Inflationomics

A Review of the Future

During the past six years, I’ve written about the economy and what I expect in the future, and now seems like a good time for a review.  So, let me try to pull together my various comments into one piece.

  1. Government expansion occurs during both Republican and Democratic regimes. Both parties have their own agendas and they both require more government intervention. Whether it is a war on drugs, or a war in Iraq, the government needs more money.  It continues to find new ways to spend more money for both social policies and international military adventures.   In short, it’s the growth of government that comes first and the need for more money that follows.

  2. To remove the constraints on government spending, the U.S. government went off the gold standard, removed all gold and silver coins from circulation and adopted a purely fiat currency (backed only by the government’s ability to tax) and continued to print more currency units, seemingly at will.  See the 1970s.

  3. Taxes have been raised to the limit of what people can afford and now, with Obamacare, beyond the limit.

  4. When tax revenues couldn’t cover government spending, the Treasury issued government securities (bonds, notes, bills, etc.) to borrow more money.  For a while, many individuals, corporations, and even foreign governments purchased these securities, allowing the U.S. government to expand further (beyond its means).  Eventually, even this wasn’t enough, so…in steps, the Federal Reserve Bank (actually, they’ve been stepping in since 1914) started buying up the Treasury obligations that no one else wanted.

  5. The Fed was established to manipulate various aspects of the economy and provide liquidity (money) to the U.S. federal government.  And so, when the federal government needs more money, the Fed prints it (quantitative easing).  And when the federal government gets to the point where it has so much debt that it can’t pay it off (the point of no return), the Fed helps its creator handle the debt by printing money ad infinitum and purchasing the debt…until so many dollars are printed that they become worthless.

  6. In short, there is a limit to what the Fed can do. It can inflate the money supply until prices rise and people come to expect more inflation.  When you have a printing press, all problems look like they can be solved with a newly printed currency unit!

    It can lower short-term interest rates (as long as the dollar is used), thus punishing savers who make capital creation possible.  Unfortunately, the Fed can’t create new wealth.

  7. It is the combination of currency printing and legal tender laws that forces U.S. citizens to use an ever-depreciating dollar.  This same combination allows the U.S. government to pay off its debts with newly printed dollars.  The problem is that non-U.S. citizens, who hold billions of U.S. dollars, are not subject to the legal tender laws and may choose to off-load their dollars at some point (very quickly) by purchasing tangible assets (like 1 Chase Manhattan Plaza), or by buying a better currency if one comes along.

  8. The Chinese, for example, are using their U.S. dollars to buy up natural resources around the globe—smart move!  They are also side-stepping the U.S. dollar by making deals in their own currency, the yuan/renminbi.

  9. It’s just a matter of time before the world (the U.S. dollar is the world’s reserve currency) becomes disenchanted with the Fed’s policies, the U.S. government’s inability to control its spending, and the dollar’s inability to maintain its purchasing power, and decides to dump dollars and adopt an alternate currency that is backed by something of value; i.e., gold.

  10. The need to fight foreign wars for oil has been delayed due to some technological advances; i.e., fracking, 3-D printing, and at some point, perhaps a non-manipulative currency.  Wouldn’t it be ironic if technological market advances could find a way to rescue the dysfunctional U.S. government from itself?

  11. The U.S. government debt ceiling battle is just a charade.  Congress has no choice but to raise the debt ceiling and keep on spending until they can’t borrow or print any more money.  They are trapped by all the promises they’ve made for the past 100 years and the ones they continue to make daily.

  12. There will be no tapering.  In fact, at some point, the Fed will pick up its pace of debt purchases from too-large-to-fail entities from around the world, especially the U.S. government.

  13. Conclusion: Individuals would be well advised to acquire some physical gold, silver, and other tangible assets that can be used as money until a currency reform takes place and the U.S. government is forced to get control of its spending.  In the meantime, the U.S. government will spend any amount of money to keep people from abandoning the U.S. dollar (including manipulating market prices of gold and silver and trying to put competing currencies out of business) and to keep people from forcing the government to live within its means and shrink its “power” to manipulate the world.  While the market will ultimately win, governments around the world will try to bend the markets to their will with various rules, regulations, and manipulations, making life more difficult and turning investors into speculators in the short run. In short, it’s going to get ugly before it gets better.

Robert Jackson Smith

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