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Inflation: Root Causes (Vol. 78)

Updated: Feb 7, 2023

analyticsbox | Nov 17, 2022


Inflation Flow Chart

Not so Fast - It’s More Complex than You Imagine

Too much money chasing too few goods. I get it and most everyone does. It is a monetary phenomenon. But let’s go a bit deeper, why is there too much money and why are there too few goods?

POLICY: As with most issues, the government’s own policies are impacting inflation the most. So let’s examine both sides, Money and Goods.

MONEY: MONETARY POLICY is greatly impacted by a need to fund deficits. So why do we have deficits? Because we have bad FISCAL POLICY. Since 1960 we have run deficits every year except 3 in the late 1990’s under President Clinton. In the last 22 years alone, the U.S. has added $25 Trillion in debt, resulting from continuing deficits, with no end in sight. The CBO (Congressional Budget Office) forecasts another $14.5 Trillion more debt over the next 10 years, if we don’t add any new programs.

When we have deficits, they must be financed, and there are 2 options: borrow from private sources, or print money. Private financing does not impact the money supply - we are taking out funds from the economy equal to what the deficits are adding. Printing money increases the money supply. To the extent that output is increased proportionally to the money supply, this is not harmful, but when you print money faster than output grows, it is inflationary (too much money chasing too few goods). And that is what we have been doing in extreme amounts for the last several years. Bad fiscal policy, coupled with bad monetary policy = inflation.

But that’s not the whole story.

GOODS: Any policies that hurt the supply of goods or services, restricts availability. If goods and services are less plentiful, the price goes up - the laws of supply and demand really work. Or if the policy adds to the cost of goods, the cost must be passed on, increasing the price. Any policy that restricts availability or adds to the cost = inflation.

The examples are numerous, let’s think about a few. Energy is on everyone’s mind. The government has curtailed production in many ways - restrictions on leasing, difficulty permitting, costly regulations, etc. This has driven the cost of energy up dramatically, and this ripples through the entire economy. Inflation. Tariffs on imported goods. Inflation. Difficulty in starting new mining operations. Inflation. Unbelievable and unnecessary regulations on business. Inflation. The list is endless, and it is all contributing to inflation.


BOTTOM LINE

Economic policy can be good, and foster growth and prosperity. Or, economic policy can be bad, and hurt the economy in many ways, slowing growth and causing inflation. And policy can be terrible, leading to virtual destruction of an economy as happened in Venezuela, North Korea, and others.

75% of the folks in this country believe we are headed in the wrong direction. They are right. We need to ‘right the ship’ before we go over the Fiscal Cliff and to improve prosperity for all.

Please take some time to visit our website, learn more about economics and the problems we face. Contact Congress. We made it easy for you on our website. Do it now.

LEARN ECONOMICS, THEN VOTE SMART

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