Why We Are All Screwed: Inflation is Here to Stay


Examining the fundamental structural features of the American monetary system, and why it’s rigged against the have-nots.

Most people have only an indirect understanding of inflation. They understand that a general upward trend in consumer prices means higher inflation, although rising prices are only a very late stage symptom of inflation. Inflation itself is an increase in the number of currency units in a monetary system.

If you consider that somewhere in America there is a literal money printer, furthermore, that the federal reserve can digitally print money with mere keystrokes (when they buy up treasury bonds or mortgage debt), and that there are humans entrusted with the responsible use of these money printers, it should come as no surprise that the most awesome super-power of all, the power to print US dollars will ultimately corrupt those who wield it. This wasn’t a problem when every printed dollar represented some amount of physical gold, but at some point in the 70s under Nixon, somebody realized that the number of dollars in circulation exceeded the number of commensurate gold reserves. The gold standard was canceled, removing the main barrier to the free printing of money.

You may have heard that there is no such thing as a free lunch. As tempting as it is to think that printing money can solve all of the world’s problems, it doesn’t work out like that. Every printed dollar dilutes the value of all the other dollars. This causes rising prices because printed dollars eventually end up in people’s bank accounts, and the people use them to bid on goods. Since more dollars are chasing the same amount of stuff, the stuff either ends up out of stock or higher in price (sounds familiar?).


In a world without money printing, people must earn their dollars by making some of the stuff that other people buy. In other words, to get the dollars to spend in the market of goods and services, one must contribute something to the market of goods and services. Thus, a balance can be maintained between the number of things for sale and the dollars being spent on them. Nobody can consume more than they produce. Population growth introduces more money chasers and spenders, and without any new printing, the value of dollars goes up! Imagine if the dollars in your bank account gained purchasing power just because of deflation with time! We wouldn’t be so tempted to go gambling with stocks and cryptocurrencies now, would we? Savers would be rewarded, and most people would be pushed into financial responsibility instead of perpetual indebtedness.


Enter the government. As a society, we have agreed that there should be a government to handle tasks that benefit and protect society as a whole. In economic terms, the government is a group of people who do not contribute to the marketplace of goods and services like everybody else; government employees sit around making up rules, organizing armies, police forces, and many agencies and offices. To do all of that, the government actually takes goods and services out of the market even though it didn’t contribute to the marketplace whatsoever. Remember the bolded rule of economics from above? In an economy, there cannot be more net consumption than production. So, it follows that government must take some purchasing power away from the collective producers in order to maintain the balance of goods and dollars. That’s you and me. We lose some of our purchasing power every time the government spends money. Let’s talk about the mechanics of it.


An honest government has two options for getting money to spend on government stuff. It can tax hustlers like you and me, thus taking away some of the dollars we received in exchange for the goods and services we provide to the marketplace. After we pay the taxes, we are forced to consume a little bit less than we produced. It’s honest because our elected representatives set spending and taxes according to our will or they get fired. The government can also sell treasury bonds, allowing us to lend money to the government voluntarily and get paid back the interest and the original sum in the future. Once again, the government transfers some of my fairly earned purchasing power to itself, and the ratio between dollars and things dollars can buy stays in balance. Governments tend to tax first and sell bonds as a last resort because taxes don’t need to be paid back. Bonds do, and with interest. By the way, the total federal debt is the net amount of outstanding treasury bonds that the government pays interest on. The deficit is the amount of new debt added each budget year.


At some point, a government can’t tax anymore — they want to get elected again. And the thing with bonds is, somebody has to want to buy them. If they want to spend a lot, and they have already issued a lot of bonds, the bids on new bonds fall and the treasury yield goes up. This means that the interest on new government debt gets higher and higher causing a death spiral of more spending and more debt. Just imagine using a higher interest credit card to pay off your other maxed-out credit card which you used to pay off your mortgage. At this point, the government needs a new way to take away your purchasing power and transfer it to itself. Remember the money printer we talked about at the beginning? The government uses it! Through the federal reserve, the government starts buying its own bonds. When the federal reserve buys assets, it does so with dollars that did not exist before. Now instead of taking money from us the honest way, the government is making totally new dollars thus reducing the value of the dollars that you have in your pocket. It’s very sneaky because you don’t notice it right away as you would notice taxes taken out of your paycheck. But somewhere down the line, you will notice that the laptop you wanted is out of stock (your local government office just bought new laptops for the office with printed money), rent is higher (government issues rental assistance with printed money), and everything else you buy will be more expensive. Congratulations! Just like with taxes and bond sales, the government transferred some of your purchasing power to itself. But this time you didn’t vote for the taxes, and you didn’t voluntarily lend money.


The US currently has around 30 trillion in outstanding debt. This is more than the entire GDP of the country. In other words, the government could tax 100% of the productivity of the private sector for a year and still not pay off the debt. Higher taxes appear to be politically off the table anyway. There is literally no mathematical way that the government can continue to spend at the current rate without buying its own treasury bonds. It cannot let the bond yields go up, because the interest on that 30 trill would start to get mighty expensive. So there are two options left: cut spending drastically and balance the budget (which would cause great depression 2.0) or continue printing dollars through treasury bond purchases by the federal reserve. The good news is that nobody said you have to hold your wealth in dollars; as inflation progresses the price of “stuff” goes up. Those with hard assets like real estate will do okay because those assets will preserve purchasing power for the future. Those who live paycheck to paycheck will notice their purchasing power fall with every payday.