Tuesday, July 21, 2009

Why I'm not worried about inflation

No matter how much money is printed it can't cause inflation if it's not in circulation, i.e. being spent by individuals and businesses. So as long as people keep losing their jobs and banks continue to issue very few loans, there's no way for available money to get out there where it can be used. Obviously the money supply isn't simply increased by the printing press, there are many things that can have the same effect: lower interest rates, making credit easier to get, etc.

When someone who is unemployed gets a job, suddenly they have more money to spend. When we are close to full employment you are more likely to get a pay raise, and again have more money to spend. In this job market you are likely to get a pay cut and be thankful that you still have a job, which means you have less money to spend. If you can get credit easily then you're more likely to buy a car or a house, etc. If a business can get credit and it knows that people are spending money because they can get credit then that business is more likely to expand, adding jobs, and putting more spending money in people's hands. But right now we see unemployment increasing and credit hard to come by. So I have no fear of inflation any time soon.

With one big caveat: inflation is no threat to our domestic economy, but the devalued dollar (a direct consequence of our soaring national debt and our increased money supply) has huge implications for our import trade. As you know we are dependent on imported oil in order for our society to function. And it seems that we have become dependent on imported food judging by the contents of the local supermarket, in spite of the fact that we could be producing our food locally. A devalued dollar will mean that at some point we won't be able to import oil and food, at least not in the quantities we are accustomed to. This will adversely impact our domestic economy by making it grind to a halt. This will then result in "inflation" in the sense that goods will become very scarce as production and imported goods greatly decrease. This inflation will occur regardless of the money supply, it will be based on unavailability of goods.

So I suggest that we go into debt now (increase the national debt) but that we use that money to become self-sufficient as a nation. Add public transit and train systems to reduce our dependence on oil. Encourage small local organic farmers who can raise food with very little petroleum input in the form of fertilizers, pesticides, and tractor fuel. Restore our manufacturing base so that we can produce the items we need in this country. This will take some time, but eventually will produce a healthy economy. At that point we can worry about inflation.

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