The inflation tax is beginning to creep up on consumers. According to the latest federal government data, year-over-year consumer prices rose by more than 5% economy-wide in June. That’s the most dramatic 12-month increase since 2008. Americans are especially being hosed at the gas pump. Prices are up by roughly 45% compared to last year.
Ballooning prices should be of no surprise. Inflationary pressures are ambushing the economy from all directions.
After being cooped up inside watching Netflix for a year, Americans are locked and loaded to go on a spending spree. As a result, too many dollars are temporarily chasing too few goods. At the same time, prolonged enhanced unemployment benefits that are keeping would-be employees at home have contributed to worker shortages. To attract staff, businesses must compensate entry-level workers with bigger bucks. Balancing the financial statements requires a bump in prices.
And then there is the massive amount of government spending from Republicans and Democrats alike that is sacrificing the value of our currency. Uncle Sam shelled out trillions of dollars in 2020 in response to the pandemic. Earlier this year, President Biden began traveling a similar path with his own $1.9 trillion stimulus package. While some extra expenditures were warranted given the severity of the health and economic crisis, bailing out state pension funds and financing pet projects was not. Now, the White House is proposing a $4 trillion “once in a generation investment.” These “once in a generation” spending ideas are redefining the term “generation.”
Dumping that kind of cash into the economy is not done without consequence. Dramatically increasing the money supply makes every dollar printed worth less than the last.
Washington’s spending addiction will not erase basic arithmetic. Congress can only spend money it collects. The rest is financed with debt. Although the impact of run-away debt is not as immediately recognizable to the average American as a more expensive cup of coffee, the repercussions down the road will require a stiffer drink.
The money we borrow from foreign countries is not without strings attached. Just like the interest you pay on credit cards, the U.S. has to make payments to service its debt. Interest payments last year amounted to $376 billion. That’s more than a billion dollars per day spent on nothing you value. And as the money we owe grows, other spending priorities like infrastructure repairs are increasingly crowded out.
Should interest rates tick up just one percent, the debt service costs will jump astronomically for our past borrowing of $22 trillion and growing.
It’s a chilling prospect. And despite what politicians seem to believe, a trillion dollars is not an amount of money that you can find under our collective couch cushions, let alone 22 of them. A trillion is almost too big to comprehend. For perspective, consider equating it to time. One million seconds passes over 12 days. One trillion seconds elapses over more than 30,000 years.
The price of a paper towel roll should not be our main concern. If our current trajectory of spending money we don’t have continues, all of our corporate and personal income taxes will be spent paying interest on the past accumulated debt. That is a prescription for the massive devaluing of every saved dollar. Not even a Bitcoin economy will save us.
• Richard Berman is president of Berman and Co. in Washington, D.C.