The Government Loves Inflation More Than It Loves You

Posted on October 22, 2021

By Paul Vanguard, for BullionMax.com

We've already covered who's paying for inflation: the middle class and below. In other words, the bottom 50%. Those of us least able to afford it.

But who is truly benefitting from it? Maybe you've wondered why we need the 2% targeted inflation rate that the Federal Reserve decided was part of its all-important mandate, when so many economists argue we should go in the opposite direction?

Well, it just so happens that the primary beneficiary of the inflation-setting Federal Reserve is the Fed's own boss, the government.

"Food's too expensive? Stop eating so much!"

Mises contributor Daniel Lacalle ventures where few would dare as he questions the government's statements. We know that, thanks to inflation, purchasing power is always eroding. When it comes to the why, though, there seem to be some disagreements…

White House chief of staff Ron Klain says inflation is a "high-class problem", while Press Secretary Jen Psaki said inflation is happening because people are buying more things than ever before.

Wait, what?

Which of these numbers screams "high-class" to you?

Commodity price increases over the last year... (Thanks, Charlie Bilello!)

• Heating Oil: +116%
• Gasoline: +106%
• WTI Crude: +98%
• Brent Crude +97%
• Coffee: +95%
• Natural Gas: +75%
• Aluminum: +66%
• Lumber: +52%
• Cotton: +52%
• Copper: +49%
• Sugar: +30%
• Corn: +30%
• Wheat: +16%
• Soybeans: +15%

Since we've already deeply explored how the 1% are the least damaged from inflation (and that the further up you go in that 1% the more this is true) we can't dismiss inflation as "a high-class problem." It is, in fact, the opposite.

As for Psaki's comments, do those really deserve discussion? "Food is more expensive, so stop eating so much, fatty." Seriously?

Whatever people are buying, with Capital Economics' latest data showing that real consumer spending in the U.S. is down 1% year over year, it can't be having much of an impact.

So what's really going on?

Lacalle makes the obvious point: that inflation is happening because of an overexpansion of the money supply. Economics 101, supply and demand. More money chasing the same amount of goods makes prices rise. (It's almost too logical to make sense.)

So, let's ask the question in a fancy lawyerly way: cui bono? When inflation rises, who benefits?

The primary beneficiary is the government printing the money. Here's why.

Over the last 20 years (with one odd exception in 2007), the U.S. government has spent more money than it's made. Every. Year. How does the government finance that spending? By issuing debt, Treasury notes, bills and bonds. IOUs. "I'll gladly pay you Tuesday for a hamburger today," if you remember the character Wimpy from the Popeye comics.

The Federal Reserve keeps interest rates low. That means it's cheap for the government to issue lots and lots of debt, creating more money. That also increases the rate of inflation. Remember the Econ 101 lesson? More money chasing the same amount of goods drives prices up.

Here's the killer part though… The government pays off old debt with new dollars that (thanks to inflation) are actually worth less. This is a deliberate policy decision. If you spend more money than you make, year after year, it's absolutely in your best interests to keep your debt service payments as low as possible.

I can already hear critics of this simple logic argue: "If that's the case, why doesn't the government just print $28 trillion dollars and pay off the debt all at once?"

Because, if they did that, each and every dollar in circulation's purchasing power would instantly plummet to zero. Worldwide, no one would accept dollars for anything. (This may sound pretty far-fetched, but it happened to the Icelandic krona back in 2008.)

If that happened, every American who's being stealthily pickpocketed daily by inflation would suddenly wake up, mad as hell, and break out the torches and pitchforks.

That's why inflation, in order to successfully wipe out the government's debts, has to be slow and steady. It's like the frog in the pot on top of the stove. At no single point does the water feel uncomfortable, and shortly the frog's ghost is wondering what happened.

Does this sound outrageous? Let's consider the same question from another angle…

How do governments repay debts?

We've established that governments issue IOUs. So where does the money to repay those IOUs come from?

There's one main source: taxation. The government's revenues come from the taxes we pay. That's it.

Next question: Do you want to pay more taxes? Of course you don't! Nobody does. And if someone says to you, "Vote for me and I'll raise your taxes," you'll laugh all the way to the voting booth.

That pretty much deprives government of its main source of revenue. Listen: I'm not saying we should pay more taxes, okay? However our nation does owe over $28 trillion dollars, and I believe in making good on debts. So what do we do?

If you're a fiscal conservative, you'd say we need to have some financial discipline. We spend less on stuff, a whole lot less if necessary, and use the extra money to pay down our debt. Like a business. Like a household.

If you're NOT a fiscal conservative, well, then you believe thatgiving away money somehow magically makes more money. You claim that spending a trillion here and a trillion there on things like "infrastructure" and expanding social services will somehow, at some point in the future, raise the amount of revenue generated by taxes. <shrug>

Say you believe that. Maybe it's true! Meantime, in order to pay for all that spending, what do you do? Print more money. Which causes inflation, which makes your debt cheaper…

Ultimately, it doesn't even matter if all those trillions spent today somehow conjure future tax revenues. You win either way. If future tax revenues go up, you might use them to pay down debt (or you could just pile on more spending). If future tax revenues don't go up, you don't really care because you've successfully inflated away your debt.

It's a win/win!

Except for, you know, your citizens.

That's why you tell your citizens the inflation is transitory. People aren't stupid. You and me, we know inflation is bad. So if the government blames supply chain snarls and evil profiteering coffee barons, they're distracting us from the issue at hand. They're buying time to let the inflation do its real work of eating away at our national debt.

Two final thoughts

Today, the after-inflation interest rate on a 10-year Treasury bond is -0.96%, officially. That means the relative amount of our nation's debt is declining. If you owed $28 trillion dollars, would you want that number going up or down?

Second: do you remember a time, decades ago, when a family owned a house, a car and then some, all on a single, middle-class worker's salary? These days, both the middle-class father and the middle-class mother are working to pay off the debt on that house and that car, hoping to someday afford to send little Johnnie and little Suzy to college. Ownership of real assets is a distant dream.

What happened? One answer: inflation. Who's to blame? One answer.

Paul Vanguard is a lifelong precious metals enthusiast and a proud member of the BullionMax team.