The Road to Hyperinflation

There is a great deal of discussion about inflation and even hyperinflation, but most are not really aware of what either are and how they come about. Inflation is not, as you have often heard, "high prices." High prices are among the symptoms of inflation. The classical definition of inflation, simply put, is "too much money chasing too few goods." We have a great deal of that going on in our economy today. The result is not only high prices, but outrageously high interest rates (which are right around the corner) and a massive drop in the value of US bonds in the eyes of international buyers. Those bonds are one of the primary vehicles our country uses to avoid bankruptcy, because of the size of our debt and deficits.

Many Americans believe we have not had a problem with inflation in decades, but the reality is inflation has grown steadily at approximately 4 percent for years. For example, items that totaled $100 in 1988 would cost almost twice that today. Those higher prices did not go up because the items became more scarce or the ability to produce them had declined (in fact, the exact opposite has happened; technology and the ability to easily do business internationally should have drove pricing down), it is due to a reduction in the value of the currency itself. This is a cowardly form of taxation, with the government decreasing the value of all money by printing fiat dollars as a form of paying bills. It is much easier to do that than the government behaving in a fiscally responsible manner.

So we have had inflation for decades, yet it has largely gone unnoticed by millions of Americans who remember the double digit inflation of the 1970s and are too busy trying to make a living to notice the government chipping away at the value of all money today. Now the federal government is going much further in its efforts to devalue our nation's money. We have got into the mode of adding $1 trillion to the deficit annually. Twenty years ago, this was the amount of the entire national debt and took almost two centuries to accumulate. The Obama administration has to do something in order to make this shell game of fiscal insanity work. There is no doubt Obama wants to raise our taxes and has moved aggressively in that direction. However, the US already has the second highest corporate tax rates in the world among industrialized countries according to the G-20. Unless the US wants to shut this economic machine down entirely, they will have to look for strategies beyond tax increases. One of those clearly include more inflation and it has already begun to happen.

On one day earlier this year, the United States took a chapter out of Zimbabwe's playbook by pumping $1.2 trillion into the money supply in an attempt to pay off its bills. Many Americans have (rightly) been alarmed by the more than $1.5 trillion we have seen in bailouts. According to the Washington Post, these inflationary efforts have the potential of being much more far reaching, noting that "combined with the billions already deployed by the Fed, the new money dwarfs even the biggest government bailouts of financial companies."

Historically, this type of monetary policy leads to the kind of inflation that we have seen in history books, where it is cheaper to use money for wallpaper than to buy it or it requiring a barrel of money to buy a simple loaf of bread. One of my favorite photos is a Weimar Republic sanitation worker in the days before World War II literally sweeping money in the gutter because it was both worthless and in excess. Printing worthless money will not sweep our problems away, but make issues we never imagined.

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.

Barack Obama: A Progress Report

Recently I invited friends of my radio show and other media to explain how they would grade President Barack Obama's first 100 days. The response was huge. This has become a popular past time lately with radio personalities, policy experts, and people standing around the water cooler. I thought I should ride this trend.

I have noticed that most of the discussions have been largely arbitrary and without specific criteria. People generally agree that the idea behind a report card is to judge the President's performance, but on what basis? Since every President swears to defend the Constitution, that should be its criteria. Furthermore, since this President is still serving his term and has not completed it, this is better described as a "progress report." With that, here are a few areas worth consideration:

• Economic integrity. Unfortunately, most people are unaware about what the US Constitution has to say about government spending, but I encourage readers to start with a short visit with Article I, Section 8 of the Constitution. There they will find around eighteen areas that the government is aloud to operate in and none of them are that sexy or expensive. One will find post offices, post roads, and standard weights and measures. Anything beyond issues such as these were to be left to the states and the citizens thereof. One can probably argue that one cannot expect a politician to purely apply these principles, but this Administration is only furthering the rapid expansion of government in a way we haven't seen and into new roles (such as socialized medicine, the government take over of energy, and other programs). Grade: F


• Fiscal responsibility. In the early 1980s I worked on a project to protest the government's action to increase the national debt to $1 trillion. This was a debt that took almost 200 years to reach. In a breath taking move, this Administration's budget will increase that debt by $1 trillion a year. Furthermore, the Administration has established a debt ratio that is comparable to what is common in third world countries. Grade: F


• Monetary policy. In order to fund a government that is growing out of control financially, the United States increasingly looks like a debtor nation going to foreign country with hat in hands and asking other nations to bail them out. China alone holds almost $800 billion of that debt in Treasury Securities. However, what the US government cannot get other nation's to finance, the Administration will likely use monetizing the debt as a part of its solution. We have already seen a move in this direction with the federal government increasing the money supply by $1.4 trillion in one day. This type of policy will eventually lead to hyperinflation. Grade: F


• National Security. Obama is sending a very strong message to the world of being a very weak President when it comes to his relationship with the rest of the world. He allowed himself to twice be embarrassed in a photo op with Hugo Chavez, he has blown empty rhetoric at increasingly aggressive (and nuclear) Iran and North Korean regimes, he is providing relief for the Communist government at Cuba by allowing US citizens to support citizens there, and he is dramatically cutting defense spending as our nation fights two wars. Grade: F


• Behavior. Most people don't remember the important "attitude" or "behavior" aspects of a progress report, but it is extremely important in this case. Obama has consistently appointed Cabinet members with an incredible level of arrogance and hypocrisy (we have a Secretary of the Treasury, the person in charge of IRS, who didn't pay his taxes). Furthermore, he is creating Czars through out his Administration who are not subject to Congressional scrutiny, which goes against his own mandate of honest government. Grade: Unsatisfactory.

Virtually everyone I have met of all parties are very concerned about the direction this nation is going. Even Democrats have told me that they "wanted more government, but not this much." Some who have voted for OBama are anxiously looking forward to opportunity to vote again and vote different. That process can begin in 2010 when people can change the composition of the Congress and begin to hold this Administration more accountable.

Kevin Price is Host of the Price of Business, the longest running show on CNN 650 (M-F at 11 am), AOL Radio, and CBS Radio. Eric Bolling of Fox News and Fox Business says that Price’s Blog “is very influential and moves the blogosphere.” Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

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.