The biggest economic risk facing the United States (and much of the world) right now is something I’m calling ‘stealthflation.’
The elites in the White House and the U.S. Federal Reserve seem to think we are at risk of monetary deflation, where the value of the national currency actually rises. This causes many systemic problems when it occurs, not least of which being that people find their personal property suddenly worth less than what they owe on it. Deflation tends to harm loan recipients (people and companies) and benefit loan issuers (banks).
In an effort to keep the dollar stable, Presidents George W. Bush (R) and Barack Obama (D) have drastically increased our federal deficits by injecting massive buckets of federal tax dollars into the economy with ill-advised bailouts and ‘stimulus.’ Meanwhile, the Federal Reserve (under Bush-appointed and Obama-re-appointed Chairman Ben Bernanke) has created an additional 2 trillion dollars out of thin air and injected it into the economy through its so-called ‘quantitative easing’ programs. All-told, somewhere over 4 trillion dollars—that’s $4,000,000,000,000.00—have been artificially forced into circulation by the U.S. government.
Based on the official inflation rates and the consumer price index (CPI), our government keeps telling us that they need to put more and more and more money into the system to maintain its stability and prevent deflation. I’ve talked before about the very dangerous risk they are running, which is that their unprecedented dollar injections will result in serious inflation and potentially hyperinflation before they realize they’ve gone too far. One could argue that inflation is better than deflation, since it tends to benefit loan recipients (people and companies) at the expense of loan issuers (banks), but putting a bunch of our banks out of business isn’t really a good thing either. It’s just a different kind of bad.
But, as I’ve discussed before on this site, our official inflation rates and CPI values are not an accurate representation of peoples’ cost of living. Fuel and food costs—two of the most important real-world costs to individuals and families—are excluded from the computations. Hence my term, ‘stealthflation.’ The real cost of living is increasing rapidly, with both food and costs skyrocketing, while that increase is not reflected at all in the values the Fed. and the government use in their economic policy making.
Worse, many in the private sector rely on the government’s numbers (under a false assumption that they are accurate) to compute their own corporate cost-of-living pay increases. If the real cost of living goes up, but salaries stay stationary, well . . . it doesn’t take world-class economists and politicos like Messrs. Obama and Bernanke to see that’s a recipe for disaster.
What are the impacts of ‘stealthflation?’ Well, the lower classes with very little (if any) disposable income will find it more difficult to provide food for themselves and their families. The middle classes will have to make cut-backs, reducing their elective spending on entertainment, travel, and luxury goods like computers, getting a new car, etc. In other words, companies start losing sales. Meanwhile, they will be forced to increase their shipping rates or prices to cover the increased costs of fuel, which then hits the consumers again. Eventually employees start demanding higher wages to cover their increased cost of living, whether the government’s numbers start telling the truth or not, which forces companies to raise prices again. You see how it very quickly becomes a dangerous cycle of inflation.
The message that Obama and Bernanke need to take is this: today it’s stealthflation, but it will eventually lead to broader inflation. Food and fuel costs, despite their artificial exclusion from the inflation rates and CPI, still have a real impact on consumers’ spending patterns and on the broader economy. Inflation starts in one place and then propagates through the system. By the time you realize it’s happening, it will probably be too late to stop it or control it. What confidence do Bernanke and Obama have that the food or fuel costs, or both, aren’t the starting point of a broader, systemic inflation cycle? On what basis have they decided that the real inflation already occurring doesn’t justify any corrective action whatsoever, but an essentially-fictional risk of deflation justifies blowing more than $4,000,000,000,000.00?
Maybe their course thus-far has real grounding in some hitherto-unknown trustworthy school of economic science . . . but I truly doubt it. More likely, they have no idea what they are doing, and are running with their discredited Keynesian economic dogmas because they can’t think of any better ones right now.
In my humble opinion, that’s a thoroughly terrifying approach to economic policy.