How To Stop Inflation
Inflation has been devastating the United States. What a lot of people do not know is that we could end inflation tomorrow. I will explain how in this video.
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Sources:
Investopedia (Inflation Definition)
Federal Reserve – Gas Prices
https://fred.stlouisfed.org/series/GASREGW
Federal Reserve – CPI chart
https://fred.stlouisfed.org/graph/?g=rocU
VIDEO SUMMARY
Let us start with the question, what is inflation? On a practical standpoint, it is when you look around and the price for everything is going up. Gas prices have skyrocketed. Here is a chart of Gas prices in the last year. This is inflation. Prices are up 50.55% from one year ago. For ordinary people, like you and me, this really hurts because everything costs more money.
From an economic perspective, inflation is too many dollars chasing too few goods. There is too much money in the system. People are trying to spend that money, but there are not enough goods to buy. Supply and demand pushes the price of goods higher. To use the gas example, Russia went to war with Ukraine. This stopped the flow of gas supplies around the world. Suddenly there was a lot less gas. Well, we still need to fill up our cars every day, and so the price goes higher as we compete to get the few supplies that are available. As a result, gas prices affect the cost of everything else, because everything rides in a truck at some point to get to the customer.
Now I do not want to mislead you. The war with Russia is only a small part of what is driving inflation. Our current problem started way before the war started. Here is a chart of the percentage change in CPI YOY from 1960 to today. In general, society tolerates a small amount of inflation. You can see that it stays around 2.5%, which means prices usually creep up every year. The US experienced some bad problems with inflation in the 70s and 80s, but it has been under control since then.
Fast forward to 2020, inflation dropped to almost zero. The grey bar in this chart was the recession that occurred at the start of the COVID-19 pandemic. People stopped buying anything. As a result, prices went down. But watch what happens after that. The government released unprecedented amounts of stimulus into the economy. The Federal Reserve printed dollars. With all this new money circulating, inflation has been skyrocketing ever since 2020. This did not start with Russia’s war, this started from the US printing dollars.
So, we are all suffering from high inflation. How do we stop it? It is amazingly simple. Reduce the number of dollars in the system. It is easy for the Federal Reserve to do this. They just need to stop printing money.
The important question is “what is keeping the Federal Reserve from stopping inflation?” You need to understand the choice they are faced with. Whenever a country is on the brink of recession there is two choices:
- Bankruptcy
- Inflation
If you do nothing, the markets will all crash and companies will go bankrupt. If you print money, and cause inflation, it will create stimulus and businesses can stay afloat.
You need to realize that inflation affects businesses differently than ordinary people. For the ordinary person, your paycheck remains the same, but the price you pay for everything goes up. That hurts. For a business, they just raise their prices, they make more money, and it is easier to pay off any debt they have. Of course, inflation destabilizes the economy, so it will be bad for the business in the long-term. But in the short term, inflation is not as bad for businesses as it is for ordinary people.
Another way to think about it, is that inflation is a tax on poor people. You are paying more money for goods, and that is subsidizing businesses to keep them from going bankrupt.
Now at this point, you might be getting angry. The Federal Reserve is instituting a sneaky tax to give my money to businesses that should be going bankrupt anyway? You should be careful with this approach as well. The downside of businesses going bankrupt is that people lose their jobs. Then you are not getting a paycheck at all. If too many people lose their jobs all at once, the economy may not have time to recover. The Fed tries to slow down the crash, by allowing a little bit of inflation on purpose. They are allowing inflation on purpose. That way, businesses can slowly go bankrupt over time.
The question now, is whether the Fed is acting fast enough. This has become a big criticism of Jerome Powell, the Chair of the Federal Reserve. What you need to realize is that Jerome Powell is not an economist. He is an investment banker. He has spent his life in a world of business owners and investors. So, he is sitting at the Fed making this decision:
- Do I allow businesses to go bankrupt?
- Or do I let poor people suffer with inflation?
He has clearly been making decisions that benefit his friends on WallStreet at the expense of the public. The good news is that even people on WallStreet have been asking Jerome Powell to get inflation under control. People realize that we must let the bad companies go bankrupt and accept the job losses, to get the economy healthy again.
So, in summary, we could fix inflation tomorrow, but we probably do not want to. We want a smooth transition back to normal prices. It seems like more and more people agree, that Jerome Powell needs to act more aggressively to get inflation under control. But be prepared. This means more companies will go bankrupt, which means everyone will suffer from high unemployment.
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.