Most Americans Don’t Understand How Inflation Works

Entire generations of Americans grew up thinking that high inflation was a thing of the past. But events of the past few years have shattered that illusion.

For anyone used to the 2% CPI increases that seemed to be the norm, the recent high inflation has been tough to get used to. There’s not a household in America that hasn’t been affected by inflation, and its effects likely aren’t over yet.

What’s perhaps even worse is that most Americans don’t understand why this inflation has come about, and they’re asking for “solutions” to this inflation that could actually make inflation worse. Their calls for action, if heeded, could negatively impact your financial health.

The Cause of Inflation

Before John Maynard Keynes began his dabbling in economic quackery, he was once a sound economist. In his Economic Consequences of the Peace, he writes perhaps the most accurate characterization of inflation ever written.

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

It’s that last sentence that has the most relevance to our current era. After all, how did this current bout of inflation come about?

Inflation was traditionally defined as an increase in the supply of money. The effect of inflation, all other things being equal, was an increase in prices. Over time, the definition of inflation has confused cause and effect, so that inflation now is defined as an overall increase in the price level.

The current bout of inflation is a classic case, however, as we can see the effects of an increase in the money supply play out on the prices of goods right before our eyes. The Federal Reserve’s monetary policy in response to the 2020 recession directly impacted the money supply, which jumped by nearly $3 trillion in just a few months.

The money supply continued to grow, peaking last year at more than 40% above its pre-crisis level. It’s no surprise, then, that prices throughout the economy soared. But why did the Fed increase the money supply so greatly?

It’s because the federal government decided to enact trillions of dollars of emergency fiscal stimulus, literally handing out money to American families. In March and April of 2020, the federal government spent nearly $3 trillion on fiscal stimulus programs.

Naturally that fiscal stimulus drove up consumer spending, helping to boost the prices of goods throughout the economy. But that $3 trillion didn’t come out of thin air. In order to get that money the federal government had to sell $3 trillion in bonds, bonds which eventually made their way onto the Fed’s balance sheet, as the Fed created $3 trillion out of thin air in order to purchase those bonds and hold them on its balance sheet.

So it was actually the stimulus payments to American households that caused this inflation. And how have Americans reacted to the inflation?

Surprisingly, 63% of Americans want more stimulus payments so that they can afford to buy things. They apparently don’t understand that it was the initial stimulus payments that caused this inflation in the first place. And they’re clamoring for a “solution” to inflation that would just throw more fuel onto the fire and result in even more inflation.

It’s astounding that two-thirds of our countrymen not only don’t understand what causes inflation but even want more of what made the inflation so bad in the first place. Thankfully, there’s little chance of Congress passing any more stimulus over the next two years, so we should be safe on that front. But if Republicans lose control of Congress in 2024, if inflation remains problematic, and if public pressure persists, don’t be surprised to see stimulus payments making a comeback.

Remember Keynes’ quote, and how inflation also erodes confidence in the existing distribution of wealth. We’re seeing that erosion of confidence today, as anger at the 1% continues to fester among those less well off.

Inflation, Stimulus, and Your Money

Inflation is a danger to your savings and investments. It eats away at the purchasing power of your money, it devalues your hard-earned savings, and it makes it more difficult for you to actually make real gains. Not only that, but it also encourages others to advocate for policies that, while supposedly intended to help people overcome inflation, result in more inflation instead.

Whether you’re directly impacted by inflation or from the policies that are supposed to fight inflation, you need to find a way to protect yourself and your wealth against inflation and its effects. More and more Americans are doing that today with gold.

Gold’s history during the stagflation of the 1970s is nothing less than remarkable, with 30% average annualized growth rates over the course of the decade. Many people today are hoping that gold will provide similar performance today if inflation becomes persistent.

Whether you decide to protect your retirement savings with a gold IRA or buy gold to store at home, the experts at Goldco are here to help. With over $1 billion in precious metals placements, thousands of satisfied customers, and a wide array of gold purchase options, Goldco has been helping Americans benefit from gold for over a decade. Call Goldco today to learn more about how gold can help protect you against inflation.