Some economists are starting to murmur that the best thing we can do for our economy is to inflate. That is, we should allow prices to rise in order to get ourselves out of our debt. If you are scratching your head right now in wonderment that such a strategy could work, welcome to the world of fiat money.
Since US money is not based on any standard except the good faith and credit of the government, the government (actually, the Federal Reserve, a quasi-governmental entity) can create money more or less at will. Most people and some economists realize that if the economy is flooded with money created out of thin air, each dollar becomes worth less. So why are we not seeing much inflation now?
Well, some say we are. There are about a thousand ways for government to lie about inflation rates, and they have used most of them over the years. For example, food and energy used to be included in the numbers but now are not. Also, the math used for calculation is complex and relies on some judgment calls. Which way do you think government will lean? Bingo. Nothing to worry about here, folks.
There are some provisos however. For example, if that money fails to get circulating in the economy, inflation is not an issue. Though it is done with computer bits rather than paper these days, an analogy to paper money is helpful. No matter how many dollar bills the Fed were to print, inflation would not arise if all those new dollar bills were stuffed into mattresses rather than spent. Make sense now?
The same thing happens if companies sit on a lot of cash rather than investing it in hiring people and producing goods. This appears to be our present situation. With the Dow going up and down like a seesaw, many are reluctant to gamble on the future. The uncertainty of Obamacare’s constitutionality and a political situation that seems hopelessly mired in stupidity add to the hunker-down mentality. Think of flood gates holding back a lake. If enough cash is lying around, it will eventually be used, even if the use is questionable. So we are OK. For now. Maybe. Later? Look out.
By printing more money or using mechanisms that accomplish the same under a different name (can you say “quantitative easing?”), the Fed can always make sure the Treasury has enough money to pay our bills. Always. In fact, there is a bonus to printing money like that. It means that as the dollar declines in value, we are paying back debts with cheaper money. Good on us. Problem is, everyone else will tend to want to do the same and a battle of printing results. Enough countries taking this strategy means global inflation that continually accelerates until all fiat money is worthless. Not pretty.
Forget about international finance. What about you and me? We are the hapless dolts who send sub-idiots to Congress and the White House to do this kind of thing to us. The effect on most people is disastrous. Our wages do not generally go up as fast as prices, keeping us eternally behind. Further, any money we save becomes worth less every day. The only advantage is that those of us who owe money come out better in the end, if we have enough left to pay the debt after blowing the rest on groceries. Sounds to me like this inflation stuff is good for government and bad for me.
Of course, no one, even Kenneth Rogoff (linked above) wants really high inflation. Just a little–like the husband who thinks a little more lighter fluid is all he needs on that grill just before sending himself rolling across the yard in a ball of flame.
This is really the problem. A host of allegedly smart people are trying to micromanage something that cannot be explained in any detail, let alone controlled. They are busy making worse that which is already bad. A little inflation? Right. Gotta go to the store now. We’re out of lighter fluid.