Tough economic news

July Consumer Price data is out. While I haven’t studied all the data, I do have a reservation at a Holiday Inn next week. While I didn’t stay in a Holiday Inn last night, I’m hoping the reservation counts for something. 😉 (The data below is from an AP article via Yahoo News)

In July, consumer prices rose .8%. May and June figures were .6% and 1.1% for a 3-month average of over .8% per month. The annual rate for the last 12 months is 5.6%, but applying the 3 month average would give an annual rate of nearly 10.5%, more than double what the past 12 months.

To make matters worse, year-over-year average weekly earnings in July are off 3.1% from a year ago. If those wage figures continue as they are, and the average inflation rate keeps up as it has for the last 3 months, that will result in annual purchasing power reduction of almost 14% per year.

Now, if you compare yesterday’s year over year change for foreign currencies, the situation gets worse. On average, though the U.S. dollar started to rebound recently, it is still down almost 9% on average against the Euro, Yuan, Yen, and Pound compared to one year ago. The U.S. consumer price index doesn’t discriminate based on foreign or domestic goods, but it follows that households whose consumption of foreign goods (especially if purchased overseas with foreign currency) is above average, their CPI increases would also be above average.

What does all that mean? If average wage earners purchase greater than average quantities of foreign goods and the current trends keep up, we’re looking at 15% year-over-year purchasing power reductions. We haven’t seen that since the 1970’s stagflation era. Is the economy in bad shape? You bet it is.

The next question might be, why? No doubt there are true underlying economic ebbs and flows. We may be at a convergence of bad timing. However, the most influential player in today’s American economy is the U.S. government. It was never intended to be that way, but it is. The U.S. government controls two huge chunks of the economy: government spending, and money supply.

The U.S. government has chosen to spend money like there’s no tomorrow, and if they keep it up, there won’t be. This spending spree requires revenue. That revenue comes from taxation and debt. In a non-inflating economy, debt is more expensive than taxation in the long run. However, if inflation rates roughly match interest rates, the net cost of debt is zero (though it still has to be paid off in the future). But if inflation outpaces interest, as it is now, the real interest rate on debt is negative. The government pays less tomorrow than it would have today, and that’s exactly what’s happening right now.

So the government spends money, taxes the people, borrows huge sums of money, and then inflates the currency at rates exceeding the interest rate of the current debt (now over $9 Trillion) to cause an effective negative cost debt. And who gets hurt in the process? You and I do.

Average tax rates grew significant from 1910 through about 1970. Since 1970, overall tax rates in America have remained relatively constant. But government spending and debt has continued to significantly outpace inflation. From 1973 through 1982, inflation was over 6% for 9 out of 10 years in a row, breaking 10% 4 times. During that period, government debt grew in absolute dollars, but sank to its lowest levels since World War 2 despite no real increase in fiscal responsibility. Since then, debt as a percentage of GDP Per Capita has more than doubled, largely due to low inflation and aggressive spending.

Given the continued interest in government spending, and significant resistance to higher taxes, the only way out of this mess is through inflation. Indeed, that’s what we’re seeing now. This ‘hidden’ tax deflates debt and hurts average Americans. What we’re seeing now is essentially a 10% or so tax increase from a few short years ago, and there doesn’t appear to be any end in sight.

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