Inflation is an ugly word, and we’re hearing it a lot these days like we did back in the 1970s. Most people think that the word inflation is defined as prices are getting higher. However, the Austrian school economists like Von Mises, Hayek, and Hazlit defined inflation as the increase or inflating of the monetary base. If you inflate the number of dollars in circulation, then they are worth less. When you have more dollars, then everything you buy gets more expensive.
In the 1960s and 70s, with the Viet Nam war raging and all the social programs for Johnson’s “Great Society” costing a ton of money, the Fed was printing and the government was spending like crazy. When Nixon took us off the gold standard in 1971, the government was no longer restricted in spending with the golden handcuffs that gold kept a check on spending. In 1980, we saw an increase of 4% in the money supply and gold go from $42 per ounce to $800, and silver go from $2 per ounce to $50.
In order to bring in all of the excess dollars/inflation and lower the value of precious metals, the Federal Reserve chairman Paul Volker raised the federal funds rate to 18%, which meant you could go to the bank and get 15% on a cd and on a treasury. With the Fed’s rate at 18%, if you went to buy a house in 1980, the mortgage rate was 20%. With rates that high, gold went from $800 down to where it risen back down to $200. Silver went from $50 down back down to about $2.
Now, let’s fast forward beyond Volker to Greenspan, Bernanke, Yellon, and Powell. We now have seen 400% inflation or a quadrupling of the monetary base. However, today we have $31 trillion of debt as opposed to less than $1 trillion of debt in 1980. If Powell raises rates even to 10%, that would be $3.1 trillion in debt service alone with no desire to ever pay the principal. So the Fed can’t raise interest rates much beyond where it’s right now. Inflation will continue to rage with the money printing and the government spending.
While today’s monetary situation is scary, I believe it can be solved by going back to the Constitution and get the golden handcuffs back on our government. We have to get back to gold and silver as our money or else printing and spending will continue out of control.