Inflation May Be Closer Than We Think

Inflation May Be Closer Than We Think

In November of 1923 at the Burgerbraukeller in Munich, Adolf Hitler ordered three beers at the cost of $3 billion marks.  Inflation in post World War I Germany was out of control.  In 2006 in the African country of Zimbabwe, it took $150,000,000,000 billion dollars, notes printed by the Reserve Bank of Zimbabwe, to take the city bus.  Within a few months, the economy of Zimbabwe collapsed. Extreme you say.  Yes it is, but both Europe and the United States are now flirting with the dangers of inflation.

The current United States debt, rising at $4 billion dollars per day, is at approximately $15,998,386,432,825.00.

Many economists say that the Federal Reserve has many tools to contain inflation once our economy turns around.  But one thing the Federal Reserve doesn’t have is the ability to control Federal spending.  And that is what should worry us.  Even ardent supporters of the current U.S. government plan to fight our sour economy by spending money now and worry about the debt later, should be worried about the inflationary effect.  Every day, for example, the U.S. needs to borrow $15 billion dollars to fund the deficit.  Someone has to buy all that and, more importantly, the U.S. has to pay it back!

Inflation is a tempting choice to pay the nation’s staggering debt, especially because the alternatives are to raise taxes or cut spending.  The government could simply print more dollars to pay off our debts with cheap currency – a tempting but inflationary solution.  Unfortunately, the effects of inflation are cumulative.  After 5 years of 6% inflation, $1 trillion dollars would be worth $734 billion, a 27% drop.  But any sustained burst of inflation would have some ugly long term effects.  One is higher interest rates.  Even if inflation remains tame, the Federal Reserve will eventually have to return to short-term rates of about 3% to 5%.  A lower dollar value on the international currency exchanges is another measure of inflation.  A declining dollar makes imported goods more expensive, although it makes U. S. exports more attractive.

One big fear is that the U.S. will have to offer much higher interest rates to sell its debt.  And that could have a big adverse effect on our economy.  But as the deficit grows, the threat of inflation grows too.  If only because the measures that the country needs to take to prevent inflation are so difficult.  There are only three ways to cut the National Debt: raising revenue, cutting expenses or inflation.  We are already seeing inflation in many sectors of our economy.  Airline fares are up 30% above last year; health insurance premiums increases are in the double digit category; and food prices have been quietly sneaking up.  Meanwhile, the U.S. government insists that the rate of inflation is close to zero.  Anyone who actually believes the government inflation numbers is living in a fantasy world.  The U.S. government has been openly manipulating official inflation numbers for several decades now.  As increasingly larger amounts of paper money are dumped into the economy, we are eventually going to see the worst inflation in American history.

Up to this point the dramatic expansion of the U.S. monetary base has not caused that much inflation because U.S. government borrowing has soaked most of it up and U.S. banks have been hoarding cash and have been building up their reserves.  However this situation will not last forever.  Eventually all this cash will make its way through the food chain and into the hands of U.S. consumers.  The next aspect of the coming inflation is the rising commodity prices.  Agricultural raw materials, metals, coffee, meat, fruit, cotton, rubber – the list goes on and on.  As those price increases enter the chain of production, there is every chance that they will cause inflation.  Meanwhile the Federal Reserve wants to print lots of money.  Further action by the Fed is likely to be warranted unless the employment situation improves.

Many American families are going to be financially shredded by the coming inflationary tsunami.  How far will their paycheck go when a half gallon of milk is $10.00 and a loaf of bread is $5.00?  Already it is incredibly difficult for the average American family of four to get by on $50,000 a year.  How much money will this family need when the rampant inflation starts kicking in?  I am afraid that we will find out soon!

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Written by
Donald Wittmer