Inflation: The Tax that Everyone Has to Pay
May 27, 2021
Whether you earn $30K per year or $1M per year, the cost of inflation will eventually wreak havoc on your finances. It has, in fact, already begun. According to the Federal Reserve, inflation has increased 5% in just the last twelve months, ending May 2021. There have been noticeable price increases in many sectors of the economy. These price increases are becoming problematic for the average household – especially in the areas of food, energy, and housing. For example, existing homes are currently being listed at roughly 25% above what similar homes were listed for last year. In addition, many of these homes are being purchased at prices that are above the list price.
The price of new home construction is also soaring due in large part to sudden increases in the price of lumber and other building materials. These price increases are most likely due to the decreased production during the pandemic. As production begins to catch up to the demand, these shortages should subside and prices for these materials should, at least somewhat, return to normal.
There are also significant price increases occurring in the area of multi-family dwellings for much the same reason. This is causing increases in the price of rent. The more expensive the cost of constructing these new multi-family dwellings, the more expensive the rent. The effects of higher rent will be somewhat mitigated by the market, but it is my belief that rental rates will increase at least moderately.
The cost of housing at all levels is one of the main contributing factors to increased inflation and is one of the reasons that I say that inflation is the tax that everyone pays.
Prior to the pandemic the US economy was running along on all eight cylinders. During the Trump presidency the economy had created 7.5 million jobs and overall unemployment was sitting at 3.5%. There were roughly 160M Americans who were gainfully employed. This was said to be the most in history. In years past, full employment was considered to be achieved at an unemployment rate of 4%. Trump’s economic policies blew that assumption out of the water.
In May 2020, the number of unemployed Americans reached a pandemic high of just over 22M people. This left 138M Americans still working. Beginning in June of the same year, the number of employed people rose steadily almost every month until May 2021. At the end of May, there were 9.3M Americans still unemployed – which means that 151M people were working. 151M people can generate a tremendous amount of cash flow in the marketplace.
This cash flow is used to pay mortgages, rent, electric and gas bills and is also spent in grocery stores and other retail outlets. This flow of cash around our country is what allows our economy to function. Without cash flow there would be no commerce. The economy would become stagnant. If this were to continue for an extended period of time the US economy would eventually fail. Fortunately, that was not the case as in almost every month after May 2020: more people were able to return to work, further boosting cash flow around the country and adding to economic growth.
The fact that at least 138M Americans continued to work and earn a living during the pandemic makes me question why these people – and not just those who lost their jobs, if only temporarily – received Covid Relief stimulus checks. These people were never under any financial stress as they continued to receive the same income as they were prior to the onset of the pandemic.
Many of these people were federal, state, and local government employees who never missed a paycheck. Included in this group are government workers who worked in government offices, many of whom were able to work from home. Others in this group would include teachers and other school personnel, police, municipal firefighters, and military personnel, among others.
A second group, which I will refer to as “essential workers,” include doctors, nurses, and other medical professionals and staff who kept our hospitals and other health care facilities up and running during the pandemic as they cared for the sick. Many of these healthcare workers were forced to work extra shifts in order to provide care for the massive influx of patients caused by the pandemic.
There were also millions upon millions – possibly tens of millions – of office workers, from companies large and small, who were able to work from home via their computers: they too never missed a paycheck. In addition to the above-mentioned groups, there were also millions of self-employed business owners or private contractors who continued to earn their living during the pandemic with little or no interruption. To be fair, in some cases, those who were self-employed may have seen their incomes reduced due to Covid. However, for the most part, many of these people continued to earn their living at their normal rate of pay – or close to it.
I can certainly understand the need to disburse stimulus money to the millions of people who became unemployed through no fault of their own. Those unemployed were collecting state unemployment benefits as well as the federal unemployment bonus and the refundable child care tax credits. In many cases, these stimulus checks, when added together with the above-mentioned benefits, actually provided more compensation than these unemployed Americans earned from their normal employment.
As I said above, 138M Americans continued to be employed during the entire pandemic. That being the case, much of the stimulus money received by these people was deposited in savings accounts for a rainy day or was earmarked to be spent on a summer vacation at some later date.
