The four ways inflation kills democracy
As multi-billionaire Charles Munger once said: “Inflation is the way democracies die. Once you’ve got a populace that learns it can vote itself money. If you overdo it, you ruin your civilization a lot.”
The prolonged surge in global inflation should frighten everyone, despite several years of promises from central bankers, who created this mess, that “inflation is transitory.” These bankers have been lying since 2010.
Inflation determines survival options for a democracy. These include where one can live, how one can feed and care for their family, if and where one may travel, right down to how much gasoline a family can afford for the week.
The cost of crude oil has skyrocketed 174% in a little over a year, and it’s going higher, much higher. The cost of roasting beef per kg surged by an eye watering 29%, and it’s a safe bet your pay-packets did not rise by 30%.
When thinking about how inflation may pour fuel on existing embers sparking ‘a death of democracy moment’, we need to identify inflation's root causes and examine how they may create a chain reaction capable of destroying democracy and civilization. Studying the history of economic events and cycles that preceded the destruction of past democracies may help us predict, prepare and protect ourselves, and our families, from likely future outcomes. The four warning signs that signal trouble ahead are:
Prolonged inflation featuring excessive non-productive debt
Devaluation of currency
Significant wealth inequality
Dishonest politicians enabled by media propagandists and phony fact-checkers
Inflation was a primary cause of the Roman empire's collapse. To repay debt, the Romans devalued their currency by decreasing the weight and purity of the silver contained in its denarius from 100% silver down to .5% silver. At that point, the economy was ravaged by hyperinflation that saw prices rise over 1,000%. Simultaneously, the Roman empire was increasing its non-productive debt to unsustainable levels. The tragic steps that followed saw the rule of law suspended, civil wars begin, and, eventually, the empire fell.
After Germany’s defeat in World War I, the Weimar republic, which already had high inflation from war debt, and its increasing government debt obligations, saw inflation march even higher. In addition, Weimar’s reckless money printing caused hyperinflation that saw a 1923 to 1924 price increase for a loaf of bread of 80,000%. These events created an economic depression so severe that it led a fearful and starving population to elect a populist leader “promising food on every German’s table and a car in every garage.” This marked the accent of Adolf Hitler, and we all know what happened next.
In 2008, Zimbabwe set new hyperinflation records when its inflation rate increased 80 billion percent month-to-month. The cost of an egg in Zimbabwe: 50 billion dollars. The reserve bank of Zimbabwe issued one hundred trillion-dollar banknotes. A decade of horrible monetary policy featuring reckless money printing, excessive non-productive debt, a decline in economic output, and corruption caused the rapid collapse of Zimbabwe.
Will the biggest financial Ponzi scheme in history – more than $250 trillion is the true US debt – mark the end of democracy?
In 2019, pre-Covid pandemic, Laurence J. Kotlikoff, a senior economist who served as a member of President Ronald Reagan’s Council of Economic Advisers, estimated the true indebtedness of the United States to be over 220 trillion dollars. Essentially, the government has been under-reporting the true level of indebtedness. They do not include the legally binding future obligations to pay social security (SS), Medicare, and Medicaid. In 2019, the SS gap between the present value of outlays vs. the present value of receivables was $43 trillion. The gap for Medicare and Medicaid was $165 trillion. Today’s numbers are even more staggering; as reported in the Social Security Administration 2021 Trustees Report, the gap has jumped to $59.8 trillion, an increase of 39.5% in two years. Conclusion: SS, Medicare, and Medicaid are unsustainable and insolvent Ponzi schemes running exponentially larger and larger deficits, expecting to pass on the massive debt to future generations. This will end badly.
The US government reported that January 2022’s Consumer Prices Index surged by 7.5%, that is the highest inflation print in 40 years. However, that understates the current real rate of inflation, which is between 15% to 19%, if you use the 1980's methodologies. The calculation methodologies were ‘adjusted’ to hide inflationary pressures impacting trillions of dollars in payments affected by COLA (Cost of Living Adjustment) indexed payments. Manipulating inflation lower provides governments a way to hide inflation and pick-the-pockets of savers. Creating phony inflation rates allows insolvent governments to lower their outgoing COLA payments.
If a slick Wall Street salesman said to you: “I have a ten-year investment where on an inflation adjusted basis you are guaranteed to lose money,” would you be interested? Why would anyone buy a US 10-year bond that yields 1.97% when inflation is at least 15%? Good thing the Federal Reserve is, 12 years later, still using its temporary emergency measures to purchase 20 billion dollars’ worth of bonds per month with its quantitative easing programs.
Inflation is printing at 40-year highs, which indicates the 13 years of extreme fiscal profligacy is approaching an endpoint. Financing the existing amounts of government, corporate and high yield debt, even at current interest rates, is not sustainable. If this thesis is correct, the most significant financial crisis in history is now unavoidable.
In January 2021, Joe Biden appointed Janet Yellen as the US Treasury Secretary, who advised Biden that stimulus will “at most be a small contributor to inflation.” Yellen was wrong. Before the Treasury job, Yellen worked in the Fed system for nearly two decades, creating the reckless money printing policies with Ben Bernanke and Jerome Powell that got us into this mess. Janet Yellen’s other forecasts were often wrong. Ben Bernanke was at the helm of the Fed during the great financial crisis of 2008; Bernanke’s forecasts were worse. Jerome Powell became Chairman in 2018. During his tenure, Powell saw departures by multiple governors for ethics violations. As far as Powell’s forecasts, he too got it wrong, parroting Yellen’s mantra “inflation is transitory,” which allowed the Fed to fall behind the curve placing in today’s lose-lose dilemma, with no way but a crash out.
In 2021, an inflationary 1.9 trillion-dollar stimulus plan was passed. Biden’s Senate finance committee, headed by Bernie Sanders, introduced a new economic policy called Modern Monetary Theory (MMT). Ocasio-Cortez, Sanders, and Warren have been advocating for another stimulus, spending a “minimum of another $6 trillion.” Sandy Cortez has argued that MMT ‘absolutely’ needed to be “a larger part of our conversation” along with taxing the rich between “60 and 70%.” It's like magic. Print as much money as you like. What could possibly go wrong? Well, inflation, more inflation, and out-of-control inflation.
As the USA focuses on tribalism and division, red warning lights are flashing everywhere; more than five of the warning signs described above are in place. A massive financial crisis is now unavoidable as the most significant wealth inequality gap expands to new highs. Yet, instead of warning the public or acting, the US is still living in the 1950s, shrieking about Russia and Ukraine. This is a critical moment for democracy in the USA and all indications point to it not ending well.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.