Inflation, devaluation, and other man-made woes

When filling up my gas-guzzling, high-carbon-footprint car, fuel costs more than twice the amount it did two years ago.  When I go to the grocery store, it cost much more to buy the identical items as a few years ago.   

The first example demonstrates an artificial scarcity brought on by Federal intervention.  In this case, lack of drilling permits and gas pipelines.  This commodity is made scarce by a regulation and therefore the cost per unit goes up.  Gas and oil is still in the ground, it’s just that our government has decided to block production and transportation.  This inflation is artificial.

The second example, cost of groceries, is a different case.  These groceries cost more because the value of the dollar has declined.  Its not due to scarcity, but devaluation.  Our US Dollars, on a per unit basis, are worth less than before.  What changed?

The Federal Reserve and Treasury Department made a fateful, and hopefully not fatal, decision in 2008.  They colluded to print over $8 Trillion new US Dollars in an arcane sleight of hand called Quantitative Easing or QE.  This is the beginning of the devaluation of the US Dollar.  

The Supply of Money, like any commodity, is subject to excess or scarcity.  In this case, the Fed Reserve created an extreme excess of dollars and thereby devalued every other dollar in circulation.  It’s why your cost of food, clothes, concerts, and services, is so high now.

Seeing a pattern yet?  The source of inflation, in the majority of cases, is federal action, not markets.  And if inflation is caused by government action, then government can solve it?  Really, would you trust a thief to replace your stolen valuables?  Then why do we trust the federal reserve to fix the problem they created?  

The Feds answer to excess dollars in circulation is not to reduce the amount of excess dollars in circulation, and thereby increase the value of every other dollar.  Which would rapidly reduce the cost of commodities.  Rather, the federal solution is to raise interest rates to crush the private economy.  It doesn’t make sense.

Herein lies the crux of the matter.  Our government can be relied on to do one thing: increase the size, scope and power of the government through its bureaucracies.  I understand that people who work and prosper in government want more control.  I just don’t appreciate that their control comes at the cost of private citizens’ freedom.  Neither should any of us.

This is a stark example of the reason for our Constitution.  This founding document recognized that a government is necessary and that, in highly limited areas, it should have tremendous power, like the military or federal law enforcement.  But the majority of the Constitution is directed at controlling the federal government in order to preserve the rights, freedoms and responsibilities of the individual.

The freedom of the individual gives rise to free markets, capitalism.  I raise this point because, in the examples above, the government has has taken courses of action that harms the private economy and by extension, the individual.  

For instance, the source of inflation is an excess supply of dollars or an artificial scarcity of a commodity.  The money supply issue is directly tied to government spending.  The Fed Reserve and Treasury created these QE dollars so that congress could spend more money on their favorite pork deals.  

What they forgot to tell you is that you, the individual, will pay for that spending because it is based on debt.  Debt that will hit the individual through inflation (dollar devaluation) and the cost of the debt, which is interest on the Treasury Bonds issued under QE.  Never trust a thief to replace your stolen items…

The solution is free markets, the individual’s right to choose and private business, and that requires a government that adheres to the controls placed upon it by our Constitution.  So, please think before you ask a thief to replace your stolen items or a bureaucrat to solve your problems.

Jay Davidson is founder and CEO of a commercial bank.  He is a student of the Austrian School of Economics and a dedicated capitalist.  He believes there is a direct connection between individual right and responsibility, our Constitution, Capitalism, and the intent of our Creator.