Both conservatives and progressives are lamenting the soaring prices in the American economy. Not surprisingly, many of them are blaming the problem on Covid and, of course, on Russia. If only Covid hadn’t hit and if only Russia hadn’t invaded Ukraine, everything in the American economy would be hunky-dory.
Progressives are now criticizing the Federal Reserve for threatening to bring an end to its long-time “easy-money” policy. Sensing that the Fed’s new policy of raising interest rates will throw the economy into recession. Democrats are, needless to say, concerned about how that will play out in the mid-term elections and, more important, how that will affect Donald Trump’s chances of being elected president again in 2024.
Not surprisingly, both conservatives and progressives are refusing to confront the big elephant in the room — the one that is the root of the problem: out-of-control spending by the federal government, which has been going on a very long time.
For decades, the federal government has been spending more than it takes in with taxes to fund both its welfare and warfare. To cover the difference, U.S. officials have simply been borrowing the money. Year after year, the amount of federal debt has been increasing.
But that debt has to be paid off. One way would be to simply raise income taxes. But that’s not a popular thing to do. So another way is to have the Federal Reserve effectively print the money to pay off the debt. As the Fed inflates the money supply, the resulting monetary debasement ends up being reflected by rising prices.
The rising prices are simply showing people that their money has less value. The reason it has less value is because the Fed has inflated its quantity with its “easy-money” policy. The debased money is, in reality, a tax, albeit a surreptitious one. The average person doesn’t realize that U.S. officials are taxing him to pay off their debt. He blames the rising prices on things like Covid, Russia, and gasoline-station owners. From the standpoint of federal officials, that’s the beauty of having a central bank like the Federal Reserve.
The problem is actually magnified by the fact that federal officials continue spending more than what they receive in taxes. That’s because the Fed then has to print the money to cover that difference and to pay for the already-incurred debt.
Let’s engage in a thought experiment. Let’s assume I am receiving an annual income of $50,000 and that I am spending $150,000 per year. After the first year, I have accumulated $100,000 in debt. At the end of the second year, I now owe $200,000. After five years, I owe half-a-million dollars.
I go into my basement and crank up a first-class, very expensive printing press, one that can print up almost perfect copies of $100 bills. I use it to print up money and use it to begin paying off my debt. But keep in mind that I’m still spending $100,000 more than what I’m receiving from my salary. So, I’ve got to print up that $100,000 also, in order to ensure my debt isn’t increasing.
As my newly printed money enters the marketplace, that makes everyone else’s money worth less. That reduction in the value of everyone’s else’s money is reflected by rising prices. In other words, because of what I am doing, everyone else’s money now buys less than it did before. And the beauty of it is that no one knows that I’m responsible. They think the rising prices are because of Covid, Russia, and gasoline-station owners.
Recall something important: For the past many years, every time the federal debt ceiling has been reached, both conservatives and progressives, along with their statist supporters in the mainstream press, have steadfastly and consistently supported raising it. They didn’t have to do that. They could have insisted on the debt ceiling be enforced, which would mean no new federal debt. That would necessarily have forced federal officials to slash spending so that income from taxes would equal expenditures.
They weren’t about to do that. They are still not about to do that. They are so addicted to spending on both welfare and warfare that they simply are unable to break free of their addiction. Moreover, there is virtually no chance that either welfare recipients (including Social Security and Medicare recipients) or the military-intelligence establishment (especially the Pentagon and the CIA and their army of voracious contractors) are going to let go of any significant portion of their welfare-warfare dole. Thus, federal officials will continue to spending vast amounts more than what they bring in with taxes, adding ever-more debt to the $30 trillion of debt they have already accumulated.
But they will not raise taxes to cover the difference and to pay off the debt because they know how people would react to that. Instead, they will continue to rely on the Federal Reserve to print up the “easy” money” that enables them to engage in these antics. But as we now see, prices are soaring across the board and the Fed is threatening to “tighten up.” But if the Fed “tightens up,” how are they going to cover all that massive spending and debt? It seems that after decades of out-of-control spending, borrowing, and inflating, the welfare-warfare chickens might just be coming home to roost.
The post Federal Spending is the Problem with Inflation first appeared on Tenth Amendment Center.
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