Anybody who has gone to the grocery store or gas station lately has seen that prices are going up. It used to cost $30 to fill your tank with gas — now it is $50. It used to cost $100 to do a week’s worth of shopping for a family. Now it is $150. What has happened? What is going on?
To answer this question correctly, we must examine first: are all prices going up or just some? It turns out just about everything you need is going up in price. Check out the price of milk. Or the price of wheat. In fact, all food and beverages are way up.
So, logic would dictate that if nearly all items are going up in price, something must be happening to the entire economy, not just to one sector of the economy. Many politicians right now are blaming the price of oil on speculators. But what about the price of milk and wheat and all foods and beverages?
No, something is happening to the entire economy, and we must find out what it is. This graph may help.
The above graph shows two things: the rise in commodities prices (the CRB index is an index of most commodities) and the increase in the money supply by the Federal Reserve.
The Federal Reserve is the super-secret agency that controls interest rates and the money supply. The Fed decides on its own either to lower interest rates or increase interest rates. Many interest rates follow Fed policy. So, your mortgage rate may go either up or down (if you have an adjustable mortgage) based on Fed policy.
The Fed has kept interest rates near zero for the last two years, the first time in history this has happened. This is called a “loose money” policy. The Fed is deliberately pumping money into the economy so that people will spend money, open new businesses, etc. But even interest rates near zero have not been enough. The Fed has also engaged in what is called Quantitative Easing. There have been two rounds of QE, and we are in the middle of the second round of this Quantitative Easing.
During QE, the Fed has been buying up toxic assets and using other measures to inject more money into the economy. Normally, nobody would buy these assets — they have literally zero value. But the Fed is buying them. In effect, the Fed is “printing money” by giving money to big banks with the expectation that this money will flood into the economy and help stimulate the economy.
This policy is having three main effects: 1)The stock market is going up because there is so much money on Wall Street. 2)The dollar is losing its value. 3)Commodities are booming in price.
So, the reason your prices are going up at the supermarket is because of the latter two effects of the Fed’s policy, ie, a lower dollar and an increase in commodity prices. Let’s look at why.
Remember back to Econ 101 when they discussed supply and demand? Prices and nearly everything in the economy are determined by supply and demand. If you have a restricted supply and stable or increasing demand, prices will go up. Think about what happened during Prohibition to the price of alcohol. Demand for alcohol was stable but supply was restricted. People were willing to pay more for alcohol. Supply and demand, the price of alcohol went up.
Now think about what will happen if you increase the supply of dollars, which is what the Fed is doing. To make this easy to understand, imagine you are in a gold rush town on the American frontier. Before all the people came with all of their money, a pound of sugar would cost $1. But the money supply has gone up, meaning that there are more and more people with more money bidding for that same pound of sugar. They are willing to pay $2, $3, maybe even $5.
An increased money supply means prices will increase. The same happens on a national scale. You can’t blame Wal-Mart because their suppliers are also charging them more. You can’t blame the gas station on the corner because their suppliers are charging them more. An increased money supply means everything costs more to everybody.
Why is the Fed doing this? Don’t those idiots in Washington know that inflation is the worst tax of all on the poor and the working man?
The Fed is doing this for three reasons: 1)we have a huge budget deficit. The only way to finance it is for the Fed to buy our own debt because nobody else will buy it at low interest rates. Yes, you read that correctly. We are printing more money so that we can buy our own debt because nobody else will buy it. Sad, isn’t it. 2)The Fed wants a low dollar to stimulate exports (if the dollar is low compared to other currencies, people will buy stuff made in the U.S.). 3)The Fed wants to stimulate economic growth and sees the stock market boom as a sign the economy is recovering. Unfortunately, the economy is barely growing, with the latest GDP figures at less than 2 percent.
We are caught in a trap. The Fed is like the little Dutch boy with his finger in the dike, keeping the water from destroying the town. If the Fed stops printing money, interest rates will go up because we will need to increase the yield on our debt to get people to buy it. Higher yields mean higher interest rates. This will slow down the economy in the short run.
There is really one good long-term solution: we need to balance the budget and stop printing money. We need to raise interest rates and cause a short recession. It is kind of like taking medicine that tastes bad to cure an illness. If you don’t take the medicine, the illness (inflation) gets worse. The sooner you take it, the better.
Sorry to be a pessimist, but this probably isn’t going to happen. What is more likely to happen is that some kind of false “budget deal” will happen in Washington that will not really deal with the debt. The Fed will have no choice but to continue to print money. Inflation will continue and probably get worse. A year from now, gas will be over $5 a gallon and milk and cereal and bread will be 20-30 percent more expensive.
Sorry to be the bearer of bad news, but it is our likely reality.
By the way, here is something to think about: what is the price of gas in gold or silver? Actually, the price of oil has gone down in those currencies. So has the price of milk and wheat and just about everything else. This is why so many people are buying gold and silver: in real money (the only money that is mentioned in the Constitution), there is no inflation right now.