Coming: A Potential For Galloping Inflation That Destroys Middle-Class Purchasing Power: Part II

MMN
Posted: 08/07/2017

Though the annual deficit has been cut from $1.4 trillion in 2009 to $585 billion in 2016, the Congressional Budget Office (CBO) warns that the deficit will soon begin ballooning again. 

Why? Because Social Security and Medicare costs will skyrocket to cover an aging population, interest payments on our accumulated public debt, and a U.S. economy still saddled with relatively slow/low growth (i.e., 2 .1% per year). 

The accumulated public debt – the total of all past deficits – is quickly approaching $20 trillion and will inevitably reach $22 trillion in the not-too-distant future. 

Worse, the CBO projects, given today's spending trends, we will add another $8.5 trillion to the debt by 2025. However – and this is a big however – many of the assumptions underlying this forecast are open to serious question. 

The Danger Of Nationwide Yawns About Growing Deficits & Our Accumulated Public Debt 

President Trump's promise to "reinvent government" has produced only a nationwide yawn. 

Of all the limited coverage of the real problems the United States now faces, President Trump's plans to reignite the economy is one of the few in which there actually have already been results and not just a promise of things to come. 

Yet neither the public nor the media have shown much interest. We can only assume they do not understand the very real consequences of ignoring deficits and our growing accumulated public debt. 

In a nutshell, our rising debt is unsustainable and seriously threatens America's solvency in a financial or military crisis. 

…A truthful joke once told by Harvard's Ted Levitt: “It appears the biggest problem we have in America today is ignorance and apathy, don't you agree Burns? Burns answered, 'I don't know and I don't care.' …" 

We had better start knowing and caring. Today's decisions bring tomorrow's results. First we make choices. Then the choices make us. 

How Are Deficits Financed? 

Anyone with a detectable heart beat and up-to-date on current events realizes our swelling deficits are financed in one or a combination of two ways––namely: (1) printing more money (i.e. quantitative easing) or; (2) raising tax levels. 

Our accompanying article on Strength of U. S. Economy Depends on Re-strategizing & Permanent Government Cost-Cutting details the Trump administration's plans to condemn to the scrap heap the need for printing more money and raising taxes. 

For far too long, government leaders worldwide – both conservative and liberal – have ignored how the growth in entitlement spending threatens their country's future.

Any attempt at cutting entitlements – or even slowing their growth – is bitterly resisted. However, 400 years of economic history tells us entitlements will eventually be cut in all developed countries. 

Said Peter F. Drucker: "The only question is by what method. If it's done openly – for instance, by raising to, say, 75 the age at which Americans get full Social Security benefits or if this is not accepted, middle-class entitlements will be cut by inflation, that is by destroying the purchasing power of middle-class incomes." 

This seems very harsh. But it's true! Yet there is a way to partially "have our cake and eat it too." 

If economic growth can be revved up to, say, 3.5% – 4% per year, and result-less government spending dramatically reduced, monies would become available to support many of today's entitlement programs – and yearly deficits would plummet and so would the accumulated public debt. 

Related Reading:

Strength of U. S. Economy Depends on Re-strategizing & Permanent Government Cost-Cutting 

Coming: A Potential For Galloping Inflation That Destroys Middle-Class Purchasing Power: Part I

The Easy Path Versus The Right Path 

From our perspective, past administrations always chose the easy path to dealing with the debt crisis. The path that required printing more money and raising and/or raising taxes. It’s a path that eroded middle-class purchasing power and inevitably produced slow economic growth. 

President Trump is attempting to do the right things with respect to fueling economic growth and "putting on trial for its life every government program, activity and project." 

If successful, he will prevent an economic disaster and its horrific consequences including the potential for massive civil unrest. 

If not successful because "the resistance" to doing what needs doing prevails, a very bleak picture emerges. 

Says Jim Clifton, CEO of Gallup: "When there is no job growth, the once huge tax base that pays for everything begins to shrink and critical government services and entitlements including government pensions, Social Security, Medicare and the like will be drastically cut." 

This is an extremely important message. Any attempt at cutting entitlements – or even at slowing their growth – will be bitterly resisted. Ample evidence exists for this assertion. 

To reiterate: By returning back to the policies of John F. Kennedy and Ronald Reagan (both enacted pro-growth tax cuts), it will be possible – when accompanied by eliminating result-less government activities and programs costing trillions of dollars-–to keep important entitlement programs in place – and avoid further civil unrest! 

The Consequences of Solution #1: Printing More Money

Printing more money almost always equates with inflation. More money in circulation without corresponding increases in goods and services translates into “too much money chasing too few goods.” 

