Government Needs a Primer on Money

When you ask the average person what inflation is, they will tell you "high prices." This is like saying that a person with pneumonia merely has a fever. Both are partial descriptions, but very incomplete.

Inflation is more accurately described as "too much money chasing too few goods." Simply put, as we increase the supply of money but not the productivity you have higher prices and so much more. The hundreds of billions (and now trillion plus) that is being spent by the government for bailouts will come from printing money, as well as other sources. Currently, twenty percent of every tax dollar goes to paying the interest on the debt. That makes printing money more attractive, in spite of the potentially negative consequence, and those consequences are significant.

• Such pumping of money into the economy will lead to a massive devaluation of the currency over time and a significant increase in prices.



• Wages will grow artificially high, which will lead to many moving into higher tax brackets even as the value of their income declines.



• There will be an obvious need to increase interest rates, regardless of where the government sets them, because businesses have to make sure that what they receive back is more than what they loaned or provided in credit. This is one of the reasons why interest rates have not gone down for consumers and others, although they have gone down for lenders. It is not mere selfish greed, but self interest in protecting their share holders.



• New businesses will find it more difficult to start up because of the perceived decrease in its future value, because of the instability of the money supply. These business will find it difficult to find investors, markets, or any future at all.
  

The bottom line is that calling inflation "high prices" simply does not give this major problem justice. Unfortunately, I am fairly confident that many, if not most Americans are unaware of how far reaching inflation can be. I have heard people say, "why doesn't government just print money to solve deficit and other problems?" If a large quantity of money made people rich, Zimbabwe, Guinea, and Yemen should be among the richest countries in the world. They are not, in fact they are among the weakest, and they also have the highest inflation.

Pouring more money on this economy is the equivalent of pouring gasoline on a fire. The projected long term consequences could be devastating.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

Preparing for Double Digit Inflation

We haven't seen double digit inflation since the late 1970s and early 1980s, but it is now a potentially serious challenge. I have seen it first hand in my local visits to the grocery store. I have eight children and the increase in my food bill in recent months has been significant to say the least. Many may not notice a fifteen percent increase here or there, but when you are buying for ten, you notice. Some of my most common items purchased have gone up around 30 percent since this time last year.

Just last week it was reported that there was a 1.5 increase in inflation in May alone. This percentage of an increase is huge for one month. In fact, we normally have smaller increases each quarter. For almost twenty years we have had an annual inflation level of around four percent. There is something seriously wrong here.

Part of the problem is the lack of understanding that exists about inflation. Many like to say "inflation is high prices," which is similar to saying "pneumonia is a high fever." These are both examples of symptoms. What people need is an understand of the cause. Fortunately, the definition is actually quite simple. It is "too much money chasing too few goods." Simply put, the amount of money going into the economy is out pacing production. For example, if in the material world there is only one pencil and only one dollar for exchange, the cost of the pencil would only be one dollar. But if they increased the money supply by an additional dollar, the price would simply double unless they produced additional pencils.

That is exactly what is going on today. The hangover of cheap money policies a few years ago lingers in the economy (e.g., sum prime lending). Then there are the demand side tax rebates that encourage consumption, but not production. These rebates are significantly different from actual across the board tax cuts, which encourage production. Finally, there is the continued growth in deficit spending, which has led to the point today where approximately one third of all government spending goes to only paying the interest on the debt.

We need to hold our elected officials accountable and not allow them to pander to us with short term government programs and breaks with negative long term consequences. Our financial future and the future of our children hinge upon it.

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Kevin Price is Host of the Houston Business Show (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.