What’s Really Driving Inflation And Why You’re Paying More For Everything
Bottom Line: Go to a hardware store and look for building supplies. You’ll have sticker shock. If you go to buy a used car, don’t be surprised to see new car prices. Going to the grocery store or the gas station isn’t as cheap as it used to be either. The most recent CPI report showed inflation running the highest it has since 2008 with the average product costing 4.2% more than it did a year ago. But what’s suddenly driving all of this inflation? Supply and demand is certainly a factor. A combination of pandemic supply-chain issues and higher demand due to the government debt stimulus payments to Americans is also a driver for unusual demand. Before either of those matter however, the single most important driver is the value of the US Dollar.
As of this entry the US Dollar index, the value of the US dollar compared to a basket of leading world currencies is $89.89. That's 10% lower than a year ago today when the US Dollar Index was $99.86. Because all commodities are US Dollar denominated (priced in US dollars wherever you buy them around the world), gas prices would 10% more expensive than they were a year ago if there were no other influences. Ditto corn, or lumber or insert commodity here. The single biggest reason inflation is running as hot as it is today, is due to the US dollar being worth 10% less today than a year ago. Why? Because nothing is free.
I’ve repeatedly pointed out that the government debt stimulus payments have to be paid for and that’s there’s no such thing as “free" money from the government. Because the United States currently has over $28.3 trillion of debt, when more spending takes place – a la sending out checks to Americans, it has to come from somewhere. Obviously, that’s in the form of more debt, but that’s not the only component. When there aren’t enough buyers for all of the debt issued, the Federal Reserve “buys” it. When that happens it’s literally printing (or digitizing) more money out of thin air. Currently $11 trillion is on the Federal Reserve’s balance sheet this way. Naturally when more money is just invented it devalues the dollar you already have in your pocket. Hence the 10% decline in the value of the US dollar year over year.
Every time you buy anything, you’re paying part of the price for all of the debt spending that’s been taking place. Due to most people being economically illiterate, the government realizes most people don’t understand what I’ve just explained. Importantly, with the value of the US dollar already down 10% year over year based on its value being watered down – any new and significant debt spending – a la, infrastructure packages would further exacerbate this issue driving inflation even higher.
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