Inflation's perfect storm

My Grandfather had a 1923, 10,000 mark German coin that was passed down to me when he died more than 50 years ago. It’s a huge, important-looking coin that one would presume to be worth quite a bit of money. At 1.2 troy ounces with a diameter of 1.75 inches, it’s much larger than an American Silver Dollar (.86 troy ounces and 1.5 inches in diameter), but rather than being made of a precious metal like gold or silver, it is made of brass. Coins like the one I have now sell for about $25 on eBay.

The reason that the nearly 100-year-old coin has little pecuniary worth is that it was a victim of its own success. It’s so bulky and has such a large face value that everyone collected them. It’s much like our 1964 half dollar. It’s a beautiful and historically significant coin, so everyone (including non-collectors) held on to them. It’s the old supply and demand equation. Where there is no scarcity, there is little value.

Although my bulky, impressive coin wasn’t quite the inheritance I was hoping for, it provides a heck of a history lesson and made me aware of the perils of inflation at a young age. Germany in the 1920s, under the Weimar government, was reeling from the weight of reparations to the allied participants in the Great War of 1914 to 1918 (AKA World War One). The punishing fiscal restraints associated with those reparation payments eventually contributed to the rise of the Nazi party, but first, it triggered runaway inflation.

In 1922, a dollar would buy 160 Marks. By the end of 1923, the exchange rate for a dollar was 4,200,000,000 marks. It was said that the people of Germany needed a wheelbarrow full of cash to purchase a loaf of bread and my modest 10,000 Marks was rendered worthless.

Examples of managed, gradual inflation over time are all around us. In my youth, we shopped at stores that were classified as “Five and Dime” or simply “Dime stores.” The analogs to those retailers now have names like “Dollar Tree” and “Dollar General,” both of which have long given up the notion of selling everything for a dollar. Here in McCook, I have always been a bit amused to see that our dollar store has a dollar section.

Talk to any older person (like me) and they can reminisce about dollar gallons of milk, $20,000 homes and a new Mustang for $2,500. Our own Mr. Bill is very proud of the fact that he has maintained the price of a snow cone at 25 cents since 1983. If he had increased that price to keep up with inflation, averaged at 2.56% annually, his Snow Cones would now sell for 67 cents. That’s not a princely sum of money, but it’s an increase of more than 167%. When we see that factor applied across the board to all consumer spending over the past 40 years, the increases associated with normal, expected, healthy inflation can be significant, but now we find ourselves confronted with inflation of the unhealthy sort. I think I can safely predict that we will not be going the way of the Weimar Republic anytime soon, but there are bumps in the road ahead.

The former White House advisor Carl Rove once defined inflation as, “too much money chasing too few goods.” By that elegantly simple definition, independent of any other contributing factors, the COVID pandemic alone was a formula for inflationary pressures. The stimulus payments provided by the Federal Government increased consumer spending, creating “demand-pull,” while the lock-down closed businesses and supply chain problems with air, ground and ocean transportation. Whether a manufacturer is awaiting raw materials or a packaged good can’t reach the retailer, a scarcity of goods results in cost-push inflation.

This is where the late-night infomercial announcer says, “but wait, there’s more.” We began our move away from the gold standard in 1933 under the Roosevelt Administration, but it took Richard Nixon, nearly four decades later, to remove us from it completely. This is where we entered the world of “fiat” currency.

In short, our dollar is worth a dollar, because our government says so, and if we run out of dollars, we can create (or print) more. In what has become an annual congressional ritual, we have permanently increased our country’s debt limit 78 times since 1960. Our ever-growing debt keeps the people at the U.S. mint busy, but most of the “new” money is fed into the economy through electronic transfer payments.

Global markets, of course, have to agree with our esteem for the dollar to make the system work. One way that the market measures the worth of currency printed by governments with no gold standard (which is all of them) is the debt to GDP (gross domestic product) ratio. Our GDP growth rate has generally been healthy. We have only slipped into negative growth a few times since World War II, most recently following the housing-bubble crash in 2008. Otherwise, our GDP has maintained something that vaguely resembles parody with inflation.

A third leg on the inflationary stool is generally referred to as “confidence.” The almighty dollar has enjoyed prominence as the “safe” currency honored around the world since the Bretton Woods conference in 1944. Winston Churchill was none too pleased by the development as the British Pound Sterling had been the standard for about 300 years, but we had just bailed him out of a war and he graciously stepped aside and let us (U.S.) take the lead in world finance.

Recently, confidence in the U.S. Dollar has been waning. We’re still the top dog, and I expect that we will be for at least a couple of decades to come, but the rise of China as an economic power and cryptocurrencies have been nibbling away at the dominance of the dollar. Most recently, our friends in Saudi Arabia have elected to accept the Chinese Yuan for oil sales with hopes to pay off Chinese debt with a more favorable exchange rate. Personally, I don’t think the dethroning of the U.S. Dollar as a global exchange has received the press that it deserves. It’s not just “inside baseball.” It’s a leaking crack in a dam that may one daybreak.

And did I mention oil? The cost of petroleum for fuel and industrial uses impacts ALL consumer goods and between domestic politics and a war raging in Eastern Europe, oil prices are expected to be volatile for months if not years to come.

The purveyors of gold and silver have been predicting a total breakdown of western economies for as long as I remember. I don’t let that get me excited, but the factors driving inflation right now are an economic “Perfect Storm.” Earlier this week, the McCook Gazette reported that the City of McCook will raise our utility costs, as it must. Municipal governments are forced to confront the same factors that we do in our business and household budgets. We can and should always ask that our representatives spend our money as carefully as possible. On the whole, I think they do, but there is no immunity from inflation.

If that’s not enough to worry about, our recent economic reports have raised the specter of “stagflation,” which, as the name implies, describes the infrequent collision of stagnation plus inflation. While our inflation rate of 7.9% is at a 40-year high, our anticipated growth in GDP (Gross Domestic Product) has dropped from 4.0% to 2.8%. If inflation remains high and GDP continues to drop, it is then that we find ourselves in some deep Kimchi, because stagflation robs our economic planners of many tools used to tame inflation and has negative effects on job growth, and that’s a whole other topic to unpack.

Suffice it to say that inflation may be with us for a while. Oil prices will eventually stabilize, but at what price, we don’t know. Whatever the case, don’t let it get you down. Snow cones are still 25 cents in McCook, Nebraska.