Prices are rising…and they are rising quickly.
As the economy rebounds from the pandemic, demand is increasing and that is contributing to price increases across the board.
However, that is not the only variable driving prices higher. There are a number of reasons. Supply chain issues, increasing hourly wages to attract workers, fiscal stimulus, and the gigantic Federal Reserve balance sheet are all causing higher inflation.
And we are all paying for it.
Companies like Chipotle are increasing their wages to attract workers and are now passing those increased labor costs onto consumers, who will now be paying more for that burrito bowl with queso and guac they’ve come to love.
That’s just basic economics.
Then there are the actions of the Federal Government. You can always count on the Swamp to screw things up.
The Federal Government has spent trillions of dollars in supposed relief payments to ostensibly help Americans who are struggling due to the pandemic. But that, of course, is only a small part of the spending in those pieces of legislation.
Because the Democrats, and even some Republicans, will never let a good crisis go to waste.
The Federal debt is now hovering around $28 trillion, and budget deficits are going to be over $1 trillion for the foreseeable future. Interest on the debt will soon become one of the highest expenditures for the government, and as inflation rises, so will interest rates, and that isn’t good for the government because it has been borrowing at low interest rates, but those days are numbered.
If it was you and me, and we had that much debt, we would be forced to cut our spending and save, but the Federal government doesn’t have the same incentive because they can always implement new taxes and print more money.
Speaking of printing money, the Federal Reserve has built up an $8 trillion balance sheet by buying trillions of dollars worth of bonds, thus increasing the money supply to epic proportions.
The more money that is pumped into the economy, the higher the risk for inflation. The Fed will have to have perfect timing to sell those bonds and take money out of the economy to avoid high inflation.
Unless they are clairvoyant, there is scant chance of that happening.
Historically, it is the money supply that is the main driver of high inflation.
The great monetary economist Milton Friedman once delivered a lecture in which he said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
History is replete with such examples of the “monetary phenomenon.”
In ancient Rome, a massive welfare state was instituted. To pay for those welfare programs, Roman emperors raised taxes and increased the money supply by debasing the silver content in their coins. Hyperinflation followed, leaving economic devastation in its wake.
In Germany during the 1920s, taxes were high, and the German government printed large sums of money to pay off the budget deficits they had accrued during World War I. Just like in Rome, hyperinflation followed, as well as food shortages and massive unemployment. The hopelessness and pain inflicted on the German people helped lay the groundwork for the rise of Hitler and the Nazis.
In a chilling report, Deutsche Bank issued a report titled Inflation: The defining macro story of the decade.
The report ended with these ominous words: “Throughout history, we have seen inflation-spurred panic manifest in social, political and economic turmoil. The looming question is how Americans will deal with the strong possibility of a post-pandemic inflation environment the likes of which could be unprecedented in our nation’s history.”
Chilling words indeed.