Inflation is “Monetary Deflation”.,,,,
Inflation is an economic situation in which the price of goods increase rapidly over time—or as the term implies: costs of goods and products “inflate”, or conversely the value of your dollar “deflates”. “Monetary deflation” may be a better term—at least for consumers, if not the politicians responsible for it.
No one likes inflation. It generates a sense of uncertainty and insecurity. Workers are unhappy with their wages, because in an inflationary cycle workers are faced daily with being unable to buy food, fuel, services or products, that they were able to afford just recently. Unhappy employees press their employers for increases in salary. Strikes or work stoppages may result. But employers are also affected by inflation. Employer costs rise and profits decline. But raising the hourly wage for workers, or increasing income for workers may simply add more dollars into the mix and create an ugly feedback loop, called an “inflationary price wage spiral”. Worst of all inflation hits those in the lowest income brackets the most, for it is these citizens who spend the largest part of their income on food, gas and other staples where inflation hits hardest, and it is these folks who can least afford the additional costs.
Inflation what is it?
You buy a loaf of bread one day for $2.98, three days later the price tag has “inflated” to $3.98. Nothing has changed. The loaf is the the same quality, same size, and weight, only the price has increased. Your dollar has bought you less than it did a few days prior. It was worth 1/3 of a loaf on day one, three days later the dollar bought you only 1/4 of a loaf. Simply stated your dollar is worth less..you lost 25% of you dollar’s buying power.
Few people seem to understand inflation. There is a good reason for this. Except for our very old head of state, (who should know about this), no “young” person has ever actually experienced the fact that your dollars are worth less and less each day and what a terrible impact this has. Thus the “thirty something to forty-somethings” who populate the halls of Congress— and make decisions on behalf of the Biden team, have lived all of their adult cogniscient lives during periods of almost no inflation, and an economy with rock stable prices. They have never experienced the hardship of sharply rising costs of living and perhaps only know this phenomena from their recently purchased textbooks.
Since the early 1980s, our nation has experienced almost no serious inflationary episodes. During the post WW II, economic recovery inflation remained relatively static. But after a decade of recovery, inflation began to rise. In two decades for this to,occur. In 1960, when inflation was only 1.5 %, but it “ballooned” to 14% in 1980. By 1985, inflation, or what I call “monetary deflation” began to decline, remaining steady at between 4% to 5% during the ‘80s and from that point continued on a downward slope, falling to about 1.5% in 2016 and to zero late 2020. Only recently, during the first year of the Biden Administration, has it rapidly spiked to its present 6.5%, the highest it has been in thirty years. Thus, for the last thirty-five years or so, no one (except the elderly) has experienced this economic phenomena.
The are several causes of inflation. Either a scarcity of products and commodities, and/or excessive amounts of money circulating in the economy. Both of these circumstances can cause uncomfortable inflation or rises in the cost of living. But at its core, inflation is controlled by the inflexible economic laws of supply and demand. When products are in short supply their demand increases and prices rise, when there is a glut of those products demand falls, as does their price. But the money supply counts too! Too much cash in the system cheapens it.
Scarcity makes things more valuable—think of those old baseball cards-or paintings of deceased artists! In the 1820s a lump of pure aluminum metal was given to the Emperor Napoleon as a gift. At the time, it was so rare it was many more times more valuable than gold. Today, aluminum is so common, as a lump of pure metal, it is valueless. The rules of supply and demand control price. Scarce loaves of bread result in higher prices. An abundance of bread loaves lowers their price. The laws of supply and demand, which control cost of goods services and products apply to dollars as well. If dollars are in short supply, they are more valuable…increase the number in circulation, and they become less valuable.
When prices climb uncontrollably in an inflationary spiral one cause may be a scarcity of goods or a glut of dollars.
Suppose the supply of dollars somehow increases. The value of dollars like all other items are controlled by their scarcity or abundance. If citizens could simply print their own “twenties” on home printers, there would be so many in circulation that the value of each would drop to practically zero.
Too many dollars in the hands of consumers results in the currency (money) losing buying power..and inflated prices.
