A distraction and a risk

When the author of this blog was growing up, a 6 oz. bottle of Coke cost only 5 cents. 50 years later, the same 6 oz. bottle would sell for 50 cents, if that bottle were still available. (The 12 oz. can usually sells for $1.00 in many outlets, so I use that for my comparison.) Even if my prices are off a little, the price of most optional consumables has gone up by a factor of 10 since I was a child.

Inflation is the thief that robs us all without immediate pain. Governments tend to spend more money than they take in via taxes, and quietly run the printing press to repay creditors with inflated currency. America has done this several times in our history, most notably during the Great Depression, when we changed the price of an ounce of gold from $20 to $35, and then confiscated the gold in American citizens' hands. 

The second time America raped its currency was during the Vietnam war. Instead of taxing the public, and openly dealing with the costs of this unneeded war, we issued debt that would be paid off with cheaper currency. And our government got into the habit of printing money, inflating the currency, until we had short term interest rates approaching 18%. When credit card debt isn't expensive, the economy has serious problems. And we did have them in the late 1970's and early 1980's, where Jimmy Carter had to slam the brakes on the economy to prevent hyperinflation from kicking in.  (Of course, Ronald Reagan got the credit here, as actions of one president often show results in the next president's term.)

Today, we're seeing a great distraction taking place. Our president has decided that the public wants a stronger military (rah, rah, rah for our team - yeah, right!) and is willing to spend money that we don't have.  During his campaign, he posed a question which is very dangerous for the issuer of the world's settlement currency - why doesn't America renegotiate its debt, and settle for pennies on the dollar? Many people have forgotten that question, but I haven't. What will happen if he decides to pay back creditors with cheaper dollars?  

70 years after World War 2, the world now has several decent options for a settlement currency of choice, the dollar being only one of them. The other two possibilities of note are the Euro and the Chinese Yuan. Any nation or zone that issues the dominant settlement currency has a distinct advantage, as its businesses have an easier time dealing with currency risk. And that results in lower costs for the nation/zone, resulting in a higher standard of living for people within that nation/zone.

Can we afford another round of inflation?  No.  But based on historical trends, we will likely see one with disastrous effects. Hopefully, I am wrong, as there are a lot more people living on fixed incomes now than when I was a child, and they are much less able to afford the risks of inflation.