Anyone who doubts the complexity behind a simple thing like money should try to explain money to a 5 year old. What it is, where it comes from, and who manages it goes from very simple to mind-bendingly complex quickly.
Money has traditionally served two purposes; it’s a store of value, or a way to park stored value, and it is a medium of exchange. These two concepts have always existed since a store of value can and was something obvious, like food, and the same store can be subdivided and used as a medium of exchange. You can exchange a part of the food for something to drink.
Over time, as economies grew more complex, what came to represent a store of value and a medium of exchange was, and still is, dominated by national governments and in the United States, it is the dollar. Fortunately for Americans, lots of other people have had very dysfunctional economies with plenty of wars, famines, and genocides, and so the dollar has been used as a ‘reserve currency’ or store of value and consequently a medium of exchange, for decades. The dollar has represented stability in an unstable world.
But, due to the ongoing and unmistakable destruction of all of the valuable and legacy parts of American heritage, the value of the dollar is being downgraded with excessive borrowing and printing of dollars by the US federal government, which is the entity that controls the dollar, and with that habit and practice, the status of the dollar as the reserve currency of the world is beginning to erode. There are two emerging credible alternatives; the Chinese currency, and digital currencies like Bitcoin.
What this will mean in the long term is not good. Normally, unrestricted borrowing and print of money means horrible price inflation in which you go to the store and buy milk one week and it costs $2, and then you go back the next week and it costs, $200, and then you go back the next week, and there is no milk to buy. This scenario has happened in many countries all over the world. Climate change and institutional racism fades in to the background as a pressing concern and keeping your house running dominates discussion. But by then it is too late.
Here is a part of a very sobering discussion with economist David Strickland. It isn’t prophesy; its speculation, but it is rooted in history and economics. These are, like the sciences, things we should rely on, and not just when we like what they tell us. The US government is putting everyone at risk with its irresponsible policies and by printing trillions of dollars and pouring it out. Prices are going up already, and if you own a home or stocks or nice stuff already, great! But if you are young or poor or both, this government is putting you and your nation and your future at real risk.
And modern monetary theorists say, well, look, the Federal Reserve can print money and the US government can borrow all it wants at effectively a negative real interest rate. The interest rate on five-year, carefree, inflation protected securities is -1.7 percentage or so. So, at a privilege, if I buy effective security for five years, for the privilege of letting the US government use my money, I’m losing 1.7% a year in real terms. Or I would expect to be, just based on expected inflation. And that’s a great deal for the US government, but it’s not a great deal for the creditors of the US government. So eventually we’d lose the dollars. And if you read publications close to the state council of the Chinese government, the Chinese Communist Party, I’ve read article after article saying the US, because it has a global reserve currency, can get away with it for a certain period of time but eventually that’s going to wipe out the dollar’s role as a reserve currency, and that’s the end of American power.
That’s one way things could happen. Another way things could happen is that inflation really takes off. And that creates so many distortions that eventually the Federal Reserve is forced to raise interest rates, call a halt to this, and then we have a real bind because if we have US debt equal to our gross domestic product, and it’s increasing at 20% of GDP a year, for every percentage point that our debt increases, we pay another $250 billion in interest. Let’s say we go up three or 4%. Suddenly our interest builds us up by another trillion dollars and exactly at the point where we are forced to reduce borrowing, we also have to increase spending to pay the interest. In other words, we look like Italy during its economic crisis of several years ago. We look like a third world country, look like Turkey and at that point, we’re in a world of pain.
So those are the two principle outcomes. And I don’t think any of this will happen at a one-year horizon, but at a five-year horizon it’s very possible. And if you can imagine the United States will wipe something like a quarter of personal income over the past year is coming from government cheques of one kind or another, and you’re forced to cut that back. The hardship on Americans and the shock to American politics would be horrendous, very difficult for any of us to conceive.
The full article can be found here: https://lawliberty.org/podcast/prospects-for-inflation/