How government controls inflation

The figure $17 billion is probably stuck in the interested  public’s mind. It represents, of course, the amount the United States government owes to various entities beyond its current ability to pay.

Let me correct that. Naturally, it could pay the whole thing to debt-holders – foreign and domestic. The problem is we would have to “create” the money to pay the amount we are indebted, and in doing so we would create a vast amount of inflation. Inflation is the rate, or amount, your dollar loses in buying power. If it happens slowly, over time, it generally does not cause panic.

During the 1950s, the inflation rate was about 1.5 percent. To figure the number of years it will take for your currency to lose half its value, you divide the annual rate of loss into 72. For example, during the last Carter years, when oil prices were helping to push prices up over 12 percent, if that rate had continued, dividing 12 into 72, our currency would have lost half its value in six years.

As you know, the most notorious inflation of the past 100 years happened in Germany during the early 1920s, when, for example, it took a trillion marks – a mark was formerly worth something around a dollar – to mail a letter. It was said that housewives who had to use laundromats had to carry more weight in their baskets in currency than in unwashed clothes. What that horrific inflation led to is well known to most of us.

What all this means is that we have to be very careful when we borrow money or we could find that the dollar erodes faster than anyone expects. So why, you might ask, does the Federal Reserve allow any inflation at all by issuing more dollars than can be backed by real assets? Their argument is that a “small” amount of inflation is a spur to employment and a strong economy. The worry is that what starts out as “tame” or “acceptable” inflation gets out of hand and cannot be reined in.

This is more likely to happen when there is another factor involved, such as we saw with oil in the 1970s. If I’m not mistaken, even though the economy was “booming” during World War II, prices were held down by government fiat. Would we accept a federal noose around prices if inflation got out of hand?

Historically, farmers have been in favor of free-moving prices, while consumers of goods – individual or commercial – do not like to see prices get out of hand. One of the arguments offered by Detroit when the Japanese started exporting cars to the U.S. was that Japanese pricing would be a threat to the American economy. The same has been said of the vast amount of U.S. manufacturing that has been shifted to China, Korea, Singapore and Japan. The fact that at the same time that American workers in those industries have been losing jobs, prices to consumers have been holding steady or even dropping.

What all this means is that the responsible powers – the Fed, the White House, and Congress – will have to act carefully to make sure prices do not get out of control. That means saying “no” to those who want more money. Programs cannot be funded at a rate faster than the increase in inflation.

Bud Stevenson, a stockbroker, lives in Fairfield. Reach him at Bsteven254@aol.com.