Inflation is a man-made crisis. Unfortunately the inflationary crisis that we are currently staging is likely to be devastating. Please allow me to describe how inflation is created and explain why it affects your back pocket.
Inflation represents an increase in the money supply. To illustrate, let's say that you had a relative who passed away and stated in his last will and testament that his money is to be divided evenly among all living relatives. The estate is worth one hundred thousand dollars and you know of only nine other living relatives. One hundred thousand dollars evenly divided between ten people gives you ten thousand dollars each.
Suddenly, forty more people show up and claim to be related to the deceased and can prove it. Even though you did not know of their existence until now, these people are still legally entitled to an equal share. This has inflated the number of living relatives from ten to fifty but the value of the estate did not increase. Therefore, instead of getting ten thousand dollars each you now receive only two thousand dollars because of the inflated number of claimants.
When we increase (inflate) the number of dollars without growing the economy, each dollar then represents a smaller fraction of the money supply just as your inheritance was reduced by the inflated number of legal claimants. This consequently reduces the value of every dollar already in existence.
The reason that the price of an item goes up when inflation is involved is not because the item itself is more valuable but because the dollars being used to purchase that item are now worth less. Consequently you must use more dollars in order to continue buying the same items. A jar of peanut butter adds no more value to your life today than it did ten years ago, it just costs more due to inflation.
Just as you have a credit score based on your ability to repay debts, governments are evaluated as well. My Congress recently increased our own government's credit limit to slightly more than fourteen trillion dollars. The best way to put that number into perspective is to relate it to the U.S. gross domestic product (GDP) which represents the total value of all goods and services produced in this country in one year. Stay with me, this is almost over. Every American needs to know this.
See below for the GDP for three recent years:
2007 GDP - $14.56 trillion
2008 GDP - $14.61 trillion
2009 GDP - $14.25 trillion
When Congress recently raised the U.S. credit balance to $14.5 trillion it is difficult to see how that affects the average American taxpayer. Let's then compare our national debt to an equivalent household income in order to give this some perspective. Using 2009 numbers, $14.25 trillion dollars of GDP revenue divided into $14.5 trillion in total credit means that America will owe slightly over 100 percent of our GDP in unsecured debt.
It is equal to a family earning sixty thousand dollars a year charging up more than sixty-one thousand dollars in credit card debt. Actually it is worse than that since the individual Congressional members who voted for this situation can simply walk away and leave us with the obligation to pay back all of that debt plus interest. It is more like your neighbor running up your entire annual income in credit card debt using your identity and leaving you to deal with the consequences.
As a U.S. citizen I am on the hook for a portion of that $14.5 trillion. In addition to the debt problem, upcoming high inflation as described earlier will likely add yet another burden on our already weakened economy. Inflation and debt are separate issues yet they are connected in this instance because the debt level has spurred my government to inflate the money supply far beyond reasonable levels. Every economist understands this. You can ask any college senior economics major to describe the best way to create punitive levels of inflation. They will simply say "devalue the currency." And then say OK, what is the easiest way to do that? "That is easy" they will reply, "just print up truckloads of money." No wonder foreign nations are quietly moving away from the dollar.
So what is the solution to our current and pending economic subservience? The answer to that question is very simple to state yet virtually impossible to implement: Congress must spend significantly less money. The family in the above illustration would have to greatly reduce lifestyle costs and find additional sources of revenue in order to succeed financially. The way to grow an economy is to put more money into the pockets of citizens, not the coffers of government. Tax cuts perform this task beautifully. If our current Congress refuses to address these difficult decisions then hopefully the next one will. Remember November.
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