Commentary
One of the main reasons for public ignorance of economics is the way economic forces can operate independently of politics. Issues that seem beyond political control or involve both major political parties can easily be overlooked by the public.
This is evident in the inflation problem that has significantly affected the American standard of living. The purchasing power of the dollar has decreased by around 20% over four years, and depending on what is being bought or avoided due to high prices, the decrease could be as much as 30% or even 50%.
The root cause of inflation, as identified by economists over many years, is the money stock. If the money supply grows faster than economic output, the value of existing money units will decrease. This relationship between money stock and price levels has been demonstrated over the last four years through the analysis of M2 (a measure of the money stock) and the prices of commodities purchased by producers.
While deficit spending by Congress and actions of the Federal Reserve contribute to the expansion of the money stock, the central bank is often seen as the solution rather than the cause of inflation due to long-standing propaganda. Despite some stabilization in inflation rates, the damage to the standard of living has been significant and irreversible.
Although there are potential solutions to improve the future, such as focusing on the energy sector for increased drilling and refining, the challenges remain, particularly in the fiscal realm.
The Federal Reserve’s recent actions can be directly attributed to Congress and the excessive spending that occurred from 2020 onwards, resulting in a significant national debt that needs to be addressed. While some may argue that the debt is insurmountable, with the right measures, even severe fiscal challenges can be overcome. However, this would require substantial spending cuts of 1 to 2 percent of GDP, equivalent to $280–500 billion, which is currently not being considered.
Similar to the situation in Argentina, where a new president implemented drastic budget cuts to swiftly resolve fiscal issues, the United States could follow suit. By achieving high economic growth, reducing government spending, and implementing deregulation measures, confidence among investors, lenders, and consumers can be restored, leading to a rapid resolution of seemingly insurmountable problems.
Unfortunately, there is a lack of political will in the U.S. to make significant budget cuts, with mere reductions in the rate of spending increases being the norm. However, with the right determination, it is entirely feasible to eliminate entire government agencies and implement substantial cuts. Argentina only took such extreme measures after facing a complete collapse, highlighting the importance of proactive action before a crisis ensues.
While inflation may not worsen significantly in the near future, the impact of past monetary policies is evident in everyday expenses. The current money supply appears stable, suggesting continued low inflation rates based on existing price levels. However, concerns arise regarding potential rate cuts in September, which could lead to increased money supply and reignite inflationary pressures. The Federal Reserve’s substantial balance sheet poses a risk of inflation, reminiscent of the 1970s economic turmoil.
It is crucial to learn from past mistakes and take proactive measures to prevent a similar crisis. By addressing excessive spending, implementing necessary cuts, and avoiding reckless monetary policies, the U.S. can steer clear of a future economic disaster. The views expressed in this article are the author’s opinions and may not necessarily reflect those of The Epoch Times.
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