Reckless Spending Undermines Fed’s Fight Against Inflation

The United States may be in for a long period of elevated inflation. The Bureau of Labor Statistics reported on May 10 that inflation has dropped from 9.1 percent to 4.9 percent since the Federal Reserve started raising rates. Yet much of this drop is due to the fact that gasoline and food prices are falling. The core inflation rate (everything minus energy and food) remains at 5.5 percent, down from a high of 6.3 percent last year. While falling fuel prices may be giving consumers some temporary relief, the value of the U.S. dollar is still in steep decline.

Government spending: There are two types of inflation: nonmonetary and monetary. Nonmonetary inflation occurs when a drought destroys a harvest or a war disrupts a supply line. Monetary inflation occurs when a government devalues its currency through deficit spending and quantitative easing.

Fed rate hikes are designed to combat both types of inflation by encouraging governments and individuals to take their money out of circulation and stash it in savings accounts. Yet Democrats in Congress are still running trillion-dollar deficits despite the Fed’s rate hikes. So America’s monetary inflation rate remains above 5 percent.

Gold standard: Droughts, wars and other catastrophes always affect prices. So there is no sure protection against nonmonetary inflation. But there is a solution to monetary inflation: The U.S. government must stop printing and borrowing money to finance its perennial deficits and run a balanced budget. Then it must peg the dollar’s value to something that has more innate value than paper, such as gold, silver or copper.

A dollar spent in 1933 had roughly the same value as a dollar spent in 1833 because the dollar was pegged to the price of gold in both years. But since President Franklin Roosevelt forbade the Treasury and other financial institutions from converting dollars into gold coins and ingots, the U.S. currency has lost 96 percent of its value.

God’s system: In The Wonderful World Tomorrow—What It Will Be Like, Herbert W. Armstrong used Haggai 2:6-8 to explain that under God’s economic system, the gold standard will be established and prices will never change. Government officials could set up such a system today if they were not so addicted to debt. But economic planners want to pay for things by creating money out of thin air, so prices keep going up as real wealth is destroyed.