Our leaders approve of chronic inflation as a benefit, which is why our father bought his new Chevrolet for $750 in 1937 and you can’t do likewise today. There are other reasons as well of course, but that’s the primary one. They begin to worry however, when the rate of inflation exceeds their chosen 2 – 2.5% target. That’s because faster rates attract too much attention to the citizens’ declining wealth as dollar purchasing power recedes.We suppose most are aware of that, and of the phoniness of many government numbers reported on the subject. Politicians believe that what you don’t know, won’t hurt them.
We hear much less on Deflation. Government hates it and hates to talk of it and will not under any circumstances tolerate it if it can be avoided. For that, it is rather unusual in real life, though Japan has been facing it until a new Prime Minister reversed things and started printing money like everyone else.
Why is government so aghast at deflation and pleased with (mild) inflation? We haven’t been told that by our governors but we suppose that it is because at bottom, inflation is simply a transfer of wealth from citizens to government, just as is a tax. Transaction-based taxes rise with inflating prices, for instance. Good for government; not so good for citizens. Best of all, government repays borrowings with dollars that no longer buy as much as when they were borrowed. And government borrows more than anyone else. Your own loan payments benefit too, but you are also paying higher prices and taxes and may or may not be earning a higher wage. If citizens earn more, government again gets more taxes but citizens get less for their declining value dollars. Politicians smile at inflation … (privately, of course).
Deflation is quite another matter. Borrowed money is repaid with dollars that will buy more than when they were borrowed, so borrowing is less affordable. Citizens incomes are declining but the fewer dollars earned acquire more purchasing power, so the citizens buys more with them while government gets lower taxes on the smaller incomes and purchases. Government really hates that, it has to reduce spending. As is obvious in Washington today, our leaders aren’t interested in spending reductions.
Europe isn’t, either; we hear that ECB boss Mario Draghi is considering leaving the job unless the Germans stop dragging their feet on full bore money printing to “stimulate” the dragging E.U. economies. Never mind that the magic has failed everywhere and everywhen it has ever been tried; it’s the Prescription of the Powerful (who use it to accelerate depriving citizens of still more wealth.) Elect me, I will spend you rich! (with your money …)
And so Congress unites to spend another $1.1 Trillion, based upon income of maybe two thirds of that, when it already owes umpteen trillions in debt. It will not reduce inflationary spending; that requires reducing social programs and military adventures. It will await financial collapse, blame it on whoever is convenient and promise them to save us by necessary cuts. That will worsen the collapse, putting many on the street at once.
A planned, careful spending reduction before the crash could head it off, returning us to a sustainable course. Since we are inflated, that would likely be deflationary; you will feel the politicians in D.C. shuddering if it even comes up. For citizens though, it would mostly mean that their existing dollars will buy more and they will likely earn fewer of them in the future. Taxes will be less, too. Aw, shucks!