Prices rising in April this year over 4% from April of last year shocked many people because Americans have enjoyed decades of very low levels of price inflation. Should you be concerned about higher inflation?
A one-month rise in prices isn’t a trend and if it were, it is nothing like the 30% increase in 1778 or the 20% rise in 1917. By world standards, the U.S. has enjoyed low levels of price increases. Prices rose almost 1,700% in Germany after World War I and forced people to fill wheelbarrows with Marks to buy a loaf of bread. In Venezuela in 2018, prices rose over 65,000%.
Still, a 4% increase in prices across the board means that most people are 4% poorer than last year. Have you noticed that while you are poorer, the stock and real estate markets are setting records highs? Do you think there might be a connection? There is and it’s the Federal Reserve.
If the money supply remained constant, prices in general would fall as production increased because the same amount of money would need to buy more goods. Make this truth your own and you will know more than most mainstream economists about money. Of course, wages are the price of labor, so wages would decline as well, but lagging behind the slow fall of prices, so that the purchasing power of wages would rise each year. Also, any cash you kept even in your freezer, would increase in value at the same rate as deflation.
Inflation works the opposite way. Wages often rise a year after price increases, so workers grow continually poorer. The largest decline in real wages in the U.S. happened from 1972 through 1990 as prices rose faster than wages. Average hourly wages fell from almost $25 in 1972 to just over $19 in 1994. All other things being equal, U.S. workers became poorer for 20 years because inflation erodes the purchasing power of cash.
Price inflation slams the poor hardest because they own few assets, which increase in value during periods of high inflation. Owners of stocks and real estate enjoy huge increases in the values of those assets that offset their falling wages. Those who invest in bonds or treasuries lose money because price inflation reduces the real interest rate they receive. If the poor have assets, they’re usually cash in the bank or under a mattress and cash loses value at the rate of inflation.
If deflation benefits the poor and inflation damages them, why does the Federal Reserve work overtime to create at least 2% price inflation in the U.S.? The simple answer is that the Fed fancies itself as the driver of the economy. To the Fed’s dismay, most voters think the President controls the economy. It has worked for a century to convince people it grasps the steering wheel and the pushes on the gas pedal.
Most mainstream economists and Fed governors believe that by increasing the supply of money in the economy, they can boost consumer spending that they erroneously believe fuels the economy. If the economy overheats, by which they mean exceeds their 2% inflation speed limit, they simply reduce the rate of growth of the money supply and the economy slows down. The Fed increases the money supply by reducing interest rates so people will borrow more or by purchasing bonds from banks so that banks will lend more. But when the Fed increases the money supply, most of the new money goes into the stock and bond markets and real estate, making rich people richer. The new money that goes to consumer spending merely causes prices to rise and impoverishes the poor and middle classes.
History shows that the Fed is wrong. Its monetary policies usually make booms soar higher and busts dig deeper ditches than they would have if the Fed had done nothing. Fed money printing ignites unsustainable expansions that crash on average every eight years. Before the Fed, the U.S. never suffered long, deep depressions like the Great Depression of the 1930s or the recent Great Recession of 2008.
A few years ago, Jake Meador, the editor-in-chief of Mere Orthodoxy, used the Great Recession to explain why his generation embraced socialism:
“Many of us graduated in or shortly after 2008 and found ourselves chasing after jobs which no longer existed due to the Great Recession and struggling to service the student loan debt we had taken on because we were confident of securing a good job post-college. We saw—and lived!—what a lack of regulation of banks did to the market.”
Jake got the nonsense that a lack of bank regulations caused the crisis from the socialist mainstream media. The truth is that banking was and is one of the most highly regulated industries in the US. Fed monetary policy caused the Great Recession, not greedy unregulated bankers. Jake’s sloppy thinking drives home the need for young people to understand the true causes of inflation and recessions. Otherwise, they become suckers for socialism.
What can we do to protect ourselves from Fed-induced price inflation? We do what rich people do: Buy assets such as stocks, real estate, or gold that rise in price when the Fed floods the country with counterfeit money. But to do so, we must spend less and save more. Then invest those savings in the right assets. Many brokers will allow us to invest with as little as $50 to start. Or we can buy gold coins smaller than an ounce. It’s not a perfect solution, but it’s the best option we have.
Roger D. McKinney lives in Broken Arrow, OK with his wife, Jeanie. He has three children and six grandchildren. He earned an M.A. in economics from the University of Oklahoma and B.A.s from the University of Tulsa and Baptist Bible College. He has written two books, Financial Bull Riding and God is a Capitalist: Markets from Moses to Marx, and articles for the Affluent Christian Investor, the Foundation for Economic Education, The Mises Institute, the American Institute for Economic Research and Townhall Finance. Previous articles can be found at facebook.com/thechristiancapitalist. He is a conservative Baptist and promoter of the Austrian school of economics.