In 1965, I wrote a check for $165.00 in Rio de Janeiro to a famous jewelry store. It was not cashed until exactly a year later, the legal time limit on checks. The Brazilian inflation rate was over 80 percent that year, and my check was passed around and used as a substitute for the rapidly declining value of Brazilian currency. Brazilian inflation began a sharper escalation after 1981, when the rate had climbed to 102 percent annually. By 1990, the inflation rate was over 70 percent per month and peaked at an annual rate of 2,948 percent. Various government plans based on faulty economic reasoning were instituted but failed to tame inflation and caused widespread shortages of goods and services and economic stagnation. Some of this same faulty reasoning can be heard today in the halls of American government, including apologies for enormous spending programs by President Joe Biden, Secretary of the Treasury Janet Yellen, and Democrat leaders of Congress Nancy Pelosi, and Chuck Schumer. This includes outrageous statements that huge trillion-dollar spending programs would have zero net costs.
In 1994, Brazil had to create a substitute for its currency for economic transactions in order to stabilize its economy and create public confidence in its new Real currency. A Brazilian Real is currently valued at $0.18. Last year’s inflation rate was only 3.2 percent but may go as high as 10 percent in the next 12 months.
Sobered and more realistic Brazilian economists of today attributed the great period of Brazilian inflation to excessive government spending, huge fiscal deficits, and phony or defective economic theory.
These are exactly the same factors that will put the United States on a quick road to hyperinflation and other economic ills if the current Democratic spending program before Congress is passed. Even the reduced $1.75 trillion compromise program will be extremely damaging. The $3.5 trillion full proposal would be stepping off a steep monetary and economic cliff. Moreover, the actual costs would likely be much more, as almost always happens. There is also a hidden and un-costed amnesty for 8 to 10 million illegal immigrants in the package. Past experience warns that an 8 million illegal immigrant amnesty would actually be 16 to 20 million amnesties, attracting another 20 to 40 million illegal immigrants within a decade. That would probably cost at least another $2.0 trillion per year for decades. The amnesty alone would probably be enough to set off an inflation level comparable to 1980s Brazil. There are two types of economists: those who deal honestly with reality and those who ignore reality to keep unprincipled or foolish politicians in power.
Not long ago, Venezuela was one of the richest countries in the world, but its economy fell victim to something-for-nothing and free-everything politics and enriching the friends of Venezuelan President Nicolas Madura and like-minded Venezuelan political leaders to follow. Extravagant unaffordable spending ran inflation up to 69 percent in 2014. It was 181 percent in 2015 and 800 percent in 2016. By 2017, it was 4,000 percent and 1.7 million percent in 2018. In 2019, it reached 10.0 million percent. Venezuelan currency is essentially worthless.
The Venezuelan economy is so bad it is difficult to measure. Participation in the labor force is down to around 50 percent. The annual GDP is thought to be below 1970 levels. It has had nearly a decade of negative growth. Shortages of all kinds are rampant. Venezuelans must cross the border to Columbia for critical goods of all kinds. Food production is falling, and malnutrition is widespread. The incidence of disease is at record levels. The public health system is near collapse, and healthcare workers are emigrating. Venezuela has been pushed off American and European headlines by Covid and other crises, but it remains a grim reminder of the consequences of promising voters that government can provide free everything and waste trillions of dollars on speculative climate and social projects.
Following World War I (1914-1918), the victorious Allies saddled defeated Germany with an unreasonable war reparations debt that considerably hindered German economic prosperity. This was just at the time when much of Europe and America were beginning to experience the prosperity of the “roaring twenties.” In addition, large government social welfare programs were becoming politically popular. But the German government could not pay its war debts and launch popular social welfare programs without raising taxes that would hinder economic recovery.
The political solution of the German Weimar Republic was fiat money. They first got rid of the gold standard for the German Mark and then simply printed and circulated enough money through the banking system to pay for reparations and social programs without damaging economic prosperity by raising taxes. Governments can also create fiat money by deficit spending or by pumping credit into the banking system without regard to real market rates. When governments create loose credit and spend more money than they have, it causes inflation and devalues the currency.
Government deficit spending and loose credit may initially create the appearance of prosperity, but the reality of inflation and devalued currency eventually show up and ravage public spending power and savings.
There are many frightening parallels between Germany in 1921 and the United States today. In 1921, the newly elected democratic socialists of the Weimar Republic had made boundless promises of social benefits, expanded education systems, higher wages, reduced hours, and more vacation. Rather than paying for the new social benefits with economy debilitating taxes, the Weimar government began to run larger and larger deficits. Reparations payments could also be made less painful with less valuable Marks. Prices more than doubled in the first half of 1922 and then began its breathtaking acceleration to the point where the new Trillion-Mark note was no more valuable than its use as wallpaper.
During the German hyperinflation of 1922-23, people’s life savings, representing years and sometimes lifetimes of hard work and thrift, became almost worthless. The proceeds of life insurance claims and savings could not buy a loaf of bread. It took thousands of German Marks to buy a cup of coffee and every day that passed a few thousand more. Eventually, it took millions of Marks to buy a single egg. Real estate prices plunged when the government froze rental rates. Real estate mortgages, however, could be paid off with cash that would not buy a theater ticket. Later, when rental price controls were lifted, real estate returned to normal, but millions had lost valuable properties in panic selling. People on fixed pensions became destitute. The real income of professionals and skilled craftsmen declined to poverty levels. The values of hard work and decency that earned these savings often perished as well. The hyperinflation came to an end, when the German government issued new Marks backed by industrial properties. The old Marks were virtually worthless.
Unfortunately for the American people, federal government deficits are strongly correlated with monetary inflation and future price increases for both businesses and consumers. Growing deficits portend inflation, and the larger the deficits the higher and more dangerous the inflation is to the nation’s currency and economy.
The estimated Federal revenue for 2021 is $2.873 trillion, while Federal government spending is estimated to be $3.916 Trillion, an annual Federal deficit of $1.043 trillion, or 27 percent. Much of the spending deficit was on COVID Relief, so this is not as bad as it looks. But it is nevertheless inflationary and cannot continue. Yet President Biden wants to add at least $1.75 trillion to spending, raising total spending to nearly $5.7 trillion, a budget deficit of close to $2.8 trillion or about 49 percent. Adding H.Res.109, the Green New Deal (GND) by Democrat Socialist Ocasio-Cortez, would add at least another $1.75 to $2.75 Trillion to Biden’s compromise budget the first year and continue for at least another ten years. Senate Republicans estimate the cost would be about $93 trillion over a decade,if the GND does not wreck the economy and impoverish the American people in the process. Again, many hyper-expensive endeavors like a massive amnesty are un-costed or dishonestly claim to have zero net costs. The U.S. Federal debt of $17.7 trillion and budget deficit of $585 billion in 2016 were bad enough.
U.S. Federal debt was $5.8 trillion in 2001, 8.5 trillion in 2006, 10.0 trillion in 2008, $14.8 trillion in 2011, and was $28.4 trillion at the end of September 2021. That is about 127 percent of the estimated GDP for 2021. We are heading toward $34 trillion in debt in 2022. We are flirting with a national monetary disaster that will rob most Americans of the buying power of most of their savings and investments and reduce their standard of living to hardships not seen since the Great Depression of the 1930s. Hyperinflation brings extreme economic, social, and family stress:
Inflation has already ramped up to 5 percent going for 10 percent for the year, but you have already seen this at the grocery store and the gas pump and will soon see it in your heating and utility bills. Bad government has painful consequences. Might it be time to live with reality?