Inflation was up 2 percent in March which is no surprise since it’s plainly obvious the government only has one way to deal with our massive debt and that is to use inflation to lower the value of the debt. In other words, the government owes more money to bond holders and other creditors than even exists in reality, much less America could actually come up with. But if the dollar devalues (via inflation) then the trillions we owe would actually be worth much less and thus more manageable for America. How’s this work? Well, a simple explanation that works for non-financial wonks is to pretend that you borrowed $1,000 from someone back when gold was $300/ounce. You buy one ounce of gold and spend the rest on generous gifts to people you want to be beholden to you. Jump to now when gold is almost $1,200/ounce and your creditor wants his money. The devaluation of gold against the dollar actually works in your favor because in theory you can pay the creditor back and still have a profit of $200.
Of course that $200 isn’t worth as much as it used to be.
The problem with the government inflating its way out of debt is two-fold. The first and most obvious is that unlike the example above, the government hasn’t used the money it has borrowed to purchase anything that will retain value against devaluation. They’re counting on the dollar being so debased that the trillions we owe will eventually be small change, the way one dollar used to be a good day’s wage but is now not even considered a good tip for a Starbucks barista. The devaluation they would need to make servicing our debts manageable would be Zimbabwe-like and lead to the complete collapse of our currency.
The more important problem is what this does to citizens’ purchasing power. Even modest inflation hurts Americans in the best of times, making essential items more expensive. During this “recovery” where we still have 10 percent unemployment, a rise in prices on essential goods (separate from food inflation which increases the burden on families) will have disastrous effects on your family no matter how well you’re doing.
My suggestion is that you start putting away long storing foods and making whatever major purchases you need now. Remember, that 2 percent figure was for one month. For the year it’s likely to be in the double digits and in 2011 the sky will be the limit.