Ronald Reagan accurately warned us in 1984 to be vigilant against inflation because it can come, “like a thief in the night to rob our savings, rob our earnings, and take the bread off our tables.”
For this reason, the government is usually on guard against the threat of inflation. In the simplest terms, this is normally done by controlling the amount of money in circulation. It’s really a matter of supply and demand. If everybody has more money in their pocket to spend, then too much money chases too few goods and the currency becomes devalued. This, in turn, drives up the cost of everything from gasoline and furniture to food and the price of a ticket to Disneyland.
President Obama’s proposed budgets over the next two years call for spending on an unprecedented scale. His proposed budget has a funding shortfall of almost three trillion dollars over the next two years, an amount equal to a staggering 12% of the entire US gross domestic product and twice the size of the worst deficits on record. Indeed, President Obama’s own budget people are predicting budget deficits during his time in office to exceed that of all the other presidents combined from George Washington.
So, Len, just how does the government plan on paying for all of this?
In essence, the government has two choices, massive tax increases or high inflation. Naturally, the government is going to take the political path of least resistance.
Indeed, in order to pay its massive bills the United States will have no choice but to abandon its commitment to fight inflation and ramp up the output of the Treasury printing presses. This, of course, will end up flooding the economy with trillions of additional dollars that will not only drive up the prices of goods and services, but also punish fiscally responsible individuals by diluting the value of their dollar-denominated savings and retirement accounts.
Simply put, inflation is taxation without representation. Alan Schram uses the example of a man earning 5% on his savings account, who ends up in exactly the same financial position whether he pays 100% tax on his interest income with zero inflation, or zero income taxes with 5% inflation. And Schram correctly observes that if Congress tried to pass a 100% tax on anything, the public would be marching on the Capitol steps with pitchforks and torches.
The US government’s unfettered spending plan is clearly unsustainable with respect to current taxation rates. But instead of suffering the consequences that would come with overtly increasing the taxes necessary to support these insane budgets and associated bailouts, Congress will be content with letting inflation do its dirty work. For that reason I believe inflation rates exceeding those seen during the mid to late 1970s are inevitable.
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