The idea that the federal government would pay out trillions of dollars unnecessarily makes me question the sanity of those who have been elected to run our government. It’s as if our elected officials have no clue as to the consequences of their actions.
Our country is now faced with a situation where the number of employed Americans is in excess of $150M. These people are carrying on their day-to-day business at a normal level. This is the everyday commerce that goes on in America every day. There is also $6T in Covid Relief money that was disbursed by the government to mitigate the effects of the pandemic. As I said above, in addition there are state and federal unemployment and other benefits as well, which have been flowing into the economy since the middle of last year with the same purpose in mind: to mitigate the negative impact of Covid on the US economy. That process is ongoing; every month more people are returning to the workforce. One would think that all this money floating around our economy, the hundreds of thousands of people per month returning to work, and the general belief that the worst of the coronavirus is behind us would be enough to satisfy the most wasteful liberals in our government, but it was not.
To make matters worse, the Biden Administration is proposing an infrastructure package which may exceed $4T. The way I understand it, the original proposal of part one of this infrastructure bill was $2.3T. This has been negotiated down to $1.2T by a bipartisan group of senators and was supposedly agreed to by the president. The balance is made up of a laundry list of new liberal entitlements and giveaways which Democrats are calling “human infrastructure.” The fly in the ointment now is that the balance of the $2.3T in proposed spending – which would have been spent on a liberal wish list of new entitlements and giveaways – was supposedly negotiated out of this deal. It has now been disclosed that the portion of the original $2.3T spending proposal that was negotiated out of the original $2.3T spending bill will be reintroduced by Senate Majority Leader Chuck Schumer as a budget reconciliation bill which will require only 51 Democrat votes to pass. If this is truly the plan of Senator Schumer, what was the purpose of negotiating a bipartisan compromise in the first place? It was nothing but a sham. If this is the level to which the negotiating process in Congress has fallen, I see very rough times ahead for the future of this country.
[Addendum: Since this post was written, The President has backed off on the deal that was negotiated with a bipartisan group of Senators. He had threatened to not sign the $1.2T infrastructure package unless an additional bill – which would include just about every item on the Democrat wish list, including some items from the Green New Deal – was passed at the same time. It is now being reported that President Biden has flip-flopped again and now intends to sign the stand-alone infrastructure bill.]
There is more spending yet to come. The Biden Administration is also proposing a $6T federal budget for FY 2022 of which only $4.2T will be paid for. When all this spending is added up along with all corresponding debt, we are looking at $14T in government spending and an estimated $7T to $8T in new borrowing between now and the end of FY 2022. I could be a little off on that but that’s what it looks like to me right now.
The country is already awash with cash, but because of the pandemic there was a slowdown in the production of goods and services. The current supply of these goods and services is not sufficient to meet the pent-up demand caused by the pandemic and all this cash floating around the economy. When the supply of goods and services is not sufficient to meet the demand, the price, not the value, of these goods and services goes up. Because of the glut of cash in the economy, the value of the dollar – that is, its purchasing power – declines. It will therefore take more dollars, which are now worth less, to purchase the same product that could have been bought a year ago for less dollars. This is inflation in a nutshell.
As anyone can see, the price of gasoline is rising at the pump. In my area, unleaded regular is now about $3.09 per gallon, up from $2.30 a gallon a year ago. It’s not just the price of gas but other energy products as well. The price of natural gas, which is used to generate electricity with lower greenhouse gas emissions, has increased. In addition, the price of #2 fuel, which is used as heating oil, and diesel fuel is also going up. During the heating season, these prices will increase again as temperatures decrease during the winter months.
The price of gasoline and diesel fuel has a much greater impact on inflation than other energy products. This is because almost every product or service we buy, including food, is delivered either by truck or by rail car. Both of these modes of transportation use either gasoline for local deliveries or diesel fuel for long-haul, over-the-road shipments. Built into the price of these products or services is the freight charge, which includes fuel.
