Inflation

During the last few years, as politicians spent ever more money, experts told us not to worry.

Jerome Powell, chair of the Federal Reserve, said inflation would be "transitory."

Treasury Secretary Janet Yellen said, "I don't anticipate inflation is going to be a problem."

Sen. Elizabeth Warren tweeted: "greedy corporations are charging Americans extra." It's "price gouging."

"Greed is constant," says economist David Henderson in my new video. "If it's greed, how do we explain prices falling?" When oil prices fall, is it because "oil companies just suddenly decide, 'I'm gonna be less greedy'?"

Inflation results "from too much money chasing too few goods," explains Henderson. "If government's spending more money, that's more money chasing too few goods."

Lately, the government borrowed from the Fed, and spent much more money. Under President Donald Trump, the national debt rose $7.8 trillion. Under resident Joe Biden, it's grown $2.2 trillion in just one year. Biden wants to spend even more -- a record $6 trillion this year.

Where will they get the money? Government has no money of its own, so increased spending means politicians must borrow more, tax more, or, easiest of all, create money out of thin air by just printing it.

In the last few years, that's what they did. In an untested experiment, the Fed printed more money than ever in history.

All this new money sloshing around the economy makes money we have less valuable. You notice the price increases, but you may not notice the damage inflation does to your savings.

If you put $10,000 under your pillow, 7% inflation will reduce that to $2,342 in just 20 years.

If you were counting on those savings for retirement, too bad. Most of your savings will be gone.

"Biden's wrong," Henderson responds. "There's no economic theory that says when the government spends a huge amount more money, prices fall."

Price controls were tried before. In 1971, President Richard Nixon ordered a freeze on all prices.

It sounded reasonable. Too much inflation? Our intuition tells us that government can fix that with a price freeze. But "that's where people's intuition goes wrong," says Henderson.

"Prices are signals ... that guide people," explains Henderson. "Mess that up, you've really messed up the economy."

Price changes tell buyers what to avoid and sellers what to produce. When COVID-19 hit, the price of face masks rose sharply. Immediately, producers made more. New Balance switched from making footwear to making masks.

Now there are shortages of some products because COVID-19 interrupted supply chains.

Soon after Nixon froze prices, there were shortages of gasoline. I drove around, wasting gas, searching for gas stations that had it.

"Price controls are like saying it's really cold and I'm going to solve that by breaking the thermometer," says Henderson. "It's actually worse than that because breaking the thermometer doesn't reduce the temperature, whereas price controls cause actual shortages!"

Venezuela's price controls led to a shortage of food. And yet inflation got much worse. 270%, 700%, eventually 400,000% inflation!

In Zimbabwe, President Robert Mugabe couldn't collect enough in taxes to pay for his grand plans, so he printed more money.

Such drastic inflation hasn't happened here. It probably won't because recently the Fed reigned itself in.

Simultaneous with the announcement that fourth-quarter GDP was pegged at 6.9% it was also announced that the national debt has officially just exceeded $30 trillion.

It is axiomatic that government spending has exceeded government income or we would not be $30 trillion in debt. Inferentially, government spending has exceeded GDP growth over these recent decades to an extent that has produced $30 trillion in acknowledged debt. "Inferentially" because one can infer, albeit unrealistically, that taxes could or would have been prudently assessed to balance the budget if more GDP had been available for that purpose.

$30 trillion in debt (not counting $100 trillion to $300 unscheduled liabilities) is a relatively recent phenomenon in terms of degree. Yes the United States faced staggering national debt after world war II yet entered a decades long error of amazing prosperity. Conventionally, we assess the seriousness of our national debt as a percentage of GDP.

Conventional wisdom tells us that a tipping point of 77% of debt to GDP is crucial. Our debt is percentage of GDP now exceeds 126%.

Obviously a debt 1 1/4 the size of the value of the goods and services produced cannot be paid off in one year but must be rolled over. That means that new debt must be undertaken to pay off old debt and that means that the interest rates for the new debt must not run up too high or the whole system will break down. Enter inflation.

Heretofore inflation in America has been under control (at least by modern rather than traditional standards of reckoning) because America has been the world's largest economy, the world's reserve currency, a superpower, energy rich, internally stable, under the rule of law, with open markets and growing. One need not review every element to immediately react and say, Biden has impaired everyone of these vital elements! Anyway, by 1970s standard of reckoning in real dollars, our present rate of inflation is approximately 17%!

So our government has run up tens of trillions of dollars in debt in the last two decades and this was done by the simple expedient of the Federal Reserve bank printing money. The money is printed by keyboard strike, preferred private elitist banks sell bonds to the Federal Reserve at a guaranteed profit and the Federal Reserve delivers printed money in the form of cipher notations to these banks. The elite are enriched, property values and paper assets soar, the middle class is left behind and a bubble is created.

By definition, bubbles burst. To resort to another aphorism, that which cannot go on will not go on. The only question that remains for us is when will this extraordinary bubble of asset values burst? Put another way, when will the ability of the Fed to sell bonds to real purchasers, rather than to itself, come to a crashing halt as the market decides that the risk of repayment at 126% of GDP is simply too high. Either the bonds will not sell or the government will have to pay staggeringly increased interest rates. One, either one, can trigger the other.

Indeed, any black Swan that strikes the economy can also act as a trigger and burst our bubble. Black swans by definition are unanticipated because they are impossible to predict but one prediction is certain, black swans are coming.

I have been saying for some time that very smart people have gone broke being right at the wrong time. Finally, it is becoming increasingly clear that the time is drawing nearer and nearer for the inevitable to happen, for the bubble to burst, and soon.

Is this time different? I believe it is, I believe the Fed is out of dry powder, the private sector is deeply in debt, the state municipal governments are deeply in debt, there is scarcely any dry powder anywhere and the inevitable retrenchment must therefore be terribly painful and the middle class will pay a terrible price.

Assuming the Republicans come into power in January 2023, the question is whether the bubble will burst before they take over or during their tenure? Either way the Republican Party must be very careful and take a look at how Franklin Roosevelt demagogued the Great Depression into one party rule for 20 years. He did it by passing out subsidies and surviving the world war. Other nations were not so lucky. History tells us that the sequela for economic crisis is often the man on horseback. Beware the demagogue, beware the strongman.

The Democrats have shown that they are not prepared to let any crisis go to waste, corona virus included, a great terrible depression will be just what they need to unleash the tyrant residing like a virus within every one of them. The job of the Republicans will be to get the public to eat spinach while the Democrats are promising dessert. The Democrats have the easier sale. If we fail, we lose the Republic.

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