The Real threat of Monitary Inflation

Most financial experts know that keeping the interest rates low and deficit spending high spells certain inflationary trends, as borrowing money is so cheap, it encourages expansion of the monetary supply and thus inflation.  We saw this recently with the Housing market bubble that burst just a few years ago.  People were feverishly buying houses thanks to government rules that encouraged lenders to make thousands of loans that just years ago would have been considered high risk to people who really couldn’t afford them.

Today, however the real threat comes from another source.  A source that has been around for decades, but that has over the last couple of years increases exponentially.  President Bush started it, but President Obama has definitely not been out done by any means.  If Obama will be remembered for anything it will be for his deficit spending and increasing of the national debt.

But what’s the problem with this?  Can’t the government just print more money?  Actually the Federal Reserve (not actually part of the government) already is, along with buying up bonds (causing our debt to be monetized) to keep Mortgage rates low. While all this is certainly unprecedented, and in my opinion quite risky, I don’t think this is ultimately the real danger either.

I’ve heard for years now people yelling, kicking, and screaming that hyperinflation is coming, and soon, but while we certainly have seen relatively high levels of inflation for the last few decades, that has caused some problems along the way, it as of yet has not had a crippling affect on our economy for a number of reasons.  Mostly because the problems have been manageable from within our own boarders because of the dollars unique position in the world; however, that may change, which is the real problem we will face in the near future.

Since the U.S. Dollar is used world wide as a standard world wide currency, the U.S. enjoys a lot of great benefits of relatively cost effective imports, especially when it comes to Oil.  These imports cause a lot of U.S. currency to flow out of the country on a daily basis, and thus the reason why the Fed is printing money, and why the government borrowing trillions of dollars has not caused hyper inflation, or at least not yet.  Think of the housing crisis, and when banks and lending institutions were saying they didn’t have enough money to lend.  It came shortly after the Fed raised rates, and gas prices jumped drastically.  Both caused the money supply in the U.S. to decline and we saw the affects of deflation on an already bloated housing market (prices dropped, and very drastically in some areas of the country).

This is why I think the Fed knows what they are doing as they continues to increase the money supply (through low interest rates, monetizing our debt, and giving banks trillions of dollars in nearly free money) to make sure we have enough within our own boarders.  As long as this money continues to flow out of the country we will not see massive inflation; though the rest of the world may, and we will likely to see it increase some compared to past years. But what if all this money suddenly started to flow back into the country?  Why would this even happen?

China and Russia have already requested that the U.S. dollar no longer be used as the international currency.  Many others are also concerned about this out of control spending, and the seemingly loss of strength in the dollar it appears to be creating.  If this were to happen, U.S. dollars would undoubtedly flow back into the U.S. which at first may sound like a good thing, but too much of a good thing leads to inflation; massive inflation – like a skinny guy that decided to start eating nothing but sugar and wonders why he’s getting fat.

If we had to suddenly exchange our money to another currency before buying gas, gas prices would double or even triple, which would have a ripple affect on the rest of the economy; and make domestic production a much better idea that would unfortunately take a decade to ramp back up.  Our ability to import goods would diminish, and China probably wouldn’t like that as we by so much from them these days, but on the up side, manufacturing would likely return to the U.S., if companies can find a way to deal with the inflation problem, and exports would likely increase as they would suddenly be cheaper.  However, this change would take time, and staring a new business in a time of massive inflation is not an easy prospect.  It would certainly spell hard times for the average person.

The solution?  We need to send a message to our newly elected republican house demanding that they pressure the Senate and the White house to cut spending in half.  Not only can we not expect China to keep buy our Debt, but also we cannot expect that we’ll be able to repay what we already have if our economy collapses.

Maybe we need to get the Federal Government onto the Dave Ramsey plan… In all reality though, the Republican House was elected last year on the idea that we need a more fiscally conservative Federal Government, and though they likely will hit road block after road block with liberal Democrats controlling the White House and Senate, they need to go on the offensive, so that a year and a half from now, when we are all deciding on who to vote for, they can make it clear who prevented them from fixing the mess that the the same group had only made worse.