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Money is like a battery in that it is a store of energy for future use. In the case of money, that stored energy is financial value. Money stored as savings is the purchasing power than Americans hope to eventually use to buy a home, provide an education for their children, or retire in security.
But what happens when that battery can no longer hold its charge? We’ve all experienced the frustration of an aging mobile phone that drains itself after just a few hours, when it used to last for days. A similar phenomenon is happening with the U.S. dollar, and it’s going to get worse. Inflation is rapidly depleting the energy stored as cash in consumers’ savings and retirement accounts.
The biggest driver of inflation over the past year has been the energy required to drive the modern economy. Through July, gas prices are up by 44 percent and fuel oils are up a whopping 76 percent over last year. Rising energy costs are fueling inflation elsewhere. Groceries are up double digits, with milk up over 15 percent, chicken—arguably the cheapest form of animal protein fit for human consumption—is up 18 percent, and eggs cost 38 percent more than a year ago. Consumers are being forced to trade down by buying cheaper forms of less healthy and more processed foods to stay within budget.
While energy prices have eased in recent months, including gas now below $4 per gallon, they are likely to move higher as winter approaches. Short-term price benefits, such as excess supply created by depleting the U.S. Strategic Petroleum Reserve and releases of similar sovereign reserves in other countries, are now running out. OPEC estimates that emergency reserves in the 38 countries of the Organization for Economic Cooperation and Development are now at their lowest levels in 20 years. Europe is without the natural gas normally supplied by Russia. The continent is facing an energy crisis so severe that, in preparation for a cold winter, Europeans are going to the woods to chop firewood that can no longer be found in stores. Nonetheless, the European Union has confirmed it will enforce its embargo on Russian oil later this year. OPEC+, the consortium of oil producing and exporting members plus non-OPEC exporters including Russia and Mexico, just met and agreed to reduce global production for October to support higher prices.
In real terms, the things we buy today aren’t worth more than they were in the past. Rather, it’s that the dollar is losing its power, its “store of energy,” to buy them. While rising prices have been blamed by the Biden administration on everything from Russian President Vladimir Putin to COVID-19 to former U.S. President Donald Trump, the real problem started long before any of these actors took the stage. According to the U.S. government’s own Consumer Price Index data, the U.S. dollar has lost 44 percent of its buying power since the turn of the century just over twenty years ago. This isn’t the first time that Americans’ buying power has been halved by inflation. In “The Great Inflation” of 1965–1982, the U.S. dollar lost two-thirds of its value. Indeed, since the U.S. Federal Reserve was placed in charge of “maintaining price stability” in 1913, the dollar has lost 97 percent of its value. Time and time again, Americans have borne the cost of the U.S. government’s pro-inflation policies.
Saving money for the future, a virtue and bedrock of civilization in normal times, is now value destructive. Unspent cash is worth less and less each day. It’s better to convert those cash savings into real assets, whether commodities, real estate, or other tangible goods whose value should grow with inflation. On the other hand, if consumers start spending all their cash on consumption in fear of higher future inflation, this itself can drive prices higher and the risk is that worsening inflation becomes a self-fulfilling prophecy.
The value of the dollar will almost certainly continue to erode, further impoverishing the working class and most retirees. Yet the debasement of the dollar has consequences far beyond Americans’ purchasing power. As the dollar becomes worse and worse as a store of value, its role as a medium of exchange is also degraded. Eventually, foreigners will stop holding and using depreciating dollars for their transactions in favor of other alternatives. This is already happening in China and Russia, and in parts of the world under these nations’ growing spheres of influence.
While the dollar has been remarkably strong recently against the euro and other foreign currencies, this is more of a reflection of weakness elsewhere than strength here. The dollar is in for a hard landing once the effects of stimulus and money supply expansion are fully priced into global currency markets, which will eventually reflect the dollar’s reduced value.
If the dollar is no longer an esteemed global reserve currency, the United States’ role as a force for good in the world is also diminished. James Rickards, an expert on currencies and monetary matters, once wrote, “While all currencies by definition represent some store of value, the dollar is different. It is a store of economic value in a nation whose moral values are historically exceptional and therefore a light to the world. The debasement of the dollar cannon proceed without the debasement of those values and that exceptionalism.”
The Biden administration’s policy decisions, especially in energy but also reflected in trillion-dollar stimulus packages, are aggravating inflation and a corresponding debasement of the dollar. Let us hope that Washington eventually comes to its senses and takes the steps necessary to rein in inflation before it’s too late. But don’t hold your breath in the meantime.
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