Economic Mugging 101

History has shown that fiat money’s only real value is camouflaging disastrous political and financial policies and massive graft.

Some years ago, I was on a TV panel show that closed out by taking questions from a live studio audience. The first question was from a woman who was irate about her local gas station’s price increase in response to an announced wholesale increase that had not yet gone into effect.

Several panelists jumped in to respond that it was “price gouging!” One suggested it should be illegal for any retailer to increase prices before a cost increase occurs.

 (Of course, we just had an economic illiterate on the ballot for President Kamala Harris, insisting that price gouging was the cause of the 25 percent plus jump in food costs since 2022, which has left Americans staggering to keep up.)

The last word fell to me on the panel. “No,” I responded. “The gas station owner was protecting his capital. He knows that the increased wholesale price means it will take more money to buy a gallon of gas for his next delivery from the wholesaler.” I could see some in the audience looking incredulous. One panelist made an exaggerated expression of disgust at me.

Undeterred, I continued, “If he doesn’t raise his price immediately, he will have to increase his capital contribution to buy the same number of gallons of gas. If he doesn’t have more money, customers may experience shortages because his gas station will have to purchase fewer gallons.”

“Ridiculous, it’s just price exploitation,” grumbled the disgusted panelist, with several audience members nodding in agreement.   

“Look,” I pressed my case, “let’s make it simple. If you own that gas station and sell ten gallons a week, and each gallon costs you $1.00 from the wholesaler, you’ll need $10 in capital to keep ten gallons of gas on hand. But if the distributor tells you that starting next week, the cost of gas will be $1.50 per gallon, you’ll need $15 instead of $10 in capital to pay for the delivery. If you don’t increase your price immediately to make up for the cost increase or find more capital, you can only order less than seven gallons of gas instead of the ten.” Blank gazes were the only reaction. 

I relate this story only to illustrate how poor the general economic literacy in the US and the Western world is and how ignorant or disinterested the mainstream media is in explaining simple economic truths to citizens.

Over the years, economics has gotten a bum rap as a dry, impenetrable, arcane discipline. Yet its basic laws follow a logical connection to behavior. While 40-odd “economic laws” can be found in texts books – some as mysterious sounding as The Law of Rent, Verdoons Law, The Law of Diminishing Returns, Gresham’s Law, and such – the laws all hinge on the basics.

Here are a few. Money is not the same thing as wealth. Access to goods and services defines wealth. It doesn’t matter whether you have five dollars or a million dollars if there is nothing to purchase with it.

Or the law that productivity and added value determine wages. Another law is that the labor for goods or services is only worth whatever the goods or service’s usefulness or utility is in the economy. Or, my favorite that I’ve gotten wrong, more often than not, is you can’t spend more than you earn unless you borrow and insure some of the risks by paying interest or pledge something of value to ensure the debt’s repayment, either of which lowers your wealth.

Since the coronavirus panic, inflation has devastated the US economy. It, too, is basic. It is the result of economic reality mugging wishful thinking. Inflation is theft by another name. It’s as avoidable as it is destructive.

Simply put, inflation is too much money flooding the system, met by a static or depleting supply of goods or services. The excess money increases the competition for the same goods and services, making them more valuable and the money less so. A ten percent inflation rate devalues money and your earnings and savings by ten percent.

The renowned economist and author Thomas Sowell offered this dramatic example of the danger of inflation in his best-selling primer Basic Economics (here):

“[Demonstrating] the cumulative effects of inflation, a one-hundred-dollar bill would buy less in 1998 than a twenty-dollar bill bought in the 1960s. [This] means that people who saved money in the 1960s had four-fifths of its value silently stolen from them over the next thirty years.”  

This phenomenon is as old as organized societies. The Bible described inflation when Nehemiah was rebuilding the wall around Jerusalem twenty-five hundred years ago and buying up the available supplies, making them scarce and thus worth more.

When Alexander the Great started using his captured treasures to buy goods in Greece, prices increased dramatically because of demand. Similarly, other great empires caused rapid price inflation by flooding the marketplace with gold or other valuable forms of exchange without regard to the supply of goods or services.

(Conversely, and just as destructive as inflation is deflation. The West African King, Mansa Musa, supposedly took so much gold to Cairo (his traveling caravan was a “day long in passing”) and gifted and spent gold so lavishly that it caused massive deflation in the value of all gold, lasting a decade.)

Over time, cities, nation-states, and empires began using various types of currency, including bank or promissory notes. The currency would represent the value of those assets held centrally that supposedly guaranteed the value of the promise made of redemption. While the introduction of currency made commerce easier, politicians, being who they were, soon realized that the state’s guarantee of value could be finagled to their benefit, proving the old saw that some things never change.

Instead of increasing unpopular taxes or hiding spending, immense waste, or graft, the eighteenth century saw the rise of “fiat money.” It is merely a currency created with no intrinsic value to support its worth, making it redeemable in something tangible. Its value guarantee rests with the government or state, and its worth is supposedly the production of goods and services in the whole economy.

History has shown that fiat money’s only real value is camouflaging disastrous political and financial policies and massive graft.

Fiat money was first used by the Romans and then by the tenth-century Chinese. The Roman Denarius was a pure silver coin minted in the first century AD. Over two centuries, the silver content continuously shrank; by 244 AD, the Denarius contained only 0.05 percent silver. One could argue the Empire collapsed with the Denarius.

Not much has changed. Modern fiat money created out of thin air on a lick and promise is worth just that. Its value rests on the public’s faith that a sawbuck will still be worth $10 down the road. How’s that working out?

But since 2020, it has been the worst of all situations. There are government-created energy shortages in the US – and more acutely in the UK and Europe as they chase the fantasy of “clean energy” – as the most energy-rich nation on earth has deliberately reduced petroleum production (and coal) and refining capacities through political policy and the “Green New Deal.” The result is obvious. Energy costs have soared and, if not corrected, foreshadow an even worse disaster looming in the near term. Food, fuel, heating oil, and virtually everything used in day-to-day life could soon be in a much shorter supply. Demand – meet supply.

What the government is doing to energy is happening in a myriad of other economic sectors. They are all disasters happening or waiting to happen. In the US, inflation has been 18% between 2021 and 2023 (here) – and this year will cumulatively add nearly another 4%. But the touted “lower inflation rates of 2024 are sitting atop the mountain of 20% plus inflation. It was all predictable – and in fact, many of us did so.

The “new economics” touted by the Biden team, the Federal Reserve, and radical left-wing activists in 2021 – “we can print all the money we need!” – are not new, but they are ancient economics pipe-dreams, proven over and over again to generate failure and misery There is nothing new under the Sun, the Good Book advises.

Not only are the laws of economics timeless and unrelenting, but they are also merciless when misused or ignored.

The nation is reaping what fools have sowed. The question now is whether the new President-elect, Donald J. Trump, and his team can quickly reverse the drivers of inflation and bring some budgeting sanity to the Federal government. It is a massive and complicated agenda that reaches into the pocketbook of every American. But this president seems steeled by experience and determined to bring dramatic, common-sense changes kicking and screaming into the swamp.