Jay Prag, celebrated economics professor at the Peter F. Drucker and Masatoshi Ito Graduate School of Management provides an easy-to-understand explanation of the relationship between the amount of money in circulation and prices: 

“Simplifying things a bit, suppose the economy is 100 apples that are sold once a year and the money supply is $100 that is used once a year. The price of apples would be $1 per apple. 

If we increase the money supply to $1000, but we don't change the number of apples or the frequency with which money is used, the price of apples would rise to $10 per apple; more money is chasing the same amount of goods. 

If the money supply increases every year by more than the supply of apples, the price of apples will rise every year and inflation occurs: a sustained increase in prices.” 

Our point? In a very real sense this is what happened during the Obama administration. The government simply printed more and more money. But they didn't do anything that's worked to produce significantly more “apples” (i.e., goods and services). 

Take-home message: At the time of this writing, of the United States and the European Union are facing the prospect of relatively low and slow economic growth for the balance of the decade until the year 2020. 

By some estimates the United States will, on average, experience a 2.2% (or less) growth rate for the remainder of the decade; and the Eurozone 1.4%. 

Couple continued low growth with runaway printing presses to pay for Bernie Sanders-like entitlement programs and galloping price inflation would be a near-certainty. 

Inflation is a Tax 

Purchasing power declines with increasing price levels. Price levels increase when government prints more money without corresponding increases in goods and services. 

People have less discretionary income after they buy the essentials. So, what's the inevitable result? They start asking for “cost of living increases.” 

Yet giving increases in wages without corresponding increases in employee productivity always results in more inflation. Why? 

A simple equation, formulated by C. Jackson Grayson, former pricing commissioners/czar during the Nixon administration illustrates this notion this quite well: 

Wage Increases - Productivity Increases = Price Increases 

For example, if wages increase by 10% and productivity increases by 3%, then prices would increase by 7%. 

From all the available evidence, productivity (especially knowledge worker productivity) will not keep pace with the demand for increased wages. 

Just for the record: This type of inflation is called by some wage-push inflation. This differs from the type of inflation created by the government printing more money. That's called demand-pull inflation. 

Simply put, many are expecting to be hit by both demand- pull and wage-push inflation. They are interrelated in this situation. Both lead to decreased purchasing power and even slower economic growth. 

If people have less money to spend, they buy less. And guess what happens? Companies adjust supply to meet diminished demand. Translated, unemployment goes up. And economic recovery becomes just a slogan. 

The Consequences of Solution #2: Raising Taxes 

Again, why would the government want to raise taxes? Because the government has to pay for swelling deficits. 

Increased taxes reduce consumer expenditures. People have less money to spend. In fancier language, this is called a decrease in disposable and/or discretionary income. 

To repeat: When taxes are raised to levels that decrease discretionary spending this, in turn, dampens business investment; the economy slows or even slips into recession. 

It's really that simple. And it doesn't have to happen. But misguided economic policies are a choice – a bad choice that will bring with it much misery. 

Without substantial economic growth (as measured by GDP), unemployment rates could rise. 

And the consequences of increased unemployment means more of each country's budget will be required to support the growing ranks of the unemployed as those who drop out of the labor force opt for federal assistance. 

It's scary. But easy-to-understand. And, best of all, it doesn't have to happen if the right policies are crafted and implemented. 

Summary & Conclusions 

President Trump is doing his best to avoid likely worst-case scenarios by changing economic models, that is, by attempting to implement pro-growth tax cuts, pro-energy growth policies, reducing job killing regulations, and the like. This will spur economic growth and bring more money into government coffers. 

Simultaneously, he wants to reduce government costs by eliminating things that do not work, things that never worked, things that have lost their capacity to produce meaningful performance and results. 

Further, much mention, of late, has been centered around what must be done to begin solve the entitlement crisis, the welfare mess that has created dependencies not competencies, and the need to rethink foreign aid, and the like. 

Of course, no plan, no matter how well thought through, will be carried out as written. Compromises must be made. But such plan serves as the ideal against which compromises are measured. 

Indeed, it might save us from sacrificing things that should be strengthened in order to maintain the outworn, the outgrown, and the obsolete. 

Within a few years, the federal budget and the federal deficit (unless proper actions are taken) will, resume explosive growth, while professional, managerial, and technical wage earners will grow even more resistant to runaway printing presses and tax increases. 

If the government fails to reign in our ballooning deficits and accumulated public debt, we can expect many to grow extremely contemptuous of government and its promises to protect middle-class life, middle-class culture, and middle-class values.

 

MMN
Posted: 08/07/2017

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