What Out for Inflation

No One IS Watching Out For Inflation

James “Seamus” Dunn

The current imbroglio over the debt/ deficit/government shutdown is over now. But there is a bigger problem looming that no one is looking at. It is inflation and the weakening of the dollar with its replacement as the world's reserve currency.

President Barak Hussein Obama has nominated Fed Vice Chair Janet Yellen to take Chairman Ben Bernanke's position as the head of the Federal Reserve. She basically walked into the position when Obama's first choice for the position, Lawrence Summers bowed out due to political pressure.

Yellen is seen as a dove in the fed, meaning that she agrees with Bernanke's concept of Quantitative Easing (QE). QE is the federal reserves purchasing of treasury bonds with newly printed money. This puts additional money into the treasury for banks to borrow at low rates which in turn loan the money out. This keeps interest rates low that the banks charge for loans. It is a boon to the housing industry and anyone else who wants to borrow in order to expand their businesses. The problem is that businesses aren't doing much expanding, at least not in a way that produces higher United States employment. The unemployment rate has been dropping over the last year from 7.8 to 7.3 percent, which the Obama administration proudly crows about, but the reason that the rate has dropped is that there are fewer people in the work force now than at the being of Obama's presidency, not because of an expansion of job opportunities. And many of those jobs are part time positions due to the requirements of Obamacare.

So that is where Yellen comes in. She claims that she has two jobs to do. One is to keep inflation low (and she will do this by continuing QE, which is really an inflationary concept) the other is to provide jobs. I had never heard about this being a job of the federal reserve which was created in 1913 to provide a sound dollar. Now it is the fed's job to provide Americans with jobs?

But there is a problem with printing money. It has been the last resort of banana republics and failed governments throughout the centuries. Argentina, Zimbabwe, and Weimar Germany all printed more and more money as a remedy for bad economies and paid the price in run away inflation. Some say that the United states has avoided the problem of inflation so far, but once again, that is if you believe the official numbers. In August of 2013, the inflation rate was 1.8 percent with according to the Bureau of Labor Statistics. The core inflation rate does not include gas and food because they are too volatile. That is so precious, it is ridiculous. Food and gas are two basics needs that people cannot live without nor cut down on. Other things will be cut out of an individuals budget, but gas and food are needed for survival. And it is those items which have best exhibited inflation recently. Milk, meat, and other basic items have gone up as well. But the government will ignore the prices of these items when calculating “core” inflation.

According to EIA data, Energy Information Administration, the average price of a gallon of regular unleaded gasoline in the United States was $1.838 on Jan. 19, 2009--the day before Obama took office. As of Monday, Feb. 11, 2013, the per-gallon price had risen to an average of $3.611--an increase of 96 percent.1

The price has dleveled some since February, but the point is the same. Inflation has taken place even though politicians and the mainstream media claim that it is flat or nonexistent.

Gas (petroleum on the world market) must be sold in dollar denominated prices. It was a deal that President Richard Nixon and his Secretary of State Henry Kissinger had worked out in the early 1970's with Saudia Arabia when the United States left the gold standard. The dollar was then, and is now the “reserve currency” for the world. More precisely it is the petrodollar that is today's reserve currency. But as the fed increases the money supply through QE, it devalues the petrodollar. The price of oil goes up because one dollar buys less as it is devalued. Still it is the petrodollar that is under attack. Other countries especially China and Russia are working to end the petrodollar. They do not want to have to pay America their cut by using the dollar in order to buy oil. Iran has been supplying China with oil and accepting the renminbi, the Chinese currency, and so has Russia. They are not the only ones looking to replace the petrodollar with a possible basket of currencies. Brazil, India, even our old ally Australia wants to see the petrodollar replaced. All of these actions will increase the cost of the United States doing business for oil. Also if the world market does not need the dollar in order to buy oil, there will be millions upon millions of worthless dollars floating around the world that nobody will need or want. When this scenario happens the United States will experience hyperinflation such as what happened in Argentina, Zimbabwe, and Weimar Germany. The Fed under Bernanke, and under a future Yellen will be driving this country to that point.

So you would think that the smart people in Washington would be able to see this coming and stop printing money now. This is easier said then done. What few industries that are hiring are doing so because they have access to easy (cheap) money and will pressure Washington not to change fed policy. They will claim that ending QE will kill the nascent job recovery and they will have to lay people off, driving the unemployment numbers up. Also the housing industry, which was at the epicenter of the last recession, will be screaming bloody murder because its recovery has been driven by QE. So there will be pressure from businesses not only to keep the course, but to increase QE. This is typical of inflationary periods. Those who benefit from it in business and in politics cannot end it. This need to be stressed, these industries are addicted to government induced inflation. Their current profits and policies depend upon the dollar becoming worth less, in order to boost their balance sheet. The problem with ending inflation is the inevitable and necessary deflationary period that follows. When the bubble bursts, a million dollar house will be sold for $100,000. Those who have borrowed heavily, and their creditors will be the losers, as will those out of work who can’t buy what they need. The stock market will fall from 14,000 to 6,000 again just as it did at the beginning of the Obama presidency. To avoid this, politicians continue to pump up the currency to astronomical heights, except they push it away and it grows. In Weimar Germany in the early 1920's, you could go into a restaurant order a meal at one price and have it double by the time you finished it and you were ready to pay the bill.

What really broke Germany was the constant taking of the soft political option in respect of money. The take-off point therefore was not a financial but moral one; and the political excuse was despicable, for no imaginable political circumstances could have been more unsuited to the imposition of new financial order than those pertaining in November 1923, when inflation was no longer an option. The Rentenmark (the replacement for the mark) was itself was hardly more than an expedient then, and could scarcely have been introduced successfully had the mark not lost its entire meaning. Stability came only when the abyss had been plumbed, when the credible mark could fall no more, when everything of financial cowardice, wrong-headedness and mismanagement had been fashioned to avoid had in fact taken place, when the inconceivable had ineluctably arrived (inescapably arrived).2

I am afraid that politicians including future Fed chief Yellen, will continue to take the “soft political option” until the dollar becomes worthless and the US is thrown into the dark abyss of an economic collapse that will make 2008-09 look tame in hindsight. Some will prepare for that day. Some will buy gold, silver, prepare for roaming bands of unemployed, but others will be caught completely off guard. It can be avoided-if there are statesmen who can make hard stands facing withering odds and still do what is right. They are few and far between.

James “Seamus” Dunn is the author of The United States of Empire-The Passing of the Mantle From the United Kingdom to the United States. He will present it at the Barnes & Noble at the Smithfield Crossings on Route 44 Smithfiled from 6-7:30 on Wednesday October 23rd.

1 http://cnsnews.com/news/article/price-gallon-gas-96-under-obama#sthash.zVdB5SPt.dpuf

2When Money Dies -The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany. Adam Fergusson ( New York : Publicaffairs,1975) page 255