Inflation – part one

Possibly the most amusing phrase that comes out of the Federal Reserve’s head honcho, Mr. Bernanke, is that “We’re going to keep inflation under control.”  Not to flog an almost dead horse, but we just have to face the facts.  The very dictionary definition of inflation, is: “An increase in the currency supply.”  With $9 trillion running off the presses just this year, is it possible to keep inflation ’under control?’  To a degree yes, because if one looks at all price increases, and averages them out, the decline in housing prices, decline in things such as copper, oil, and even gold and silver, can make inflation appear to be temporarily inconsequential.  Believe me, it’s temporary.

The big picture though, is that inflation has been rearing its ugly head ever since FDR did his thing and got us into WWII.  We had 50% inflation during that war, because the gold backing of dollars was drastically reduced, and the war was fought with semi-backed dollars, which caused inflation.  At the end of the war, consumer goods cost about twice what they had been before the war.  My family bought a new Plymouth for $660 in 1940, and a new Ford in 1949 for $1900.  In my Dad’s drug store, the public phone went from a nickel to a dime, and coffee and Cokes the same.  Cigarettes went from 13 cents and two packs for a quarter, to a quarter a pack.    All things don’t go up evenly because of supply and demand.  As examples, in 1940, gas was 19 cents a gallon, and after the war it was 26 cents a gallon.  Maybe because during the war a lot of refining capacity was built, making the cost lower?  Milk, on the other hand went from 8 cents a quart to 23 cents after the war.  Stamps remained the same at 3 cents first class.

I could rehearse these figures endlessly, and they’re available to anyone who wants to look, but a new home was going for $6,200 before the war and $13,500 after.  Inflation? A first class stamp has gone from 3 cents to 42 cents, and a raise comes next month.  That’s exactly a 1400% inflation rate for stamps in 55 years, or a 15.5% inflation rate for postage per year.  Bread at eight cents, and a new house at $6,200?  How many thousand percent inflation is that?

Inflation is manifested by prices going up, but the actual process is, “an increase in the currency supply,” as the dictionary defines it.  The actual price going up will invariably be delayed, because of exhausting inventories, delayed wage increases of manufacturing, transportation, and retailing, and delayed price increases in raw materials.  Some raw materials come from overseas, and their inflation rate may be lower than America’s, and the cost of raw materials will affect retail prices.  The huge inflation rate we currently see, (increase in the currency supply), with $9 trillion added to the currency supply, may see prices going up far slower than one might expect, but the laws of economics say they will go up proportionately…eventually.  I just replaced a perfectly good refrigerator and dishwasher with new ones.  The old ones were 15 years old, and still worked fine, but when inflation hits, new ones will cost far more than I paid for new ones now.  I intend to do the same with the washer and dryer soon, even though the current ones work fine.  Planning ahead makes sense to me.

I think that we have had probably 1400% inflation since 1940.  From 1900 to 1940, very little, and maybe even a slight deflation.  The reason is that while dollars were 100% backed by gold, mass production came into existence, thanks to Henry Ford, and others followed.  The reduced cost of manufacturing made things cost less, and therefore perhaps a slight deflation.  Model T Fords ended up costing $275, brand new.  New brick row houses at the turn of the century cost about $2500, and I bought a rather well aged (beat up) one on Cresson St in Philadelphia for $3300 in 1963.  That one probably cost $2500 when new in the early 1900’s, and was so cheap because it needed a major overhaul.  To say that America has had no inflation, or that it can be “kept under control,” when the presses are running night and day, is absurd.  It will happen, and to be prepared for it, is to be smart.  Being smart, means keeping one’s surplus assets out of decreasing value dollars, which is the inevitable inflation.

Zimbabwe is a classic case of inflating.  In 1980, Zimbabwe had a rather mild inflation rate of 7%, which is probably less  than America’s today.  A year later, it jumped to 14%, and by last July, the inflation rate was 231,000,000,000%.  A loaf of bread cost $30 trillion Zimbabwe dollars when the currency was declared to be worthless.  Surely, this couldn’t happen here, could it?  Since 1979, according to Wikipedia, there have been 19 instances of hyper-inflation in the world, and Zimbabwe’s makes 20.  1400% in 55 years here in America, to me is frightening, but the worst is yet to come.

During the War Between the States, incorrectly called the Civil War, both sides inflated, till neither the North’s greenbacks, nor the South’s Confederates had any value at all.  In the South, as an example, what a Confederate dollar bought in 1861, was priced at $1200 by 1865.  The bullets, guns, swords, and fighting materials were bought on both sides with paper money, backed by nothing, and the inevitable happened. Authentic Confederate money is now worth it’s face value, thanks to antique value, but I doubt that a new 2009 dollar bill will be worth much as an antique in 2150, but who knows?  We won’t be around then.

We’ve been through the German thing before, but here’s a refresher:  Germany lost WW I, and for the first and only time in history, the loser was made to pay for the damage it did.  The “Treaty of Versailles,” forced Germany to pay hundreds of billions of reichsmarks in damages.  As an aside, when Germany and Japan lost WW II, America paid them royally for their damages done.  We rebuilt their steel plants, and sent them gobs of dollars, via an abomination known as “The Marshall Plan.”  At any rate, Germany was broke.  How was she to repay anything?  Her industry had been crushed, and no one would have bought from her anyway, so angry was the world.  She had to pay, so what could she do?  Start the presses and pay with printing press money, of course.  The reichsmarks went from 25 cents US, to maybe a billion to the dollar, and then it was declared worthless.  A loaf of bread, before the worthlessness was declared, took a wheelbarrow of paper scrip to buy.  A cup of coffee may cost one price, and the refill more.   This all happened in Germany, the South, North, Zimbabwe and all the rest, because currencies were printed with no backing, which released politicians from discipline of any kind, and then guess what they did?  Printed to pay their bills and get re-elected or solve problems, which is exactly what is happening now, today, and currently.  Think about this.  Since politicians are factually responsible for most if not all of America’s woes, are they indeed political criminals?