I once heard someone say, “Inflation is caused by rising prices.” Actually, that’s putting the cart before the horse. An increase in the Consumer Price Index is one result of inflation, not its sole cause. Inflation is the decline in the purchasing power of the dollar. The cause of inflation is an increase in the supply of money and credit at a rate greater than the nation’s output of goods and services, in which case relatively more money is chasing relatively less output.
Spending for Social Security, Medicare, Medicaid and a host of other social spending “entitlements” already represents more than 2/3 of all federal spending. On top of that, trillions have been spent on extraordinary programs during the pandemic to stimulate the economy and relieve hardship. This has driven federal spending to unprecedented, stratospheric levels far exceeding revenues and our tax capacity. Joe Biden’s Build Back Better spending spree is only compounding the problem.
To cover these multi-trillion dollar budget deficits, Federal Reserve purchases of Treasury Bonds have propelled the national debt to record levels and bloated the money supply. The ensuing inflationary effect is a major factor in the 6.2% rise of the CPI for the year ending in October 2021, its highest in three decades.
The CPI estimates changes in “the cost of living” by tracking prices for a market basket of goods and services. Inflation’s devaluation of our currency explains only part of the change in prices for items in that market basket. Relative prices for each of the items within the CPI go up or down because of particular factors of supply and demand, raw materials, productivity, technology, and the effect government regulations, mandates and subsidies that pick winners and losers.
For example, while the overall increase in the CPI was 6.2%, the price of meats increased 14%, fruits and vegetables 1.7%, rent 3%, gasoline 50%, fuel oil 59%, utility-pumped natural gas 28%, apparel 4%, used cars and trucks 26%, alcoholic beverages 2%, and college tuition 2%. The price of some items actually went down, like toys -0.4%, smart phones -21%, and air fares -4.6%.
Inflation explains very little of the sharp in increase in fossil fuel prices, above, which now and in the future will rise as the consequence of Biden administration policies shutting down pipelines, blocking domestic development, discouraging fracking, and increasing our reliance on foreign sources.
Milton Friedman, the oracle of monetary policy, must be spinning in his grave when Biden and Nancy Pelosi preposterously claim that the Democrats’ massive spending bills will have “zero cost.” As Friedman explained, the cost of government is what government spends, regardless of whether that spending is funded from taxes or borrowing. And every dollar of our money that government spends, crowds out spending and investment by people and businesses in the private sector, ultimately the only source of income, wealth creation and government largesse.
When the supplying power of American businesses and workers grows the economy with real output of goods and services, that creates legitimate consumer demand. When the government runs trillions of dollars in federal deficits, drives up the national debt and finances spending sprees by borrowing from the Federal Reserve and expanding the money supply, that creates artificial demand that historically leads to inflation.
Transitory supply-chain shortages and obstacles explain some of the recent price increases. But counter-productive government policies also share the blame. The U.S. Department of Transportation has been asleep at the switch.
Democrats in the one-party state of California are culpable for the waiting line of freighters off the West Coast and containers stranded in ports because of California’s radical environmental restrictions on trucks and its blacklisting of non-union truckers that disqualify 40% of the rolling stock.
On November 19, House Democrats rammed through yet another Build Back Badly massive spending bill chock full of numerous goodies on their wish list. It’s laden with budget gimmicks, like pretending programs will be phased out in the future, when they intend no such thing. They claim it’ll only cost $2 trillion over a decade. Objective analysts score it at more like $5 trillion. When it comes to spending, they have no limiting principle. Then, spending $10 trillion must be twice as good as spending $5 trillion. But this is all for show. They know this bill won’t pass in the Senate. It’s just another opportunity to demonstrate their generosity with money we don’t have and seduce more voters with government dependency for life.
When Franklin Delano Roosevelt was elected in 1932, federal spending was 3% of GDP. In 2000, the last year of Bill Clinton’s presidency, it was 18% of GDP. Now it’s 31%.
At the peak of World War II when the US was fighting for its literal survival, the Gross National Debt was $260 billion, which was 122% of GDP. In 2000, the debt was $5.6 trillion, which was 57% of GDP at $10 trillion. In November 2021, at $29 trillion, it was 126% of GDP which was $23 trillion or $87,000 for every man, woman and child in the country. And that doesn’t include a total of $75 or $100 trillion of unfunded government liabilities in the next half century.
This is madness en route to insolvency.
Longtime KOA radio talk host and columnist for the Denver Post and Rocky Mountain News Mike Rosen now writes for CompleteColorado.com.
