Can we apply a little common sense here? If the Fed is going to raise interest rates to “combat inflation,” it makes common sense to ask how raising the cost of every bank loan, every credit card, every mortgage, every business bond, and, of course, every salary to compensate for that raise in the cost of money is going to lower the rate of inflation? The Feds argue they must fight fire with fire. Just be careful how much gasoline the Feds pour onto a blaze they began.
It’s like the forest fires across the country; most are caused by “controlled burns” to reduce flammable material littering those forests. If you don’t handle them just right they can explode into hundreds of thousands of additional fires. Yet no one asks: Why the heck are you starting fires in the dry season? Ah, but those Feds always know best.
Back to inflation: Exactly how is raising the cost of everything going to help normal people make ends meet? It won’t, is the obvious answer.
Look, there are only two ways the National Debt can be repaid. In Switzerland, they once chose to raise taxes for two years — punishing as that may be — and they paid off their national debt as a matter of national security.
In the USA, four times during my lifetime, our government has used “inflation” as an excuse to raise interest rates, causing prices to rise everywhere — homes, rents, food, salaries. Once the Feds put “inflation” rising interest rates in place, you can start counting two to four years before a new level of much higher prices stabilizes.
Nixon took us off the gold standard so he could play with interest rates. Reagan allowed the mom-and-pop savings banks to become real estate and business traders and loaners, flooding money into the market at high risk, and banks failed. Bush/Cheney lied about the National Debt and, in 2008, inflation struck again. Trump over spent, locked down and taxed imports, and reduced the immigrant workforce.
Nixon left in ’73, and within four years inflation doubled. Reagan left in ’88, and prices doubled before Bush Sr. left office. Bush/Cheney left in 2008, and the banks failed. Trump left in 2020, and here we are, almost two years later, and inflation has struck — hard — again.
So what happens when inflation goes rampant? To finance D.C. spending, the U.S. government sells bonds, Treasury Notes, which have a fixed value and are non-index (inflation) linked.
A $100 U.S. Treasury note falls in real value when inflation hits. That value is crippled by inflation. A Ford station wagon in 1978 cost around $4,500; that size car today costs $25,000. A house that sold in Amenia for $65,000 in 1982 resold in 1989 for $330,000. The car your family needed in 2007 cost $8,500; it now costs $25,000. A house in Phoenix, Ariz., that sold in 2016 for $275,000 sold last week for $1,100,00, without any improvements.
Even allowing for today’s car being 30% better made and longer lasting, that’s still a heck of a jump for a heap of metal.
So, did you cause this inflation? Nope. Can you control this inflation? Nope. How can you cope with this inflation? Well, the quicker you ask for a raise, the sooner you can protect your family.
Here’s the downside… and why the Fed is acting slowly: If inflation becomes rampant, you will end up buying a loaf of bread with cash carried in a wheelbarrow.
So, what is America to do? So far, the Feds inflate interest rates to slow consumer buying, all with the hidden aim of reducing the value of those Treasury Bonds. It worked three times after Nixon took us off the gold standard.
Will it work a fourth time? The pain will be measurable for every working American, every retiree, every military family and especially for people who save in banks at ridiculously-low interest rates. That’s guaranteed. That buck you saved? Within a year it’ll be worth 60 cents.
As long as we spend and tax without constraint, the government can only protect the really wealthy and the power the U.S. dollar wields worldwide one way. In the end, the middle class will be gone forever, the poor will become poorer and the American work ethic will be valueless. It’s a downward spiral we’re caught in once again.
Former Amenia Union resident Peter Riva now lives in New Mexico.
Photo by Graham Corrigan
