Thanks to government meddling in the free market and individual greed, we are living in serious economic times. During any economic downturn, the government has four basic options:
Reduce government spending – When a family has less money to spend, it just makes sense to cut back on the extra expenses. Yes, it might mean sacrificing your favorite morning pick-me-up, but do you realize that skipping your daily Starbucks drink could save you over $1,000 in a year? Do you have any other daily or monthly expenses that you could reduce? Not that the government lives in the real world. Can you remember the last time our government voluntarily cut back on its own expenses? Neither can I.
Raise taxes – Any time the government sees a need for more money, a cry will echo down the halls and rooms of D.C. to raise taxes, often targeting those evil, nasty rich. While campaigning, President Obama said that he’d only tax people making $250,000 a year, but that promise was quickly broken when he raised taxes on cigarettes. Most of the people who smoke make nothing close to $250,000 a year. Setting aside Obama’s broken promise, raising taxes acts as a damper on whatever is being taxed, so raising taxes on income will have the effect of damping people’s efforts to raise income. You can think of raising taxes as similar to placing a few stones into a hiker’s backpack. It’s unlikely that the extra pound or two will cause the hiker to give up altogether, but the added weight will make him work harder than he would have done. And that extra effort means less energy for other activities on the hike. That’s similar to raising taxes in real life. When people are already burdened with bad economic times, it’s a dumb idea to add to their burden with tax increases.
Borrow more money – The government can always raise more money by borrowing, but to do so, it would have to find someone willing to finance the debt by buying our bonds. In his excellent post, Peter Murphy explains that China, Japan, and Russia are not in the position to buy up our bonds. And as the economic problems echo around the world, the pool of people able and willing to finance our debt will shrink even more. But borrowing even more money while already deep in debt is foolish at best. If you are already maxed out on ten credit cards, will you be any better off financially if you max out another five? (And is it really all that wise to attempt to raise money from people who consider us their enemies?)
Print money – The government could just print more money. If the money were backed by something concrete like gold or silver, then producing more gold or silver would make it possible to print more bullion-backed bucks. But our money is fiat currency, meaning it isn’t backed by anything tangible, just the full faith of the U.S. government. But what tangible items does the government actually produce? I see government producing laws, regulations, press conferences, and scandals, but I don’t see anything of value actually produced by the government. It is the people of these United States that do all the real producing. So any additional money printed by the government is backed by the future productivity of the people, not the government. When borrowing money and raised taxes won’t bring in the needed funds, the only option left to the government is to print more money. So get ready for the coming looming threat of inflation.
Americans haven’t had to deal with high inflation since the early 1980s, so the coming inflation may be a nasty surprise to those who haven’t been through it before. But it could be worse–we could experience hyperinflation, when the government shifts money printing into overdrive. The bill in the image above is a 100 quintillion Pengo bill, printed by the Hungarian National Bank in 1946 during its worst period of hyperinflation. Since there are no zeroes on the bill, allow me to make it clear just how much that bill is worth:
That’s 20 friggin’ zeroes! It’s no wonder they used text instead of numbers on the bill, or the peasant girl would have fled in shame. Unless our government reins in its rampant spending, we will see inflation hit the U.S. hard.
Hopefully, we won’t experience hyperinflation like that experienced in the Weimar Republic of Germany, when it was cheaper to burn stacks of money than it was to buy firewood. Don’t forget that the German hyperinflation damaged the Weimar Republic’s reputation and left it impoverished and dispirited, allowing a certain poisonous charismatic leader to be elected. And don’t forget the effort it took to remove him from power.