Inflation Tightens Its Grip
“WE HAVE to recognize that we are at war . . . with inflation,” declared Business Week magazine. It added: “We are, moreover, losing that war.”
The “war” against inflation was being lost in the sense that, regardless of the measures taken so far, inflation has tightened its grip on the world’s economy.
As a result, there is a loss of confidence in money—that is, paper money. This can be seen from the price of gold. Historically, gold has been the “money” of last resort, most valued in times of trouble. So it is a kind of “barometer” of economic conditions. Less than 10 years ago the price of gold was $35 (U.S.) an ounce. But in 1979 it went over $444 an ounce! This represents a large measure of lost confidence in paper money, and is an indication of how savage inflation has been.
All during the 19th century prices were relatively stable. But after World War I they became more erratic. Then, after World War II inflation became a part of everyday life. In recent years it has become more pronounced than ever, so that even during recessions inflation persists.
During one month in 1979 inflation in the United States registered 12 percent above the previous year, 15 percent in Japan, 18 percent in Britain and over 10 percent in France. The Federal Republic of Germany, with one of the more stable economies, experienced a 10-percent jump that month.
The Philippines reports that since 1966 the price of food, clothing and fuel has more than quadrupled. The price of Japan’s staple food, rice, increased over 500 percent in two decades. Brazil admitted that inflation in 1979 would be about 40 percent, as in 1978. There, the magazine Administracão e Servicos observed, “68 million Brazilians are not able even to think about buying a simple electric iron” because of having to spend their money for necessities.
Some African countries have inflation rates of over 100 percent for just one year. Israel’s rate was near that last year, and since its founding over 30 years ago the consumer price index there has risen over 5,000 percent!
The situation in the United States demonstrates what can happen over the years because of inflation. The dollar that was worth 100 cents in 1898 is now worth only 12 cents.
Workers whose wages just keep pace with inflation are being hurt two ways
However, have not wages also increased? Yes, they have. And for many workers wage increases have been greater than the inflation rate, so their standard of living has improved.
That is not the case with many other workers, though. In the United States, for example, about half of all workers find that inflation grows faster than their incomes, meaning a decline in their living standards.
Further, many poor people and persons on fixed incomes have fallen far behind. Note just one sample of this, a retired schoolteacher in New York city, who said:
“My present annual City pension is $4,439 [below the poverty level in the United States]. That we find it difficult to get along despite our heroic efforts at economy will, we are sure, not surprise you.
“We have no car. We do not own our own home. We rent the same small apartment we have lived in for more than 35 years. We take no vacations. We do not travel. We do not eat out. We consistently shop only [at] sales, and only for the most important necessities.
“We use no tobacco. We never indulge in liquor—not even in an occasional beer. We have not been to the theater or even to a neighborhood motion picture since my retirement more than 21 years ago.
“We do not entertain. We spend no money on gifts to friends or relatives. We content ourselves with the occasional good will postcard for important occasions. We do not regularly buy a daily newspaper anymore.
“My wife and I are both in our mid-seventies. Neither of us is well or able to work.”
Workers whose wages just keep pace with inflation are also being hurt. Why? Because inflation’s bite cuts two ways. Not only do increasing prices reduce the value of hard-earned money, but corresponding wage increases put workers into higher tax brackets, exposing them to heavier tax burdens. The result is a net loss of purchasing power.
Also, inflation often penalizes thrifty persons who put money in savings banks. In one country, the interest paid by the banks was only about half the inflation rate. So at year’s end, the bank account, including interest, was worth less than at the start of the year. What made this worse was that the interest was taxable.
People carry heavier and heavier debt
The money squeeze has resulted in an enormous increase in personal debts of all kinds. One reason is that people do not want to try to save money before buying things they desire. So they go into debt to get them.
But another growing cause for this debt is that, due to inflation’s relentless surge, more people now borrow money just to maintain what they have. And the American Annual for 1979 also noted: “Those who once borrowed rarely, and only for big ticket items, sometimes found their borrowings paying for necessities instead.”
Then there are those who see no future ahead and so adopt the ‘eat, drink and be merry’ attitude, trying to enjoy all they can before it is too late. As one such person said: “I have a sort of doomsday-type attitude.” Some others even borrow heavily with no intention of paying back, which amounts to stealing.
U.S. News & World Report called the trend in debt “a tidal wave” that is “throwing a new scare into economists.” It also said: “Never before have people relied so much on borrowed money.” Any severe economic setback would bankrupt millions of these people.
Why is there so much inflation today?
What is causing the type of inflation that is so rampant throughout the world today? Authorities do not agree on every aspect of the problem. But most of them do agree that one of the main culprits is the spending of more money than what is being made and going into debt to finance this spending. As the Times of London reported: “What is inflation, after all? . . . It’s an economist’s word for overconsumption; for living beyond your income; for taking more out of the kitty than you put in.”
When governments spend more money than they take in from taxes, they must “create” money to make up the deficit. Harper’s magazine put it this way: “The debt arising from the government expenditures that taxes won’t pay for is covered by creating fresh new dollars.” The Wall Street Journal also noted:
“By far the largest part of the upward pressure on prices, . . . has been inflation in the literal sense. That is, it’s caused by a huge expansion of the money supply from years of excessive government deficits financed by the creation of money and credit, the modern equivalent of . . . running the printing presses.”
An example of this source of inflation is the domestic debt of the United States. The government has had 17 years of deficits in the last 18. Whereas it took 167 years for the debt to reach the first $100 billion, it now increases by that amount every year! The total is expected to pass one trillion dollars soon. And the interest on this debt is about $60 billion a year now, the third largest government expense. All of this means more money chasing goods and services, pulling their prices up, as at an auction.
Making the situation worse is the oil problem. Only a handful of nations produce more oil than they use. These nations have banded together in OPEC, the Organization of Petroleum Exporting Countries. They have increased the price of oil to more than 10 times what it was a decade ago. Since so many things—gasoline, heating oil, plastics, chemicals and others—are petroleum-based, their prices rise accordingly.
Because of these factors, some nations now are so heavily in debt that they are being kept economically alive only by further massive infusions of credit. Some of these countries cannot even pay the interest on their debt from their own resources, much less the debt itself.
Some economists wonder if inflation has gone beyond curing
How can inflation be cured? A number of economists wonder if the situation has not gone beyond curing. They compare it to a heroin addict who is too far gone, demanding more and more heroin to produce diminishing effects. If he continues, the drug will kill him. If he withdraws, the consequences of his drug-taking may still shorten his life.
To stop inflation, the overspending by governments, businesses and individuals must be severely cut. But this would mean people buying less, and so businesses would produce less. This would throw many people out of work, hence a severe recession or depression. The world economic system is now geared to such a high state of production from overspending that some observers claim it already is too late to be cut back drastically without causing about as much harm as is caused by the inflation itself.
[Diagram on page 7]
(For fully formatted text, see publication)
$1 = $.12
The U.S. Dollar Shrinks