Michael A. MacDowell: Inflation: The Good and the Bad News

Historically, the impact of inflation on families has two aspects. The bad news is that everyone’s take-home pay is worth less. The most recent calculation is that current inflation has accelerated to a rate of 7.9%, posting the highest rate of inflation in over 40 years. If this rate of inflation continues, your income could be worth about 8% less than it was last year.

Usually the good news about inflation is that it tends to increase the amount of interest you receive on your savings account, savings bonds, etc. However, that is not the case this year. The reason for this is that banks are overflowing with loanable funds due to the amount of money that has been given to individuals and businesses as pandemic relief payments. So basically there is no “good news” about the country’s inflation.

How did it happen? The first of the pandemic stimulus payments (CARES Act) was issued in April 2020 for a total of $292 billion. The second round in January 2021 under the US bailout totaled $164 billion. The third round, decreed on March 11, 2021, after the last presidential election, was $411 billion.

These $867 billion payments were a significant outlay of funds, but they were dwarfed by the total amount of all pandemic relief efforts. Additional payments grouped under the innocuous acronym, Catalog of Federal Domestic Assistance (CFDA), have been scattered by various departments, including the Department of Labor, Health and Human Services, Education, Agriculture, Transportation, Homeland Security and Veterans Affairs. The Small Business Administration paid PPP funds to employers, of which only 23% to 43% went to their employees who would have lost their jobs. The cost was approximately $258,000 per job retained.

As of January 31, pandemic-related obligations stood at $415 trillion. To give you an idea of ​​the $415 trillion figure, it would take you about 31,710 years to count to one trillion. Even with the pandemic waning, some members of Congress have recently called for a $15.6 billion addition to the omnibus spending bill. As US Senator Evert Dirksen is believed to have said in 1964, “A billion here and a billion there, soon you’ll be talking real money.”

Although this amount of debt is almost incomprehensible, the good news is that we don’t have to worry about paying it off all at once or paying it off. It’s because, as members of Congress like to say, “We owe it to ourselves.”

About $6.5 trillion of US debt is “intra-governmental,” amounting to government agencies such as the Social Security Trust Fund and the Treasury Department, which lend it to other agencies such as the Defense and Labor. The rest of the public debt amounts to about 22 trillion dollars. Of this amount, 66% is held by US citizens and institutions such as US banks, corporations and institutions that receive interest for the privilege of lending money to the US Treasury. The rest of the debt (34%) is owed to foreign entities that hold US bonds as attractive investments that pay interest mostly above what other quality investments would yield. Since there are few, if any, safer investment opportunities than US debt, we don’t have to worry about cashing in on their bonds, at least not yet.

So why should we care about increasing the national debt if we owe it mainly to ourselves? This is because of the “redistributive effect” that occurs when those who hold the debt receive interest payments taken from taxes paid by US citizens. The recipients of these interest payments are generally in the higher income brackets. The result is that every year money is transferred from low-income citizens to high-income citizens.

As the federal government pays borrowers to fund larger spending to cover debt interest payments, especially at a time when there are labor shortages, man-made energy constraints and supply problems, it is no wonder that inflation is the result. Too much money for too few goods is the classic definition of inflation. No amount of rhetoric from the Fed, the White House, or Congress will change that. The only thing that will do is the fiscal responsibility of Americans and their elected officials.

Michael A. MacDowell is President Emeritus of Misericordia University. He is a board member of the Calvin K. Kazanjian Foundation.

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