Beyond the Cusp

March 9, 2014

The Coming Inflation and Its Hidden Damage

Inflation has effects beyond the obvious of making the item we buy, especially the necessities which we cannot live without, more expensive eating away at what little money we have after the various levels of government take their overtly large share. What has not been discussed much are some of the many hidden side effects caused by inflation and what are some of the driving causes of inflation. One of the surest causes of inflation comes when the money supply is increased no matter the reason. When the government prints or electronically invents money in order to finance government spending, especially deficit spending, then eventually this gets represented by rising prices. The United States since sometime during the second term of President George W. Bush began printing money electronically. This was used in order to fund the original “bailout” of two-thirds of the American auto industry, kudos to Ford who actually turned down any bailout monies as they had taken a precaution and downsized two years earlier in anticipation to trends they predicted that the other two major companies, General Motors and Chrysler, had ignored. Of course, once the Federal Government found that it could boost a lagging economy by injecting more and more monies an addiction set in and every problem became just an opportunity to throw good money after bad. When it also turned out that throwing more money into the economy also had the effect of pushing the stock market higher and higher, well, what’s not to love?


The problem is these increases in the value of the stock market were nothing more than inflationary effects caused by the increased money supply. What basically resulted in the increases was that each stock is actually a value of a percentage of the total money supply which is presumably driven by GDP and production. When the government simply pushes more money into the supply and there has been no increase in actual goods, services and other tangible assets, then it is reflected in higher prices, inflation, as the price of commodities and even stocks are what their worth is in the total of production times the total money supply. If produced goods have not increased and there are additional monies in circulation, then everything rises in price to restore its value in percent of the available money proportional to its actual percentage of the total value of goods. The goods and services have not changed in their actual value, but instead are now revalued to equal a larger money supply. Much, if not all, of the higher prices in stocks is not representative of increased worth but reflects cheaper money as the total money has been increased through Quantitative Easing, a fancy pair of words that actually mean printing money except they can now make money simply by pressing the appropriate keys on a computer keyboard and presto, increased money supply leading to higher stock market gains and eventually inflation which will eat up an equivalent percentage of everybody’s wealth as inflation will eventually even everything back to represent the ratio of total goods and services against the total amount of monies in circulation whether it is in higher stock prices or bundles of dollars at the Federal Reserve or individual banks and corporations who received bailouts.


So, what could be the most damaging effect of inflation? There is the obvious effect of increasing prices at the grocery store, the service station and everywhere else but that would theoretically work itself out as salaries would also rise to reflect the inflation, though somehow the salaries never quite keep pace with inflation, or at least that has been my experience. But the effects of inflation within any nation’s borders according to economic theory pretty much equal a zero sum game where everything rises proportionally. The real difficulties come when we look at trade between nations. As inflation forces prices up on goods and on the processes that manufacture the goods, the price on the international market rises and remains higher until the balance of currencies eventually works itself out in the exchange rates. The rebalancing of the currencies is always a lagging indicator and thus inflation has an initial effect of damaging trade of the nation under its effects. Inflation also will eventually cause all imported goods to increase in price, though this is a lagging indicator that represents the changing balance of currencies. So, when inflation first strikes it takes its toll on exports but eventually takes a permanent hit on imports.


As noted earlier, inflation is directly proportional to increased money supply that exceeds the increase in total goods and services within the national economy, it is a ratio. Thus, there is only one solution to prevent inflation from heating up, which is to remove the excess monies from the total supply. The reason the United States has not experienced excessive inflation from the large amounts of monies pushed into the total money supply starting with President George W. Bush and continued by President Obama is because the vast amount of the monies is being sat on and kept from circulating as the banks have been woe to put it in circulation through making loans. Another reason has been that a fair share of the cash has been invested in European banks and institutions in order to prop up numerous European economies which were in varied amounts of distress. The effect this has had is to allow banks to keep the interest rates low and inflation in check, but such a game cannot last forever. Eventually the economies will begin to recover and the banks will begin to make more loans as the interest rates increase. As the interest rates increase, so will the required payments on national debt increase even if all that is being paid is the interest payment and no principle is paid off, exactly what the United States has practiced for a very long time. As the interest rates increase thus pushing debt payments higher then taxes will also be increased in order to pay off the debt and still finance the government including any inflation. As rough and difficult as such may be, this distressed situation actually will have an eventual benefit, it will remove a portion of the excess monies in circulation. Eventually an equilibrium point will be attained and inflation will slow or even virtually stop and the interest rates will stabilize and possibly lower for a while. Unfortunately, do not expect the government to lower anybody’s taxes when this occurs as the government is very adept at finding ways to waste inordinate amounts of money thus never cutting its ability to take more from the people and the engines of production. Actually, the one eternal hidden cause of inflation is government spending and government largess simply makes for higher inflation as government spending seldom adds to the total amount of goods and services provided in the national total production. An interesting ride is in the makings as the economies of the world adjust to the policies of the past decade and there may not be very many winners.


Beyond the Cusp


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