OPINION:
Price inflation may be down, but the value of your dollars continues to be drained.
The latest consumer price index report showed that inflation had slowed to an annualized rate of 2.7%, down from 3.0% in September. With the affordability crisis continuing to squeeze Americans, focusing only on the speed of rising prices leaves us with an incomplete understanding of what is driving our economic asphyxiation. Instead, we are better served by taking a closer look at our fiat money, how it functions and why it always buys less.
U.S. dollars, whether physical paper bills or digital representations in your bank account, are simply containers that hold value or purchasing power. This precious purchasing power is the real object of value we use every day to buy goods and services. When you are paid with dollars for your work by your employer or your customers, you are receiving some of their purchasing power. When you hold or save dollars in your bank account or even under your mattress, you are making the implicit decision to store your valuable purchasing power inside them.
You can think of your dollars as paper bags filled with sand. Each bag represents one of your individual dollars, while the sand represents the purchasing power contained within. The more bags you accumulate, the more purchasing power you have. However, there’s a wrinkle: Even though you possess the paper bags, your sand is not safe.
This is because the federal government has established a system that allows your purchasing power to be silently stolen. This is done in two ways. First and most infamous, the Federal Reserve “prints” new money, magically creating it out of thin air to indirectly finance the annual deficits Congress creates by spending more than it brings in.
Second, every day, private commercial banks create new money when issuing loans through a process called “credit expansion.” When lending money, banks create deposits (dollars) that did not previously exist. These practices artificially “inflate,” or expand, the total supply of money. The Fed and private banks can create new money, but they cannot create new purchasing power.
When the new money is created (new paper bags), it effectively punches holes in your bags and drains some of your sand into the freshly minted bags. This drains some of your hard-earned purchasing power from your dollars and leaves you holding — you guessed it — the bag. No, your bags are not now empty, but they contain less purchasing power than they did before.
In this analogy, it’s worth noting that the central paper bag manufacturer (the Federal Reserve) has a publicly stated goal of continually draining 2% per year of the sand from every bag you own. In fact, since the Fed’s creation in 1913, it has drained nearly 97% of the sand out of our bags. When you stop to consider how hard you have worked for your purchasing power, you can immediately see just how perverse and downright immoral this legal inflationary system is.
Your accumulated purchasing power not only represents your previous labor and the hours of your life you spent working, but it is also the current manifestation of that previous effort. Draining or stealing your purchasing power from the money you own literally steals portions of your life. The practice of inflation, aka “monetary debasement” — artificially expanding the number of paper bags — has been accepted by the public for years. Like zoo animals born into captivity, we accept it as the familiar, though unnatural, state of our modern economic existence. It’s all we know.
Hidden behind economic technical jargon, charts, Fed chairs and modern monetary theory, lies this quiet, never-ending vampiric extraction. What is the solution? Sound money: a medium of exchange consisting of or tied to something the government cannot create more of on a whim or conjure into existence when it is politically convenient. If our money were sound, government spending could be held in check, and so could the generational devaluation of your earnings, savings and life’s work.
Before proposing policy solutions to combat rising prices and expand affordability, we must first acknowledge and address a cold, hard fact: Our money is broken. Saving your purchasing power in U.S. dollars is a losing proposition because the dollar is not a store of value; instead, it is designed to drain value. For Americans to truly thrive economically, we must be able to keep the fruits of our labor and safely store our purchasing power, without the threat of government inflation.
The next time you see headlines about inflation rising, falling, accelerating or easing, just remember one thing: Inflation is theft.
• Paul Mullen is the program manager for the Wealth and Innovation Project and the assistant director of marketing at The Heritage Foundation.
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