Who here likes when the prices of things you buy goes up? Do you enjoy spending more money to buy the same amount, or even less, goods? I imagine most people don’t like it, but we will have to get used to it. When it comes to our wages, homes and stock market investments, we love inflation. However, when it comes to food, oil and the necessities of life, we loathe inflation. Unfortunately, despite what the Keynesians may say, we cannot have it both ways. As price inflation continues, the price of everything we buy is going up, but as usual during times of inflation, wages are staying flat, or worse. Unless you are in pole position to take advantage of the freshly printed dollars (Wall Street banks come to mind) you are having to shell out more of your money for the same amount of goods and services. This is the deliberate policy of inflationism as advocated by the likes of New York Times columnist Paul Krugman, Democratic President Barack Obama and Fed Chairman and Republican Ben Bernanke. They are by no means the only ones advocating inflationism as the solution to all the world’s ills, but it gives you a taste of the bipartisanship that Keynesian thought enjoys. To them, all of our economic problems can be solved by the printing press. Many have pursued this policy in the past with predictable and tragic consequences.
For those who are unaware, the dollar is still considered the reserve currency of the world. It used to be said the dollar was as good as gold, because, well it was. Prior to the closing of what was known as the gold window in 1971, foreigners (mostly central banks) could exchange their dollars for gold. There was even a time when mere American commoners could exchange their dollars for gold. The gold standard, although imperfectly run by the US government, created a much more stable, honest system. If it were to be reinstated (highly unlikely) there are significant improvements that could be made to make it far better than it originally was.
In any event, decoupling the dollar from gold sent the world into uncharted territory. Except during times of war, the international monetary system always had at least one major currency backed by gold. Now, no major currency is backed by anything more than the promises of politicians. Politicians are only good at one thing, spending other people’s money. In most cases, they don’t take in enough taxes to satiate their thirst to spend. This is when the central bank comes to the rescue. This supposed “independent” organisation is anything but independent. Central banks are only good at one thing, inflating the currency for the benefit of the government and well-connected banks and multinationals.
By printing ever more money, politicians can go on spending with virtual short-term impunity. They no longer need to raise unpopular taxes. They can promise the electorate the moon, so long as they can continue to print their paper rocket ship. Unfortunately, we live in a world governed by economic laws. One such law says that printing ever more money (inflation) weakens the currency, causing a general rise in prices. We are seeing (and have been for a long time) the effects of an inflated currency all around us as commodity prices (among other things) reach all-time highs. There are those, like the Federal Reserve and its apologists, who don’t believe inflation is a problem. Recently, NY Fed president William Dudley told an audience that inflation wasn’t a problem, because get this, iPads are getting cheaper. To which someone in the audience reportedly came back with the brilliant “I can’t eat an iPad.” The sheer arrogance, and perhaps ignorance, of Mr. Dudley’s statement should worry us all.
These Fed bureaucrats are clueless, or worse, they are deliberately destroying the value of the dollar. In any event, the market will eventually catch up to the situation, and in many ways it already has. When the dollar’s status as the world reserve currency comes to an end, the US economy will tank. For those who thought the dot-com bubble, or the financial crisis 3 years ago were bad (which they were) then prepare yourself for something much worse. Right now, numerous entities are diversifying out of the dollar. They no longer believe the US government’s promise that they will ever pay back their debts.
As the greatest holder of US debt, China has been graciously buying America’s number one export, inflation. This is slowly coming to an end. With fewer central banks buying US debt, the consequences of American profligacy will stay at home, in the form of drastically increasing prices.
Oil is currently priced in dollars meaning any state or multinational must use US dollars in order to purchase it. This is a great boon to the US as it allows the US dollar to limp on, since many rich countries import a lot of oil. This agreement is slowly coming to an end. Oil-rich states are increasingly weary of accepting rapidly devaluing dollars and are diversifying out. They are increasingly willing to accept other currencies. This will perhaps be the most noticeable change in the short-term, rapidly increasing prices for oil-products, like gas.
As stated above, these aren’t events that are going to happen in the future. These are taking place as I type, and have been for awhile. It is never too late to reverse course. However, the longer we wait, the harder it will become. Like an alcoholic, the first thing we must do is exit the denial stage. As a nation, US citizens must determine the role they want government to play in all of our lives. If we want a globe-straddling empire that costs trillions of dollars and regularly creates new enemies of otherwise friendly people then we must be willing to accept the consequences; less money to address domestic issues and perhaps even more violence directed at US citizens. Likewise, if we think the federal government is the best way to address the major problems facing the United States today, then we will be sorely disappointed and made even poorer in the process.