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.
According
to the U.S. Bureau of Labor Statistics, the United States’ overall inflation
rate in 2021, was 7%.
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.
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.
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).
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%.
* 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).
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. 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.
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.
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.
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.
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.
Flynn, Sean. Economics
for Dummies. 2nd Ed. Wiley Publishing, Inc. 2011. p. 16.
Flynn, Economics
for Dummies, p. 16.