Another area where inflation is more severely impacted by the price of gas and diesel fuel is in the area of commuting expenses. Whether you drive to work or take mass transit, the price of fuel will have an impact on the price you pay to commute. It has been estimated that the price of commuting, especially for those who drive to work, has increased by roughly 50% over the last fifteen months. These commuters are receiving no added benefit from the fuel that they purchase. It is just costing more dollars for the exact product. That is classic inflation.
In addition to the increased cost of shipping goods to market, there is also the increased cost of growing and packaging the food that we eat. For example, the price of feed for livestock has, at least in part, increased due to the increase in the price of fuel. Livestock feed has to be planted, cared for, harvested, packaged, and shipped to market. Every step consumes energy and that adds cost to the beef, pork, poultry, eggs, and vegetables that we buy. In fact, the price of everything we eat is affected by the price of fuel. This is just another reason why inflation is the tax that everyone has to pay.
The two main reasons why the price of energy in the US has exploded are the cancellation of the permit to build the Keystone XL Pipeline and the new policy of the Biden Administration to stop selling oil and gas leases on federal land. Both of these policies were put into effect by executive orders signed by President Biden on his first day in office.
The Keystone XL Pipeline was being built for the purpose of shipping Canadian crude oil from Canada to the oil refineries on the Texas coast. The pipeline provided a more cost-effective means of transporting this product to market and is, according to our new Energy Secretary, Jennifer Granholm, a much safer method than the alternative of shipping by over-the-road trucking and rail car. Another advantage of using the pipeline is that 800K barrels per day could have been shipped via the pipeline. Only 200K barrels per day can be shipped by truck and rail car. The pipeline was a win-win for the country, and President Biden screwed that up with a stroke of his pen.
Keystone XL shutdown
The second screw-up by our new president on his first day in office was to end the sale of oil and gas leases on federal land. Although exploration for oil and gas is still taking place with leases that were already in effect, that work will end as those leases expire. The cancellation of these two projects will cost the country roughly 130,000 high-paying construction jobs and oil
workers jobs in several states. Nice going, Mr. President, you couldn’t have screwed this up worse if you tried. What kind of heartless idiot hurts the families of 130,000 Americans by cancelling their jobs with a stroke of his pen?
[Addendum: Since this post was written, the Supreme Court has struck down the executive order signed by President Biden, canceling the sale of oil and gas leases on federal lands. This action taken by the court will save roughly 120,000 high-paying oil worker jobs.]
These two executive orders will have both economic and political consequences. First of all, there is the loss of 130,000 high-paying jobs right here in the US. Secondly, it will be necessary for the US to import more foreign oil from people who don’t like us. At this point, I have to question the logic and the motives of those, including President Biden, who make these decisions to make us more dependent on foreign sources of oil.
The final contributing factor that will have an effect on rising prices is the cost of labor. As the necessities of life – food, energy, and housing – continue to spike, there will eventually be pressure on employers to raise wages. If prices continue to increase, it may be necessary to raise wages further. It has been said many times by very learned economists that our economy is flexible upward – but not downward. Once the price of labor increases, it is difficult for wages to retreat back to their former level. In my opinion, the economy is flexible downward but only on certain commodities and only in times of recession.
According to Biden Administration officials, this period of inflation will be “transitory” in nature. I find this to be disingenuous at best – and flat-out BS at worst. First of all, the increased price of energy is not going down anytime soon. When President Biden canceled the permit for the Keystone XL Pipeline, ended the sale of oil and gas leases on federal land, and terminated oil exploration in Artic National Wildlife Refuge (ANWR), our domestic supply of crude decreased by millions of barrels per day. This will have an effect on the supply of energy products. We are being forced to import crude from Russia and the Middle East in order to meet demand. This change in policy is not in our best interest.
Since the price of energy affects just about every product and service we purchase as consumers, the upward pressure on consumer goods will continue unabated. There is also the borrow and spend policies of this administration that will inject trillions of dollars into our economy, causing the value of the dollar to decline and making the cost of goods and services more expensive. As I have written previously, these price increases will have a more detrimental effect on lower income families than the rest of the population. Mr. President, this is the very segment of the population that you said you wanted to help. If this is your way of helping those in need, I think that it might be time for you to reassess your policies, or those of your staffers, whichever the case may be.
