Inflation II

Posted by in Accounting, Auditing & Tax



Under the Federal Reserve financial system a dollar today buys 3 cents worth of goods compared to 1913. Not mentioned by critics is that the standard of living is higher today though.
Now some would argue that if there had never been a Fed, living standards would be even higher, but we can’t compare a “what is” to a “what would be.” And even if true, it isn't the Fed's fault.  The Fed doesn't loan money to the government; the government borrows it. If politicians were responsible, the system would give us the benefits of low inflation for liquidity and also things like good roads.

But because of a solid banking system, politicians for years could abuse sound economics and get away with it. Set up an unsound welfare system, "borrow" it. Fight unnecessary wars, sure "borrow" that too. And when the rational warned the irrational, we were called just plain mean because we hated the social programs for the poor or wars of liberation.  Except we weren't mean, unfortunately we were right and the children paying for it that we tried to protect are you.

For since the Fed charges the government no interest, politicians treated the money like it was free. You still pay the interest though. If not monetary interest, then inflation in the number of jobs created by false prosperity; job inflation, which leads to the destruction of families when the scheme fails, the people then worse off than if the economy had been left alone and real jobs created the unspectacular way, business growth.

Sure, there would be at times the short term pain of unemployment; even sound economies have downturns, but you wouldn't have a record number of people with children about to lose everything.

Government also causes other kinds of harmful inflation or deflation, from stock market inflation, interest inflation or deflation, bursting economic bubbles, etc. And as I wrote last week, as long as it stays out of the money, politicians don’t care.

Well, unavoidable now, we're going to have monetary inflation. The Fed's redoing Operation Twist. This is where the Fed lowers rates across the board so low that money floods the system. It's not designed for job growth though.

This was done before and was said to have been a failure because no jobs materialized; except, remember it was politicians talking. The purpose of the operation wasn't to create jobs but to repudiate debt incurred during World War II.

Still, you can’t tell Harry and Betty who both fought the war and bought bonds, “Hey, thanks a lot for your service, we're about to screw you to a wall by creating inflation.” Same today.  So we're getting 4 to 6 percent inflation a year for a few years to wipe out a bunch of debt. China won’t like it, but since we're a lot more powerful, life’s tough.

Who benefits from inflation? Look for jobs that deal in debt. Creditors benefit from inflation, so they'll be lining up for loans. And as the liquidity loosens up, so will the jobs.

Suppliers of raw materials also benefit. It may be a good time to look into financial jobs at companies like Alcoa which supplies aluminum. Every company that's big needs compliance officers, people to manage payrolls and benefits managers.

Manufacturers hate inflation, so inflation doesn't help us here because it makes our goods more expensive to sell overseas (but exporters to us will snap up raw materials and increase sales, so this creates jobs in imports). Manufacturers also hate inflation because they can’t knock supplier’s heads together to make suppliers sell cheap by playing one off the other.

Under deflation ¼ of a cent becomes a point of contention, with companies squeezed between suppliers increasing costs and fixed contract customers. Under inflation, costs are passed on, with fixed contract customers relieved that their cost didn't go up 10% on new bids.

Want to try to beat this inflation?  Get the job applications in now. It takes 18 months for past economics to enter the present and that time's almost up.

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By Jeffrey Ruzicka

Jeffrey Ruzicka is a retired executive of a small company that specializes in
industrial water treatment. He lives happily with his wife in Western Pennsylvania and is a contributing writer to Nexxt

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