George Sarant

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Posts Tagged ‘inflation


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The Federal Reserve has now compounded the inflationary scenario discussed previously by printing yet more money, in order to buy $40 billion of mortgage securities per month. This was a political decision, not an economically sound one. As a result our credit rating is starting to be downgraded and the price of commodities- everything from gasoline to food, is increasing. But while prices are already rising the increase is nothing compared to what is to come. 

At the same time interest rates are being driven down to nothing by the government printing press, so savers are actually losing money. The illusion of economic improvement in recent stock market gains is misleading in that it just means more money is going into stocks because interest rates have such a low yield, even though there is significantly greater risk. At this point the “medicine” of the “Quantitative Easing” is becoming poison that will produce galloping inflation down the road unless there is a sharp turn in policy, and even then the challenges are daunting. 

The federal government is currently taking in about $2 trillion in taxes, while spending over $3 trillion a year. This deficit gets added to an ever-increasing debt load that presumably is going to be paid by future generations. Numbers like a trillion are beyond comprehension, but anyone can understand the simple math of the consequences of spending three of something when you only have two. The rising  debt is held by the public and foreign countries like China, which goes along because it finances the export of goods to this and other countries, enabling its economy to continue growing.  

But given that the government is now effectively cheating by debasing the value of the currency, sooner or later lenders will stop lending. However, long before that, interest rates will rise to levels not seen since the 1970s, as lenders must protect themselves against the shrinking value of the currency. Worse, these rates are not being factored in to government projections so that future debt will be larger than anticipated. When there is a 300% increase in the money supply there are bound to be consequences. As rates rise the cost of borrowing will also increase, with disastrous results. First, the interest cost to the government to cover all this debt will become unbearable, given that much of it is short-term borrowing that constantly has to be refinanced at the rate prevailing at the time.  Second, the real estate market will crash even further as the cost of mortgage interest becomes impossibly high. Third, foreign investors will pull their money out as the value of the dollar plummets in relation to other currencies. 

The only way the government will be able to sustain itself is by printing more money, so that the money it pays back is worth less than the funds it borrowed. But if the dollar is worth less, it can only mean that things will cost more and more and incomes will not keep pace with the surging rate of inflation. I’m not even talking about a hyper-inflationary doomsday scenario or total collapse, for even an increase of interest rates to a moderate level of say, 7% will leave the government in dire straits, in terms of maintaining payments of the debt load it is carrying forward.  Furthermore, none of this includes additional state and local debt. On a personal level, the only way you can stay ahead of this turmoil with your own funds is by putting them in appreciable assets that provide an inflation hedge.

These things will become obvious by next year, and will accelerate in the years ahead, unless there is a drastic change of direction in Washington. It will require an iron political will to correct, as the necessary steps are bound to be painful and highly unpopular, across the board. It will require deep cuts in spending, reform of entitlement programs, and revision of the tax code. There may be a steep political price paid for acting responsibly, at least in the short term. But that is the only way to save this country, and for that matter the world, at this point. Hopefully we will have the leadership and political courage to ameliorate this situation while it is still possible.  Think about this when you vote in November. 


Written by georgesarant

September 16, 2012 at 9:40 PM


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Inflation is inevitable given that the government has been printing huge amounts of money while borrowing more in order to continue spending money it doesn’t have.  The value of the dollar will be further eroded, with the day of reckoning postponed only because things are worse elsewhere at the moment.   Everyone knows this, but what may be less apparent is that the effects of inflation are already here, it just is not immediately obvious.  It is masked by  government-created economic distortions, structurally built-in, which are expanding like a silent bubble on its way to bursting. While evident in high gas prices and food prices that are about to take off, it is deeper and more sinister. It is like a mirror opposite of inflation that has already devalued money, and we are already paying for it. 

When there is inflation money is worth less. That is elementary. But although there is little apparent inflation at the moment somehow money is still worth less. One way to look at it is what you can earn on your dollars. The government is deliberately depressing interest rates to ridiculously low levels by continuing to print money. This enables it to continue borrowing at bargain rates, which depresses interest rates across the board. As a result the thrifty are penalized with miniscule returns on their savings. When a dollar earns a paltry 1% return what is it really worth? Those who save are already paying the price of hidden inflation by losing what they would otherwise earn were it not for government-induced distortions. This leaves savers, senior citizens, and retirement or pension funds in the hole because the anticipated returns are not being realized. That leaves no alternative to taking on riskier investments to try and earn a decent return. The net result is the same as inflation, where phantom higher returns are earned by money that is worth less and less. 

These policies are breathtakingly irresponsible. Yet they are deliberate, resulting in artificially low interest rates to facilitate voracious government borrowing. But sooner or later lenders will stop lending. The President thinks he can reduce the deficit by taxing rich people more. The problem is that there aren’t enough rich people to make a serious dent in the debt, Even if their taxes were completely devoted to it and notwithstanding the more likely scenario that it would simply be spent on more “unmet needs,” there are many ways the very affluent can avoid taxes. They can simply move, like the wealthy are doing in large numbers in France due to the socialist government’s attempt to raise their taxes to a 75% level. The net result of that is that there will be even less money coming in, and the not-so-rich are left to pay for it and the problems only become worse. 

The Republicans, on the other hand, want to reduce the debt by promoting growth instead, i.e. creating new wealth, instead of depleting existing wealth. If the economy were growing at a healthy pace it would increase tax revenues. In order to stimulate growth there has to be enough incentive to invest and take risks. High taxes, such as those in France only result in a capital strike, for no one will invest if their earnings are to be taxed away. Then governments try to adjust by providing tax incentives, rebates, etc. to get business to invest, which then results only in crony capitalism and economic distortions. 

But whoever wins the election will face daunting challenges due to decades of mismanagement. They may also subsequently pay a political price if policies to truly extricate us from this situation are pursued, for there are no easy solutions. Let us hope we get leaders who will finally behave responsibly, for the alternative is an almost certain collapse. 

Written by georgesarant

September 12, 2012 at 1:36 AM