Price inflation is no great mystery. It’s a function of Money Supply growth that is not tied to Productivity. The remedy is simple: The U.S. must spend less and produce more. Government spending was $6.8 Trillion in 2021, $4.5 Trillion of which (66% of total spending, 19% of GDP) went to Entitlements. The U.S. ran a $2.8 Trillion deficit in 2021, a $3.1 Trillion deficit in 2020 and a $984 Billion deficit in 2019 (see CBO table 3). This is a recipe for price inflation (which is a tax), and an excellent method for creating both a permanent welfare class and pervasive moral hazard.
Productive Money Supply growth: The Fed expands the money supply by depositing Dollars with commercial banks. Those banks keep a small portion on hand as reserves and lend out the remainder for productive use (equipment loans, revolving lines of credit, other bank loans, etc.), thereby growing the money supply. Companies deploy that new capital to grow Productivity (i.e. goods & services or GDP). Ideally money supply growth should be in-line with Real GDP growth.
Non-Productive Money Supply growth: The Fed expands the money supply and that money is deployed to various welfare (“entitlement”) programs where Trillions of Dollars are printed and deployed to non-GDP-generating activities. Every line item in the CBO table below is a non-productive Dollar spent with the exception of the “DoD” and “Other” line items and for sure there are Dollars wasted within those categories (Military spending is included in GDP).
Long-Term Inflation Solution: The long-term solution to Price Inflation is to radically curb Government spending, especially entitlement spending. The U.S. Government ran a $2.8 Trillion deficit in fiscal 2021 as $4.5 Trillion was spent on Entitlements – a non-productive use of taxpayer capital.
- Everything from Social Security to Unemployment to Subsidized Housing to Child Tax Credits to any Public program not tied to Production.
- Government spending by various Government Agencies that add zero value to the American population ought to be pared.
- Regulation that subsidizes various industries such as the Pharmaceutical and Insurance industries ought to be eliminated.
- The Fed’s QE efforts ought to be made illegal by Congress. The Fed is responsible for the enormous bubble it blew across asset classes, most notably in equities and housing.
Once the money printing associated with these four activities is brought in-line, the U.S. will enjoy a fiscal surplus rather than a deficit. We would put the U.S. back on the Gold Standard which would ensure the U.S. does not spend beyond its means. The fact that Government Debt is approximately 130% of GDP is outrageous.
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