold for twenty-five cents. Today it costs over $2.00 (and as high as $4.00). Gas was twenty-five cents a gallon. Now a gallon of gas goes for almost $4.00. The popular tennis shoe all the kids wanted went for about $15.00. Parents pay up to $100.00 for a pair for the latest fad tennis shoes now.
Those
in the know say the purchasing power of Americans today is greater than 55 or
60 years ago, but I ask you, where is all this is leading to? How far can it go before the government
revalues our currency, defaults on its debts, or loses control of
inflation.
We have only to look at history to see where things can end up. In Germany’s Weimar Republic following World War I, their money was so worthless that people used if for wallpaper. It lost value so fast that people spent everything they had today, because their money would be worth even less tomorrow. Is that what we want for America?
ALTERNATIVES
There are some people who want to return to the gold standard. Given the amount of money in circulation, that does not seem to be realistic.
The Federal Reserve could raise interest rates. If it is done without a simultaneous major reduction in federal spending, the result could be a major recession.
Others talk about abolishing the Federal Reserve as a way of circulating money. I have not, however, heard of a workable alternative to replace it.
We might continue on as we have been. If we do, however, it looks to me like we are headed for disaster.
The ideal solution would be to pass a constitutional amendment requiring a balanced budget. The founders made it difficult to pass amendments, and there are special interests that would generate propaganda designed to sway popular opinion against it. They would try to convince the voters that a balanced budget amendment would shut down the government, force the abandonment of “vital” social programs, and gut the national defense. They would say that people will die for lack of health care, housing, food, and energy to heat their homes in the winter.
Respectfully, when Speaker Newt Gingrich and the Republicans in Congress forced President Clinton to agree to a more-or-less balanced budget, none of these dire consequences happened; except a drastic reduction in our military readiness. (The military cuts would not have been necessary if the Democrats had agreed to deeper spending cuts for other programs.) Instead of a disaster, people now speak fondly of the prosperity we enjoyed during the “Clinton economy.”
RECOMMENDATIONS
American voters must wake up to the fact that we may not always have patriotic Democrats like Senators Manchin and Sinema who are willing to stand up against the Progressive elements in their party. The Democrats are nearly unanimously trying to pass huge trillion-dollar spending bills, which will aggravate already unacceptable inflation rates in our economy. Regardless of party affiliation, we must all vote for fiscal conservatives in the upcoming 2022 and 2024 elections.
In selecting candidates to vote for, primary consideration must be given to those who want to stop deficit spending, and who do not buy the lie that trillion-dollar spending bills will be paid for by taxing the rich without a tax increase for the rest of us. Currently, we are all paying a seven percent “inflation tax” caused by excessive federal spending - and that is the truth.
Our elected representatives in Congress and the White House must take immediate action to reduce federal spending. Under President Carter the economy stalled while inflation reached unacceptable levels. After he took office, President Reagan restored economic prosperity by cutting the growth of spending on many federal programs, eliminating some of the bureaucracy involved in distributing federal funds, and by eliminating federal regulations that were strangling economic activity.
We need laws that would limit the national debt to a reasonable percentage of the Gross Domestic Product (GDP). We need accompanying legislation to limit federal spending to $10 billion less than yearly revenue, until the national debt is reduced to its legal limit.
The people we elect need to be willing to act to reduce by law the excessive regulations that are driving up the price of producing and distributing goods and services. The regulations that have shut down domestic petroleum and coal production are the major culprits. The Obama, Trump, and Biden presidential administrations have demonstrated that executive orders are temporary. Therefore, deregulation must be codified in law.
The Senators and Congressional Representatives we elect in 2022, and our next President, must act to stop the federal government from the excessive spending that is flooding the economy with devalued money. Where possible the growth in mandated spending must be suspended indefinitely.
A zero-based approach must be taken toward all programs where spending is not mandated by law. Spending must be reduced or eliminated for programs that cannot be justified by the role of the federal government as defined by the U.S. Constitution. Congress must not throw money in whatever direction the judicial branch will let it get away with.
The solution to national problems begins at the local level. Write your Senators and Congressional Representatives. Vote. If primary candidates in your area are not fiscal conservatives, get involved with your local party to develop candidates who are. Advocate for a balanced budget amendment.
As citizens of a constitutional republic, we bear a corporate responsibility for the things our government does. If the average American does not act; the politicians and special interests will spend the country into bankruptcy and all of us along with it.
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