Human Costs of Inflationary Monetary Policy

Inflation is not a rise in prices; inflation is an increase in the money supply, which often increases costs. In the last year, the Federal Reserve has added about $1.5 Trillion to the money supply. The adverse effects are numerous and include higher prices (which wages won’t keep up with), loss of productivity, loss of value in people’s retirement and savings, and an unfair advantage for the people who get the new money first.

The effects of the creation of new money go far beyond what the Consumer Price Index leads people to believe. However, even according to the CPI, inflation has potentially devastating effects on American’s at all wealth levels.

The CPI estimates a current annual price inflation rate of 5.4 percent, which is the highest price inflation rate since 2008. In June, energy prices rose 1.5 percent, and gasoline prices rose 2.5 percent. The energy index rose 24.5 percent over the past 12 months, the gasoline index 45.1 percent and used car prices 44.2 percent. This impacts all Americans, especially those commuting to work who now have to put a more significant portion of their paycheck towards gas and may even have trouble affording food and other necessities if they were already living on a tight budget. Even if people’s wages rise with inflation, they will be pushed into a higher tax bracket and not keep as much of their money.

5.4 percent is not an insignificant number. Anyone who retired on a fixed income or is saving their money has to make significant returns on their money every year, or else they are losing a large amount of its value consistently. Even at the rate of 5.4 percent, the CPI does not accurately account for inflation. The CPI does not include investments, including real estate and house prices which rose 15.7 percent from April 2020 to April 2021 are a major mover in inflation.

The CPI also does not account for the counterfactual. In a system of voluntary exchange, prices should be going down because goods and services should become more accessible. The only industries where prices seem to go down are industries that innovate at such a fast rate that they can overcome the influx of new currency. For instance, the costs of the category, recreation commodities, which includes televisions and audio equipment, decreased by 0.3 percent in June. These might become even more affordable if it was not for the actions of the Fed. With a stable currency, people would have better access at a higher quality if they chose to save their money.

Some people benefit from the addition of credit by the Fed. The primary beneficiary is the U.S. federal government because the Fed is willing to create money to purchase its debt. According to a July 8th federal reserve balance sheet, the Fed owns $5.2 trillion in U.S. Treasury securities out of $8 trillion of overall credit. That is up from $4.2 trillion on $6.9 trillion in credit a year ago. The Fed graph of currency in circulation looks like an exponentially increasing curve. The total amount of currency in circulation has more than doubled since 2011. As Dave Smith pointed out on his Part of the Problem podcast, the people who benefit from this would be the people who get the money first— before the prices go up. This would tend to be people who are already very wealthy.

The debasing of U.S. currency by the Federal Reserve is no less of a crime than counterfeiting. It lowers the value of everyone’s money, causing people to have lower living standards (or at least lower than what would have been possible) and decreased savings. Ending the Fed is the best step towards increasing economic opportunity for all and diminishing the state’s power.

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