June 11th, 2021

in the soup

Too much of a good thing

In the Sixteenth Century, the Kingdom of Spain controlled most of Central and South America as well as the Philippines. They looted the natives and exploited them terribly. They worked the natives to death in the silver mines, too. Tons (literally) of silver were exported to Europe, much of it spent on armaments, as in the Armada sent against England. In the end, the influx of silver not only financed Spain's brief moment of greatness, it also wrecked its economy.

For money is not a fixed good. Money is the means of exchange of goods and services. Money is measured in terms of prices, which are always in flux. As goods and services vary in supply, so prices are constantly being adjusted. If too little money is available, the exchange of goods and services is inhibited, and people are unable to buy because there is too little cash available. But if too much money is available, people have to pay more and more for the same goods and services, because their supposed affluence bids up prices.

The Spanish empire experienced severe inflation because they kept importing silver to finance their spending. But the amount of goods and services didn't increase with the same rapidity as the amount of money in circulation. The same thing happened after each major gold rush in the Nineteenth and Twentieth Centuries. The first big influx of gold made some people very rich (i.e., able to buy lots of stuff). But the increased amount of gold in circulation made prices for everybody go up rapidly.

Today, our money isn't backed by gold or silver. It is merely a convenience, facilitating the exchange of goods and services. But our government keeps pumping more money into the economy, and it's not helping. That first $600 covid relief payment helped some people. The next $1200 relief payment was more than most needed. The last $2000 payment was simply gratuitous. Combined with the expansion of unemployment benefits, it has injected massive amounts of cash into our economy in a time when the supply of goods and services has not increased; indeed, while we are unsnarling the supply chain problems created by last year's pandemic, the supply of goods and services is temporarily restricted. But there's plenty of money -- too much money.

There are jobs everywhere -- but not applicants. Banks don't want deposits, because they can't make anything off our current, historically low, interest rates. Prices for food, for gas, for lumber (this last affected seriously by Trump's stupid trade war with Canada) are taking off. There is simply too much money in our economy, and Biden wants to spend ever larger amounts -- on what, seems irrelevant. Just spend.

Historically, there are two ways to curb inflation. You can drastically reduce government spending (good luck with that). Or, you can raise interest rates; which, given the amount of debt the government is financing, will blow a huge hole in the federal government's expenses. Right now, debt service is 8% of all federal spending. Wait till it hits 12%: everything, including Social Security and defense, will be threatened.