INFLATION

Think About It
Let’s talk about inflation. It is certainly a perennial problem in America, so it should be of interest to everyone. We are taught that inflation is the result of wages and prices increasing. We are even taught to measure it by a government invention called the Consumer Price Index. The index compares current consumer prices to previous consumer prices to see how many more dollars you now need to buy the same products.
I would submit that we are putting the cart before the horse. The Consumer Price Index is really a measure of the “symptoms” of inflation, not the “disease” itself. I think we all agree that if there is only one horse in town available to buy, and everyone in town holds $2,000 on Tuesday; when suddenly the mayor graciously gives everyone another $2,000 each on Wednesday, the price of the horse just went up. This is called the law of supply and demand.
Thus, we would make the point that the “inflation disease” is properly defined as the artificial over-expansion of the money supply. Since our national currency is no longer backed by a commodity such as gold, it is called “fiat” money, meaning it can be arbitrarily created by decree. The authority to do this in the U. S. belongs to our Federal Reserve System. However, I am not yet one of those who would cry, “crucify them.” They should expand the money supply in amounts “equal to” any increased production, so that there will be enough money to buy every new product which we can physically produce. But since 1970, the U. S. money supply has actually doubled every 10 years, while GDP (production) has less than trebled in the entire 30 years. That works out to 800% money chasing 300% production. Remember the horse? The way the system works now, the act of printing actual greenbacks is not nearly as important as in the past. By controlling bank reserves, the Federal Reserve can create more money to put into checking accounts, without printing greenback dollars. Actually, about 2/3rds of our $100 bills are held by others in foreign countries.
History shows the real crux of the problem arises when our government wants to fight a war, but does not want to raise taxes to pay the new and extra expenses, nor to cut any present expenses. They meet the problem by “monetizing the debt”, or creating extra money. Our worst example is the Viet Nam conflict, and the Iraq conflict is not far behind.
A good example of inflation to the extreme can be found in Germany after World War I. At the outbreak of the war, Germany suspended the redeemability of its German “Mark”.By the end of the war, the money supply had quadrupled. By1920, prices were up 500%.Confidence in the mark weakened. By 1922, prices had increased another 700%, and yet the government still kept printing money. From mid-1922 to November 1923, hyper-inflation raged! By mid 1923, some workers were being paid 3 times a day, and their wives were meeting them each time; and then rushing frantically to buy goods before the shops were empty. People needed a wheelbarrow of money to buy a loaf of bread. It is said one woman burned money in the stove, because it was cheaper than buying wood. Finally, the government stepped up to the plate. They printed 2.4 billion new “Rentenmarks” to replace the old marks at the unbelievable exchange rate of one rentenmark for one TRILLION marks. But, they committed that no more rentenmarks would be printed, and they severely limited borrowing. Drastic new taxes were imposed, and by 1925, the crisis was over.
If you remember our interest rates of the early 80’s, you saw an example of our government stepping up to the plate, in the form of The Federal Reserve. Interest rates reached 21% on home mortgages. This was a direct result of LBJ escalating Viet Nam, while spending domestically on a “great society”; followed by Nixon, who wanted a landslide re-election in 1972. But, when borrowing is reduced, the money supply automatically shrinks. We finally overcame that inflation, but a lot of people lost their shirts. We are nearing another crossroads. Our debt has mushroomed to nearly $9 trillion (That is 9 million x one million). We are monetizing the debt. We must start to pay it off.