If you are 55 years old or younger you do not have living memory of what it means when inflation takes hold of our economy. It is not merely that you the price of everything goes up. It is a recipe for killing the economy and will feed a black market and reduce the revenue that governments–local, state and federal–rely on to provide services.
I graduated high school in 1973. The United States was on the cusp of a major inflation crisis (I encourage you to read the article that is linked here):
This is the gruesome story of the great inflation of the 1970s, which began in late 1972 and didn’t end until the early 1980s.8 In his book, “Stocks for the Long Run: A Guide for Long-Term Growth” (1994), Wharton professor Jeremy Siegel, called it “the greatest failure of American macroeconomic policy in the postwar period.”
The great inflation was blamed on oil prices, currency speculators, greedy businessmen, and avaricious union leaders. However, it is clear that monetary policies, which financed massive budget deficits and were supported by political leaders, were the cause. This mess was proof of what Milton Friedman said in his book, Money Mischief: Episodes in Monetary History: Inflation is always “a monetary phenomenon.”
The great inflation and the recession that followed wrecked many businesses and hurt countless individuals. Interestingly, John Connally, the Nixon-installed Treasury Secretary who did not have formal economics training, later declared personal bankruptcy.
We were not just paying higher prices for food and gas. If you wanted to buy a house you were saddled with a double-digit mortgage interest payment. If you are now buying a $300,000 house with a $60,000 down payment, your monthly payment with a 3.8% is $1,401.63. What happens when the interest rate is 16%? You will pay $3,510.75. What do you think that does to the sale of houses? It kills the real estate market.
I had the misfortune of living in Argentina in 1984 during an incredible hyperinflation period. The inflation raged at 1,000% annually. Prices of food and fuel and everything else surged during the day. If you bought an apple in the morning for 50 cents, you would pay 75 cents in the afternoon. Imagine you are a small business owner having to constantly (I mean every couple of hours) re-price your merchandise. It is a nightmare.
This period in Argentina was devastating for the middle and upper-middle class. A dear friend was a baker. He provided pastries served on Aerolineas Argentina. Before the inflation spike, he purchased a new truck every two years. He lived in a 4,000 square foot home. His name was Alberto. He sold his home for $250,000 just at the start of the inflationary spiral in order to build a new bakery. When he completed the sale the agent forgot to pay the land tax on the property he sold.
During 1984 he struggled to complete the bakery. He had to sell his beautiful Ford truck and buy a clunker. The price of glass, wood, concrete, and tile went up every day. Alberto was like a man trying to stay afloat in Lake Michigan during a storm with concrete blocks attached to his feet. He eventually finished the construction and opened for business. But the cost of everything required to run a bakery made it impossible for him to stay in business. He went bankrupt.
The worst news came at the end of 1984. He was notified that his tax bill on the land he had sold was due. It was adjusted to compensate for the inflation. He owed $260,000. That is what happened to the value of the Argentine peso in just one year. The tax on land cost more than what he received for selling the damn house.
I visited Alberto in 2002. He was living with his new wife and three small children in a rundown shack with 1500 square feet and one bathroom. There was hole in the wall leaving the bathroom open to the frigid air outside (it was August, which is winter in Argentina). Oh yes, he had no hot water. Try taking a shower with cold water when it is 40 degrees outside.
I pray we are not heading towards such an inflationary spike. But the Federal Government is lying to you about the actual inflation rate. You are being told it is only 5.3% right now. Yet this calculation excludes food and fuel. Do you think those are not worthy of consideration in determining the inflation rate? Take gas as a telling example. The price of gas has gone up roughly 68% in the last year. That ain’t 5.3%. You are seeing a similar jump in food. Beef is up over 30%.
If you have an adjustable-rate mortgage, get rid of it as soon as possible. I do not know how high the real rate of inflation will go, but I do know that Joe Biden and his team are totally incompetent. The unfettered spending by the Feds has sowed the seeds for an inflationary wave that will dwarf what we experienced in the 1970s. I encourage you younger folks to do some reading and some preparation. You do not want to wind up like my friend Alberto. It was tragic.
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