In post WW I Germany, the Weimar government in an attempt to pay its foreign war debts began a process of printing more and more paper money. So many Deutschmarks were circulated that the German currency became nearly valueless. Photographs of that time show citizens literally rolling wheelbarrows of piled Deutschmarks to the grocery to buy food for the supper meal.
So governments can instigate inflation by printing too much money. Too many dollars in circulation (supply and demand) reduce the value of each dollar. The FED (US Federal Reserve Bank or central bank) is supposed to be the guardian of our currency’s value. One of the bank’s mission statements is explicitly to guard against inflation. But it is often a conflicted institution for it is also tasked with insuring the continued vibrancy of the economy.
A financial policy termed “monetary easing” is one of the mechanisms used by the FED to vitalize a sluggish economy. Monetary easing is a process whereby the FED “buys debt” in the form of bonds issued by major banks. This process permits a bank to “sell its debt” to the FED thus permitting it to hold on to funds that would have to been paid out to satisfy that debt (it does not pay its debts) and thus can continue to lend out that money to other customers. By simply writing off or nullifying these bond debts , the FED, in effect, is “printing up money” and dumping it into the economy. For years now, the FED has been buying up debt and thus dumping trillions of dollars into circulation each year, and in effect “cheapening” your dollar, i.e. causing inflation. At the present time, the FED has bought up debt or dumped greenbacks into the economy to the tune of about $7 trillion dollars. Monetary easing has decreased the value of the dollars you hold by making them less valuable by that amount. That FED policy contributes heavily to inflation.
The FED is not alone in potentially contributing to inflation. The Biden administration has contributed to inflation in two ways. One of the first acts of this President was to attempt to decrease the use and supply of fossil fuels. This was a bad idea and was bad timing. It caused a rapid rise in oil prices, and added another vital commodity to those in short supply. This made it much more expensive to fill your gas tank or heat your home. That caused inflation. Secondly the Biden team again foolishly and with again with bad timing added to the recent wave of inflationary dollars in circulation (by government hand out legislation, see below). This policy sent more dollars into circulation , chasing goods and services in our economy which were scarce to begin with .
When President Biden first entered office his government passed the $900 billion dollar relief program of January 2021. The Covid pandemic spending bill, added another $1.9 trillion dollars into circulation. The total —$2.8 trillion dollars— increased the number of dollars chasing goods and services in the marketplace. On top of that our persistent pandemic upended many supply chains and decreased economic activities. Thus goods became scarce too. Between true pandemic generated scarcity of goods and commodities and the FED and the Biden team dumping dollars into the economy, inflation spiked and contributed to our recent inflation of about 6.5%, the highest in thirty years.
Biden’s recently passed infrastructure bill, costing taxpayers another $1.9 trillion was just signed into law, and the House of Representatives just passed another social spending and climate bill which will add ( if it is ratified in the Senate) another $4 trillion to the sea of dollars swirling around in the economy. Thus in this last year (ignoring the the $7 trillion (trn)dollars monetary easing dollars) the Biden Administration alone has pumped $ 0.9 trn, $1.9 trn, another 1.9 trn, and potentially another $4 trn dollars (total =$8.7 trn) into an already overheated economy with an inflation rate that is higher than it has been in 30 years..
Wage increases can also stir inflation. The pandemic has caused many workers to give up work and stay home. As the economy improved, a shortage of workers caused employers to raise salaries to encourage employees back. Wages have risen by over 4% in the last year. Higher wages are another inflation stimulus—more money chasing scarce goods in the market place cause prices of goods to rise. Rising wages can generate a self reinforcing spiral of higher wages causing more inflation termed a wage/inflation spiral. It is noteworthy that while wages rose by 4%, inflation rose by 6% in same period, so a wage earner’s buying power has dropped by 2% even as wages rose. Classical inflation problem!!
All of these massive government expenditures and efforts to get more money into the hands of worked have and will add more dollars to the economy over the next years and will act like a “bomb blast” of inflation stimulus. Expect prices to soar and inflation to climb to record levels as they sap the buying power of your wages, savings, college savings accounts, and IRS plans.
Will you be able to both pay for the gas at the pump, buy your medicines and still feed your family? Inflation can make all of these costs rise to unprecedented levels.
The answer is to modulate the explosive government spending the Biden team of youthful inexperienced decision makers are foisting on the rest of us.
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