Inflation is very simply the debasement of the currency. Your money buys less stuff. Inflation starts out barely noticeably — and is often welcomed as a sign of growth and prosperity. But like kudzu – that fast-growing green vine that has taken over many landscapes – the devastation takes a while to reveal. With kudzu, at first your trees and bushes look green and healthy, but the vine slowly squeezes its host plan to death. Same thing with inflation!

Inflation results when too much new money is created. At first, that creates the feeling of a surge of prosperity, as we saw with the stimulus payments and business bailouts of last winter. But suddenly, with more money chasing fewer goods (think supply chain problems) prices start to rise. The buying power of those dollars declines. You need more money to purchase the same goods. That is inflation in action.

And that declining buying power quickly is recognized – even without monthly statistics about rising consumer prices. You don’t have to be an economist to realize that your dollar doesn’t go as far, that your food costs are going up, that it costs more to fill up your gas tank.
But that’s just the tip of the iceberg. As all things cost more, workers demand higher wages to compensate. That’s happening now — and will continue into the future. Many labor contracts and payments, including Social Security, are tied to the inflation rate. So, higher inflation gets embedded into the economy.

Inflation – A Dim Memory
Few remember the inflation of the 1970s – and no one under 70 personally experienced its financial ravages. But, now it is more than likely we will feel the impact of modern inflation on our lives and finances. That’s why it’s worth remembering the experience of the past. It starts with a simple question:

Why would any government or central bank not only tolerate, but encourage the money printing that leads to inflation?

Creating new money allows the illusion of prosperity – for a while. That tempts every government from time to time.
In the 1970s, our government “printed” excess money to offset the twin costs of fighting a war in VietNam and the rising cost of oil caused by the OPEC oil embargo. (Look it up: back then the Middle East produced oil that we imported and depended upon.) Creating more dollars helped us “afford” to pay for all those expenses, making voters feel better. At first.

Then in the late 1970s inflation soared, as Americans realized all these new dollars were worth less, purchased less. Ordinary people ran from the rapidly value-losing dollar. The bought commodities, farmland, and gold to get rid of dollars. Higher interest rates were a free-market “bribe” to get people to leave money in the bank or buy government debt. Treasury bills yielded more than 15 percent by early 1980!

Modern Inflation
Today, we have a similar situation. The government has “created” trillions in new money, handed out to businesses, individuals – and fraudsters. That action did shorten last year’s recession and triggered a rebound in economic growth. But the initial illusion of prosperity is being replaced with the realities of the underlying impact. Prices are rising sharply: inflation!

And there is one big difference between the inflation of the 1970s and today. Back then, it was easier for people to try to keep up with inflation. Money market funds allowed access to those higher interest rates, and banks soon had to lift their 5% limit on interest paid on savings. At least in the late 1970s savers could try to keep up by demanding higher interest rates.

Today — at least until now — the interest rate market has been manipulated by the Federal Reserve – buying debt securities of the government and mortgage market, flooding the markets with new money — and keeping interest rates artificially low. Low interest rates help debtors, especially in times of rising inflation. And the biggest debtor of all these days is the U.S government!

The real losers these days are savers. Today, “chicken money” in the bank earns less than 1%, with inflation running at 6%. But with the recognition that inflation is not transitory, the markets will eventually overwhelm the Fed, pushing rates higher. The Fed is already slowing its money injections and hinting at rate increases. They are way behind the curve. Be patient, savers.

Government can borrow as long as the Fed keeps monetizing it — buying the debt with newly created money. But the world is watching. As famed economist Milton Friedman said, “There is no free lunch.” And that’s The Savage Truth!