Some thoughts for the few readers of this website.  A bit of politics perhaps.  Take it or leave it as you wish.

I write of one of my pet peeves can now be better explored in the era of the Internet.  Inflation has been more than an irritant to my existence.  Growing up in the 1950’s and ’60’s and working through the rest of the 20th Century, we struggled endlessly with regular and at times extreme inflation.  It slowed down significantly but still did not stop in the 1980’s and ‘90’s.  I joked, however, that when we were poor and had to borrow money, interest rates were at 10% and then, when we no longer had debt and instead could save, the interest rates became 3%.  Still the earnings on savings seldom exceeded the rate of inflation.  Worse, savings income is taxed which made it even harder to justify savings. 

The wise did not save.  Instead they chose to leverage inflation with debt.  I cursed their irresponsibility when I was younger.  Now I laugh and cry that saving was such a foolish activity.  Still, if we did not save persistently, we could not have dared give up work a few years early.

I knew that inflation has been a perfidious and chronic phenomenon.  In reading old books or reports, one is struck by the value of labor and goods a hundred years ago.  I knew that government could control inflation, and I read in school that government often pumped up the money supply (and inflation) during times of war.  I also know that economic events might cause monetary imbalance, but thought the government should be able to adjust for that.  So why is inflation so constant?

Wikipedia and the Bureau of Labor Statistics have answers.  Inflation, as we know it, is a recent phenomenon beginning in the 1930’s.  Before that the dollar value went up and down, but over decades, indeed throughout the 1800’s, it remained largely constant.  Inflation during the Revolutionary, Civil, and World I Wars pushed down the value of the dollar, but otherwise it bounced up and down, some years very significantly, but generally maintained its value.

The value of the dollar began a serious downward trend only in the 1920’s and then its current and continuing plunge in the post-World War II era.  The common excuse is that “a little inflation” provides stability and flexibility for the Federal Reserve Bank to manage financial crises.  Indeed the current Wikipedia article credits the continuous inflation of recent decades from preventing severe recessions.  I suggest that this section could stand some revision.

I believe that inflation is promoted and has been maintained as another tax, and a very effective one.  Inflation is a gift to the debtor and a curse to the creditor, and since many of us are debtors, we grumble much less about inflation than we should.  The government, being the largest debtor in the world, does itself a huge favor when it decreases the value of its debt, which is monetized in dollars.  Since even currency is really a government IOU, inflation automatically transfers money from the dollars in your pocket to the government every day.

More, the government taxes earned interest and dividends.  Interest and dividends reflect the value of deferring spending.  In theory interest should balance inflation and risk.  One loans a dollar with the expectation of getting a dollar back.  But if a dollar is worth 95 cents next year, one wants at least an interest of five cents to break even.  Today savings accounts pay about 1.5%, but inflation is about 2.5%, so you loose money when you save.  Yet the government taxes the interest as if you made money.  That is part of the magic of inflation.

Now as the government goes into a black hole of debt, there is discussion among “economists” that a higher rate of inflation would be beneficial.  In an era when excessive borrowing by individuals and government has led to a stagnation that cannot end until savings are restored and people are harshly nudged by a lack of “free money” from under-funded government handouts (ranging from social security and food stamps to government pensions) making the debt shrivel through inflation has great appeal to government bankers. 

No one wants to admit that we are and will have to continue for some time paying for what we have already bought.  Instead, the government is busy buying more things we don’t need thinking that it is a shortage of money that is causing the problem.  No one wants to admit that the problem is not a shortage of money but the crazy idea of those who have money that if they invest or loan it they might not get it back.  How could they get such an idea?

The obvious solution is to encourage savings and private investment.  How could this be accomplished?  Perhaps by the government taking and spending less money?  If that is asking too much, it could start by maintaining the stability of the dollar. 

I would be the first to encourage a bit of inflation.  A target of 0.5% seems ideal.  In a crisis the rate could be cut in half to 0.25% or doubled to 1.0% to achieve monetary goals.  Inflation would continue but at a rate where pricing and labor cost decisions could be made free of the confusion associated with the current high rate of inflation. 

Interestingly, there recently have been various expressions of concern for deflation.  Deflation is a natural reaction to the gross over-valuation of assets resulting from the massive over-borrowing of the past decade.  Houses, for instance, became ridiculously over-priced and their value is deflating nicely.  Is it a bad thing that the cost of housing is becoming more reasonable?  Deflation is a consequence, not the cause of the problem.  We may prefer to avoid deflation, but then we should have avoided the wild inflation that led to it.  The solution is not more inflation! 

The government measures inflation, and does so rather badly.  Since the government benefits from inflation, this is no surprise.  During the 1990’s the cost of housing, education, health care, and taxes exploded.  The inflation rate scarcely reflected these increases.  I cannot estimate how much higher the actual rate of inflation exceeds the consumer price index, but suspect it could be as much as double.  With inflation “moderate” is it any wonder that the Federal Reserve Bank kept pumping money into the system creating and ultimately bursting a housing bubble.  At the same time, the government encouraged and supported the mortgage industry “to make home ownership possible for more people.” 

Today, it is de jure to blame our economic stagnation on bankers or hedge funds.  No one wants to blame the borrowers, “they were defrauded,” nor the government, “it is stemming the damage”. 

The lesson to be learned, I guess, is that logic does not necessarily work to one’s benefit.  I made many mistakes leading up to the crisis in 2009.  Most ironic was not investing in bonds of Freddie May.  I knew the rate being paid was too low considering the risks it was taking.  The Wall Street Journal warned of its collapse and suggested that the government might end up making good on its debt.  Why wondered I as a taxpayer would the government be so stupid as to do that?  In fact it happened.  I should have made a bad investment knowing that in fact it would be made good.  Wiser men than I did so. 

My point is that bad policy makes bad behavior that causes great harm.  We as citizens should demand more responsible government.  If we don’t, we bear what we reap.  It is time we thought more about basic philosophy (common sense) than about the benefits of “stimulus packages.”  It would also help if we thought more about supporting ourselves than about government welfare, but I guess if we did that we wouldn’t be entitled to such things as financial aid for our children’s education.  Does anyone wonder why we don’t save anymore?  This is a problem that will take decades to resolve.  Until we do, we may become poorer and poorer.  Better we start getting used to it.

Chuck Strehl