The Economic Balloon by T. Edwin Perry
I’ve made no secret of my opposition to the Government’s “Tax and Spend…and Spend” economic philosophy. I believe that it’s bad for the economy, and bad for the long-term stability of this Great Nation. And the reason that what is going on RIGHT NOW in Congress is VERY BAD is that, since they don’t have enough revenue from TAXES, they’re paying the price for their programs by PRINTING MORE MONEY. The result of this action is simple: INFLATION.
Now, when I think of inflation, I think of rubber balloons, and I’m going to ask you to do the same. (If you happen to have a balloon on hand, some of you have kids and might, go get one and try this out for yourself. It’s OK. We’ll wait…Ready? OK, here we go.)
The Balloon represents “Value.” Merriam-Webster’s Dictionary (www.m-w.com) has this as a definition of value: “relative worth, utility, or importance.” Now, keeping the balloon intact, I want you to examine the balloon. It has a certain weight, a certain quantity of latex rubber, and a certain color. It also has a certain amount of AIR inside of it, even without blowing it up. We’re going to give that air a name, and that name is Money.
There was a time when our Money in the United States was based upon the value of gold. In fact, our old dollars were called “Gold Certificates” and were worth a specific quantity of gold in exchange for that certificate. In 1971, our Government took us off the “Gold Standard.” Why? We needed more money, and didn’t have more gold, so we unhooked our money from gold and simply PRINTED MORE MONEY. Remember the definition of Value? Relative Worth: If the amount of gold remains the same and the number of dollars increases, the VALUE of that money goes down.
Let’s go back to the balloon now. Remember, it already has air in it, and that air is money. So, we print more money, the value of money goes down, but the value of the balloon remains unchanged. It has the same amount of rubber. It has the same weight. It has the same color, so it needs more money inside of it to remain the same. Take a breath and blow into the balloon. What happens? IT INFLATES.
I did a simple Google Search for an inflation calculator. I found one that is actually sponsored by the US Government at http://data.bls.gov/cgi-bin/cpicalc.pl and there are others that are privately sponsored that are pretty close. Let’s make a comparison between 1979, just thirty years ago, to today. According to this calculator, $1 in 1979 is currently equal to $2.97 in 2009. By that measure, simple logic dictates that things should cost nearly 3 times as much today as it did in 1979. Lets take a look at some examples of this.
The Average cost of a house in 1979: $58,100. Based upon the inflation calculator, the average price of a house in 2009 should be $172,835. (It’s not. It’s currently $193,725 based upon a simple average of the regional median prices for 10/2009 per the National Association of Realtors. (http://www.realestateabc.com/outlook/overall.htm)) I thought we were in a housing crisis?! According to these figures, after adjusting for inflation, home prices are still up over 12%. (source for 1979 prices: http://www.thepeoplehistory.com/1979.html)
The Average cost of gas (per gallon) in 1979: $0.86. Based upon the inflation calculator, the average price of gas in 2009 should be $2.56 per gallon. (I paid $2.52 per gallon this morning. That’s pretty close.)
The Average monthly rent in 1979: $280. Based upon the inflation calculator, the average price of rent should be $830. Depending on where you live in the country, that’s either right in line or VERY low, especially in urban areas.
Now for a big one: The Average Household Income in 1979: $17,500 per year. Adjusting for inflation, just to be at the same level as 1979, you need to earn $52,059 per year. And that’s just to be AVERAGE! Ouch!
Inflation grows relative to the amount of money printed to the value of goods, services and commodities that are available. As more money is printed, inflation goes up. Our Government has been printing more and more money to pay debts over the past 2 years than in the previous 15 years. (Look at this pretty chart: http://www.chartingstocks.net/2009/03/chart-of-the-us-money-supply-1917-2009/) Based upon this information, they’ve nearly DOUBLED the money supply in just TWO YEARS!
Let’s go back to the balloon, shall we? Let’s say that the balloon is all the value that there is. Blow it up to a comfortable size. That’s the amount of money in 2007. Now DOUBLE IT. What do you think will happen to the balloon?
According to our Inflation Calculator, the dollar has inflated by 4% since 2007. That means that what cost you $1.00 in 2007 will now cost you $1.04. However, I believe that this indication is skewed as a result of Government involvement in our pricing system. After all, if you DOUBLE the money supply, relative prices should also DOUBLE. Paid $1.58 for a loaf of bread in 2007? The price should now be $3.16. Gas for $3.00/Gallon should now be $6.00/Gallon. That, after all, is how economics works, but the Government restricts these changes because, well, we all saw what happened in 2007 when gas prices jumped to $4/Gallon. People panicked. Businesses began to close. The cost of goods increased. So, instead, the Government increases prices incrementally, to avoid panic. After all, if that $1.58 bread only goes up to $1.65, you won’t even notice it. But, for the sake of argument, let’s say that $1.58 loaf of bread was 1979, and we adjust it for 30 years. Now, its price is $4.70. Do you notice it now?
It’s for these very simple reasons that people like myself are so against the uncontrolled increases in Government Spending, particularly when they continue to simply PRINT MONEY to pay the debt. These influences on inflation have LONG TERM consequences that reach far beyond the current administration, and are very difficult, if not outright impossible, to correct. Right not, the OPEC nations are talking about moving away from the US Dollar for oil sales. If that happens, how do you think it will influence the price of gas, or electricity, or goods at the store? Right now, our money is worth LESS than Canada! Remember when Canadian Money was worth HALF or less than U.S. money? Remember when the Mexican Peso was a joke? We’re not laughing so much today, are we?
In short, if I can say that after two full pages of arguments, Inflation is bad for the economy. Left to its own devices, it creates social chaos that can literally bring this country to its knees. Before that happens, we need to DEMAND that our Government become more RESPONSIBLE with its spending and to STOP PRINTING MONEY. We’ve got to get this Inflation under control before our entire balloon pops.
While I agree wholeheartedly that inflation is bad for the economy, there *is* an advantage to inflation. If you take a mortgage out today, and inflation drives the value of a dollar down (and hopefully forces incomes up in an attempt to “stay even”), it gets cheaper to pay off your mortgage. In other words, if you have a mortgage payment of $1000, and 2019 dollars are worth only 50% of a 2009 dollar, then it costs half as much to pay your mortgage payment.
But I’d never claim this as a reason to support or encourage inflationary economic policy.
But, therein lies the rub. There’s a big IF about the income level of American’s trying to “Stay Even.” Lynn commented on this on my posted link on Facebook as follows: “While the prices have increased pursuant to inflation, unfortunately, income has not. The median income in the US is $50,000 and is not increasing to match inflation. In fact, based upon inflation, over the past 10 years median income has decreased. In 1999, the median income was $40,800, perfect for inflation.” Also, consider that, for the first time since 1975, people on fixed Social Security and Welfare Benefits will not be receiving a Cost of Living increase for 2010. As such, if the cost of goods or services increase relative to the inflation incurred over the past 2 years, which is threatened by the detachment of oil prices to the US dollar, then those on fixed or annuity incomes will be most significantly impacted by this inflation. Of course, I’m sure thre are those who will benefit on inflation based upon currency exchange investments. People who bought Euros three years ago could stand to make a fortune selling them in the next year, but that fortune would be essentially worthless a year later.