Doomed to Repeat by Bill Fawcett

Author:Bill Fawcett
Language: eng
Format: epub
Publisher: HarperCollins
Published: 2013-01-20T16:00:00+00:00

CHAPTER EIGHT

Too Much Money?

The first panacea for a misguided nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.

— ERNEST HEMINGWAY (1899–1961)

The United States government did not create its Federal Reserve Board in 1913 to assist in recovery from depressions. It was started to control and prevent inflation. Even during the long recession starting in 2008, the primary stated purpose of the “Fed” is to make sure inflation is kept at a low level. Why is this? Why is there so much concern with inflation, even over recession? Because you can have too much money. Well, maybe not you personally, but a nation can actually have too many dollars floating around. So more correctly, there can be simply too much money in circulation. Too much currency—whether it be printed dollars, puka shells, coins, wampum, or numbers recorded in a Federal Reserve computer—can create inflation. When the amount of money in circulation increases but the amount of goods that the money can be used to buy stays the same, the result is “inflation.” The cost of everything inflates larger and larger, like a balloon being blown up. Unfortunately, like that balloon, an economy can be burst by too much inflation.

From Ancient Rome to twenty-first-century Zimbabwe, inflation has brought many a nation to its economic knees. It was not that long ago that inflation crippled the U.S. economy. In the early 1980s the inflation rate surged until it reached a staggering 13 percent. That meant that everything cost, on the average, 13 percent more than it did the year before. It also meant that someone on a fixed income, like an elderly retiree on a pension, could buy 13 percent less food, fuel, and clothes compared to a year earlier. Since then the inflation rate has been much lower, so many of us are ignoring the topic, but that is a mistake. Inflation, in the classic form of higher costs for basic goods, is again a threat. The increased cost of gasoline alone shows how inflation can affect every single person in a nation.

Inflation has several causes, but often it happens when the economy expands too quickly. Credit and cash are plentiful, and people borrow and spend freely. That creates a demand for more goods and services, so the prices on these items and services inflate. This is often reflected in the decreasing value of the dollar (or any currency) compared to the money of other nations.

Inflation can be put in two categories: monetary and price. When there is too much money in circulation—monetary inflation—then there’s too much money chasing too few goods or services. This results in price inflation, an increase in the cost of those goods and services.

Inflation is typically measured by the Federal government by excluding the volatile prices of things like food and gas. This “core inflation rate” is what the Federal Reserve considers in determining whether inflation is escalating.

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