As I discussed in my last article the federal government has a love affair with big spending and inflation. What I didn’t discuss was the “why” and the “how” for trying to fix it. Now let me start by saying, other than the micro and macro economics courses in undergrad and graduate school, and 20 years in industry, I am by no means an expert. Nor did I stay at a Holiday Inn recently. That said, it doesn’t take a full-blown economist to see what is and will happen with inflation.
Let us start with the “why”. Why does the government love inflation? Well its pretty simple, when the government creates situations for inflation- putting more money in the economy than what was earned through growth, and actual results of producing something- they by default devalue the currency which is what inflation is.
Well what does that do? In simple terms it makes what you OWE, your debt, worth less. Let us use an example. Let’s say for arguments sake, a home loan remaining (debt) is $300k. Due to inflation and market demand (not enough houses so prices increase), drives the value up. Now someone can sell the house for $675k. You would look at that as a positive- but in financial terms its not.
You see, if the price was inflated to $675k, great it sells, the owner makes $375k so the debt was much easier to pay. The problem is though, when you need to buy a new house, the same money that got the last house, is not even close to what will get them the next house of the same features. The nominal value is much less. Your dollar bought you half as much as it did on the last house.
The same thing works for the government- they want inflation to lower the value of their debt. Its easier to pay off in theory. The problem is, they never intend to pay it off. So, we as a citizenry are the ones who suffer with much higher prices and challenges to in the market place.
You must remember the government does not add any value to the economy. They take money from those who do add value and redistribute it while taking percentages to keep themselves going. No value is added to the actual economy.
So what do we do? How do we overcome?
Well, the first thing is getting politicians in office that have at least passed an ECON101 course. That will help. The second is growth. Growth makes the financial PIE bigger. It takes creators, entrepreneurs, small businesses, corporations, investing their money in growing their businesses. Making new products, creating new value in the market.
I know it sounds simple, but it really is. The more a corporation or small business is taxed, the less it can invest in growth. So, the government takes more money, just redistributing it and taking some to pay themselves. Whereas the company or small business would have that money to invest in new products, hiring more people, expanding product offerings etc.
Has it ever been a curiosity that when we cut taxes, the government takes in record income tax? Does anyone ever wonder that? Now, I’m not saying we need to fill the government coffers, but the reality is lowering taxes increases government revenue and keeps more money in the economy to grow. There are multiple examples just in the last 40 years.
All this to say that growth combined with cutting government spending, is what helps solve the inflation crisis ahead. I would recommend we cut taxes more. Take the corporate tax rate down to 15%, adjust the tax code to a flat tax or readjust the progressive rates to lower, especially on the higher brackets. Rich people are the employers. We need them having the money to employ.
That yacht that gets ridiculed by politicians, employs a couple hundred people to make, more people in supply chain, logistics, manufacturing, etc. That 3rd house that is frowned upon, took a contractor, painter, electrician, roofer, landscaper to make. Adding value.
Go back to my last article analogy. Why is inflation getting so high? When we influx money to the economy that is not earned, it decreases the value, which increases prices. If I had $100 and there were 100 chairs to buy. Each chair can get $1 per chair. If I have $200 and 100 chairs, then each chair gets $2. (inflation).
If I make more chairs and sell more chairs and the economy has grown (more business, more people making income that can buy more chairs, more value being added) then we can work to outgrow the inflation. It will probably take a decade, unless some major technological breakthrough occurs, but we need to start now.
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