I don’t recall the exact venue or date or even whether his comments were made on an open mic or if they were meant to be said to the public. I do, however, recall the gist of what was said. President Obama once made a statement regarding Joe Biden that was not exactly flattering. What he said, and I’m paraphrasing here, was that Joe Biden had an enormous capacity to “screw things up.” I don’t often agree with former President Obama, but he hit this nail right on the head.
Inflation, although not a government-levied tax, affects the economy in much the same manner. It causes the consumer to have less buying power in the marketplace, which in turn results in the purchase of less goods and services overall. If a hundred families, because of inflation, are unable to purchase the goods and services that they require, that’s one thing. If millions of families across the country encounter the same problem, that’s quite another. Decreased consumer spending at this level would negatively affect the entire economy and could result in an economic downturn. This would be an example of inflation morphing into a recession. This would be similar to what occurred in 2008 and 2009 when the economy experienced a period of what was referred to as “stagflation.” My understanding of this concept is that the economy was simultaneously in a period of high inflation and stagnant economic growth.
As I explained above, the problem with inflation is that the consumer is forced to spend more dollars to purchase the exact same product. The reason for this is that those dollars are worth less and it therefore takes more of those dollars to purchase the product. By definition, the exact same product means that these products have not been improved or enhanced in any way. There is therefore no added value to the products. They now just cost more money. Period!
In times of high inflation, employers, in order to keep key employees, are forced to raise their salaries. Sometimes, in order to maintain profitability, it becomes necessary to cut the jobs of other employees. Depending on how prevalent these layoffs become for this or other reasons, the economy may begin to slow down. Here again, depending on the severity of the downturn, additional layoffs may occur down the road. When there are less people working, there is less consumer spending. When the economy starts shedding jobs, people become less optimistic about the future and begin to save more and/or spend less. Less spending = less jobs = less economic growth = stagflation.
With the trillions of dollars of currency that are floating around the economy, it would not surprise me to see a repeat of the economic disaster that occurred in the late 1970s and the 1980s. For those of you who are not old enough to remember that period, the inflation levels of that time were as high as 13% per year. This peak began to drop in the early 1980s to around 7%. By the end of the decade, inflation levels had fallen to below 5% which, by today’s standards, was still quite high.
There are other areas of our economy where inflation also takes a toll. One area that comes to mind is sales tax, which we are all required to pay on just about every purchase we make. The higher the rate of inflation, the more painful this tax becomes. If the cost of goods and services increases by 10%, the amount of sales tax paid increases by the same percentage. Here again, it is low-income families who suffer the greatest hardship when our economy is hit by this tax that everyone has to pay.
Another area where inflation can negatively affect the finances of the average family is with one’s saving accounts. This would include passbook savings and also CDs. As an example, suppose you have $100K in a one-year CD at an interest rate of 3%. Also suppose the inflation rate for that one year is 5%. That said, at the end of one year when that CD matures, the balance of that CD will be $103K. Because of inflation, goods and services that would have cost $100K a year earlier will now set you back $105K. By keeping your money tied up in this CD for one year, you will actually lose $2000 in purchasing power.
It can also be argued that one of the main reasons many employers across the country are struggling to find help is because of all this free money that the government is doling out. It has become more advantageous for people to stay home and live off the government dole than it is for them to go work. Between the state unemployment, the extra bonus federal unemployment, the stimulus, and the refundable child tax credits, it’s no wonder that many people have chosen to stay home and not work. News flash! This is not the way it’s supposed to work. As Don King, one of the great American philosophers of our time, once said, "Only in America” could our elected politicians be this stupid and still continue to breathe.
If this situation persists where people are refusing to come back to work because they are getting paid more from the government to stay home, employers will be forced to raise wages or offer signing bonuses to entice people to return to work. How much extra these employers will have to pay will determine how much these businesses will have to raise prices. Here again, since no additional value will be added to the product, these price increases will be inflationary. Again, it is the low-income families that will bear the burden of this madness.
