The Problem With Inflation

 

Inflation in one form or another has always been with us.  Even during the 18th and 19th centuries, there was some inflation.  Inflation, however, really 'got its legs' beginning in the 20th century.  Two events gave it the boost it needed to become a household fixture: the creation of the Federal Reserve Bank, and the 16th Amendment (Income Tax).

The Federal Reserve Bank made it possible for the federal government to fund itself with deficit spending: 'borrow' money from the Fed and pay it back sometime in the future — maybe never.  Our 'national debt', the Keynesians told us, was no problem because 'we owe it to ourselves!'

The Income Tax made it appear that the federal government was actually 'paying' its way.  Well, actually you're paying its way, sort of...

Until the advent of COVID hysteria and the latest round of massive government spending bills, it was estimated that the value — the purchasing power — of a 1913 dollar had fallen to about five cents ($0.05).  Yes, inflated by a factor of twenty.  Since COVID, it has gotten much worse.  80% of all the greenbacks in circulation today were printed within the past 3 years.  Since (Milton Friedman warned us) 'inflation is everywhere and at all times a monetary phenomenon', that means that our hypothetical 1913 dollar is now worth approximately a penny.

Now, if you are a businessman or a wage-earner, your prices or wages will rise to accommodate the inflation.  Everything seems to adjust itself, to 'establish equilibrium'.  Generally.

If you aren't a businessman or wage earner, if you are living on savings, things are going to be somewhat different.  Your savings are static.  They don't automatically rise to establish equilibrium with the new prices for everything.  This is why AARP is always so concerned about their members, many of whom are on fixed incomes.  For them, everything is suddenly more expensive and their 401k's don't seem to be quite as lush as they felt last year or the year before that.

We are told by our politicians that this inflation is transitory, meaning it will subside within the planning future.  (Janet Yellen is lately 'walking back' that pronouncement.)  Even if it is, there's still a serious problem left unaddressed.

The real problem is this: once inflation subsides, prices will still be high.  Just because runaway inflation becomes less runaway, prices don't go down.  They stay at the elevated state the last runaway inflation left them at.  Things are still unaffordable; they're just not becoming more unaffordable.

What us senior citizens on fixed incomes really need is a little runaway deflation: prices retreating to levels not seen since 2018... or 1958... or 1918.

Is that going to happen?  Not likely.  For that to happen, the government would have to grow smaller and less expensive.  The Mint would have to collect greenback dollars and take them out of circulation — while not printing any replacements.  We would then have the situation of 'fewer dollars chasing the same amount of goods'.  We haven't ever seen that happen with the U.S. economy, so we don't know exactly how such a thing would work out, but it would be an interesting experiment, no?