“Necessary” Inflation Adjustments

I don’t think it’s any surprise to most thinking people that the federal government is spending too much money that it doesn’t have. Yes, we need infrastructure improvements, desperately. We also need to spend more money on basic, basic research, because that’s the foundation for future technology and it’s the kind of research that U.S. industry doesn’t spend enough on, but we need to pay for that spending by increasing taxes, not by printing money and creating more debt.

And we need to increase taxes now… before we destroy our economy.

Right now, we’re told that the economy is recovering…and it is, but barely, and that recovery is being pushed by increasing debt. We cannot keep funding more and more programs based on debt. While liberal economists claim that these programs will generate more tax revenue, the facts show that the marginal revenues generated by such programs are less than the additional costs of the programs.

So far, the government has been able to manage the debt by artificially manipulating interest rates to keep them low, and, as I’ve also pointed out more than once, the federal government has changed the criteria it uses to calculate inflation. This combination, if continued, will have disastrous several results.

First, lower calculated inflation rates allow the government to pay less interest on federal debt instruments. Those lower “official” inflation rates also reduce cost of living increases on Social Security benefits and military retirement, and any other federal programs indexed to official cost-of-living indices.

One financial expert, Jared Dillon, pointed out this week, “If we calculated inflation the same way we did in 1990, the inflation rate would currently be 8%. If we calculated it the same way we did in 1980, it would be at 13%.”

But… if the official interest rate were anywhere near that, the government would have no way to pay the interest on the national debt – except by printing more money, which would spark runaway inflation. The government can’t afford to do that.

So, in the meantime, the actual purchasing power of Social Security benefits is being even further eroded. The purchasing power of the dollar continues to decline, and that means maintaining federal programs takes more and more inflated dollars.

At the same time, those low interest rates discourage traditional private saving and investment and encourage people trying to maintain the value of their savings into more and more highly speculative investments, which has led to an asset “bubble” and inflated housing prices nation-wide.

Without a significant tax increase, this inflationary bubble will just get worse, and no matter what happens, the U.S. faces turbulent and difficult economic times ahead, times that cannot be resolved by artificially low interest rates and printing more money.

2 thoughts on ““Necessary” Inflation Adjustments”

  1. Shannon says:

    Is the American way of life just unsustainable?
    I enjoy reading your insights but they do make me wonder if we’re living on borrowed time. What happens when we can no longer manipulate our way out of a crisis?

  2. Tim says:

    The usual way seems to be to declare a national emergency such as has happened recently.

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