In addition to the $6T spent by the federal government on Covid Relief, President Biden wants to spend another $4T under the guise of improving our nation’s infrastructure. The reality is that most of the first $2.3T will be spent on new entitlements and giveaways (a.k.a. human infrastructure). I guess this means that Democrats want to give everybody a new skeleton. Isn’t that special? Only about 700B or so will actually be spent on what most people consider to be infrastructure: roads, bridges, airports, seaports, water and sewer projects, and broadband. As to the remainder of the $4T, I have really not seen too much information about what exactly it will be spent on. This spending is nothing more than a thinly veiled attempt to transfer wealth from those who earn it to those who don’t. It’s basically as simple as that. It is also a way for Democrats to buy votes.
When you add up the $6T in Covid Relief, the $4T in proposed infrastructure spending, and the $6T proposed in the federal budget for FY2022, the US will be drowning in cash. This $16T will be in addition to wages and salaries of the roughly 151M who are currently working. In fact, as this money enters the economy there will most likely be more jobs created, flooding the country with even more cash to spend. The problem we face is that right now there are not enough goods and services to meet the current demand. This glut of money (demand) has created a scenario of too many dollars chasing too few goods and services. As I mentioned above, and as I’m sure you have probably noticed, prices on food, energy, housing, and just about everything else are rising.
According to the Federal Reserve (Fed), consumer prices have risen 5% between May 2020 and May 2021. They are also projecting an additional 3.4% rise by the end of this year. It is my guess that given the glut of cash in the country, the lack of inventory, and the pent-up demand caused by the effects of Covid, the Fed’s projection will fall somewhat short.
A few months ago, in a previous post, I wrote that the US would reach a level of $50T in debt by the end of FY 2030. This prediction was based on what I believed would be the level of government spending coupled with the amount borrowing necessary to supplement the tax revenue collected by the federal government over the next ten years.
I am now forced to amend that prediction significantly upward because of this period of rising prices and the decline in the value of the dollar. With inflation comes higher interest rates and higher yearly deficits. The result of these higher interest rates and higher deficits will be higher government debt. The higher the debt, the more interest the government has to pay on that debt. How much higher our national debt will be will depends on how long the federal government continues with its current policy of unprecedented borrowing and spending. The current amount of interest expense paid by the government is roughly $400B per year. The US government is now borrowing trillions of dollars per year. How much longer until the annual cost of interest expense paid by the federal government reaches $1T per year? Will that also have to be borrowed?
After battling the coronavirus for almost sixteen months, a battle which is still ongoing: the US is now faced with a new crisis – inflation. This new crisis, although not deadly in nature, has the ability to do substantial harm to this country’s economy and to many of its citizens. Inflation lowers the value of our currency, causing the price of goods and services to increase. Those at the lower end of the income spectrum are especially hard hit by the devaluation of the dollar. They have less dollars to begin with, and inflation makes those dollars less valuable, as their buying power is diminished. It therefore becomes more difficult for low-income families to make ends meet.
The battle to overcome inflation will not be won by the borrow and spend policies of Schumer and Pelosi. It will be won by increasing the supply of goods and services to meet the demand and by ending the glut of money caused by injecting trillions of dollars of borrowed money into our economy. There should also be an end to the ridiculous liberal policies that make it more beneficial for people to stay home rather than go to work and earn a living.
In addition to the proposed $6T federal budget for FY 2022, there is at least one more massive spending bill before the Congress, totaling at another $4T. Much of this money will be printed and borrowed, causing further devaluation of the dollar and creating more upward pressure on consumer prices. Printing money and giving it away may be a smart move politically, but it’s not beneficial to the overall economy. Money should be given in return for a good or service. In this context, the word “service” means gainful employment. The country needs people to be working and paying taxes – as opposed to staying and living off the public dole.
The longer this period of inflation goes on, the more damage it will cause to the economy. In addition to the public paying higher prices, the government will also have to pay more for its programs. This means borrowing more to make ends meet. This will increase our debt that much faster. There is a finite amount of money that the government can borrow. Let’s hope that we never find out just exactly how much that is.
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