US National Debt Surpass $35 Trillion

Everything is not getting more expensive, it’s your currency losing value. It might seem like a nuanced difference each leading to a gradual loss of purchasing power, but there is an important distinction. If we base our understanding on the fact that our loss in purchasing power comes from increasing costs, the focus will be on why everyone is raising their prices. Corporations are put to blame for wanting to increase profits, greedy workers are blamed for asking of salary increases, while consumers bear the blow with less affordable prices. It kicks off a blaming game while the main reason often is left out.

To understand how we got here, we must look back in time and recognize the change that was made to the definition of inflation. Up until the 1960’s, the original definition was “a change in the proportion of currency in circulation relative to the amount of precious metal that constituted a nations money”. In layman terms, it was defined as an increase in the circulating supply of a currency. A larger supply of currency chasing the same amount of goods would lead to more of those units being required to buy a fixed amount of goods, or an increase in prices if you will.

In the late 1800s and early 1900s the distinction between currency and money started to become blurred. Nations started to move away from having their currency backed by money (gold/silver) in their reserves. This gradual process, leading up to the final convertibility between the US Dollar and gold being cut in 1971, eventually led to the word ‘currency’ and ‘money’ being used as the same. No longer was the nation’s money backed by hard assets, and the circulation of the currency was no longer restricted.

A change in the definition of inflation was made to define it in the change of prices. The new definition, “The rate of increase in prices over a given period of time”, is vaguer and cover the consequence of inflation, rather than the original reason. A temporary imbalance between supply and demand could lead to a period of increased prices. This balance will normally be restored over time, when the market finds new solutions. However, an increase in the circulation of a currency resulting from monetary policy, will have lasting impacts and lead to a steady weakening of the value of the currency, maintaining the increased prices. If you look at a long enough time horizon, it’s only the original definition that explains that explains the loss in purchasing power.

Over time, as production of goods and services get more efficient, less resources are needed for production. More automation leads to less payed workers required. Better infrastructure and more efficient energy sources, leads to reduced transport times and lower costs. There are many more examples of this, and it argues against the logic that goods become more expensive to produce over time and being the cause of inflation.

There are numbers of different cases like this throughout the history. Monetary policy initially targeting a short-term crisis, leading to an increased supply of a currency, leading to prolonged higher inflation. We currently see the US national debt surpassing 35 trillion Dollars, without a clear plan of how to deal with it. Neither are there any clear short-term incentive or will by the politicians to sort it out. It won’t be easy to predict the rate of inflation going forward, but you can expect your currency to continue losing value. As an individual the only thing you can do is to opt out of the currency game and plan your investments accordingly.