Money is like a battery in that it is a reserve of energy for future use. In the case of money, this stored energy is financial value. Money stored in savings is the purchasing power that Americans hope to use to buy a home, provide an education for their children, or retire in safety.
But what happens when that battery can no longer hold its charge? We’ve all experienced the frustration of an aging cell phone that goes dead after hours when it lasted for days. A similar phenomenon is happening with the US dollar, and it will get worse. Inflation quickly depletes the energy stored in the form of cash in consumers’ savings and retirement accounts.
The main driver of inflation over the past year has been the energy needed to run the modern economy. Through July, gasoline prices are up 44% and heating oils are up 76% from a year ago. Rising energy costs are fueling inflation elsewhere. Groceries are up double digits, with milk up more than 15%, chicken – arguably the cheapest form of animal protein fit for human consumption – is up 18% and eggs cost 38% more than a year ago. Consumers are being forced to cut prices by buying cheaper forms of less healthy and more processed foods to stay within their budget.
While energy prices have fallen in recent months, including gasoline prices now below $4 a gallon, they are expected to rise as winter approaches. Short-term price advantages, such as the oversupply created by the depletion of the United States’ strategic oil reserve and the release of similar sovereign reserves in other countries, are now running out. OPEC estimates that emergency reserves in the 38 countries of the Organization for Economic Co-operation and Development are now at their lowest level in 20 years. Europe is deprived of the natural gas normally supplied by Russia. The continent is facing an energy crisis so severe that, in anticipation of a cold winter, Europeans are heading into the woods to cut firewood that can no longer be found in stores. Nevertheless, the European Union has confirmed that it will apply its embargo on Russian oil later this year. OPEC+, the consortium of oil producing and exporting members as well as non-OPEC exporters including Russia and Mexico, has just met and agreed to cut global production for October to support the price increase.
In real terms, the things we buy today are worth no more than before. It is rather that the dollar is losing its power, its “energy reserve”, to buy them. While the price hike has been blamed by the Biden administration on everything from Russian President Vladimir Putin to COVID-19 to former US President Donald Trump, the real problem started long before any of those actors come on stage. According to the US government consumer price index Data, the US dollar has lost 44% of its purchasing power since the turn of the century just over twenty years ago. This is not the first time that the purchasing power of Americans has been halved by inflation. In “The Great Inflation” of 1965-1982, the US dollar lost two-thirds of its value. Indeed, since the US Federal Reserve was tasked with “maintaining price stability” in 1913, the dollar has lost 97% of its value. Time and again, Americans have borne the cost of the US government’s pro-inflationary policies.
Saving money for the future, a virtue and foundation of civilization in normal times, is now destroying value. Unspent money is worth less and less every day. It’s best to convert these savings into real assets, whether it’s commodities, real estate, or other tangible assets that are expected to rise in value with inflation. On the other hand, if consumers start spending all their money on consumption for fear of higher future inflation, that in itself can drive up prices and the risk is that worsening inflation will become a self-fulfilling prophecy.
The value of the dollar will almost certainly continue to erode, further impoverishing the working class and most retirees. However, the depreciation of the dollar has consequences far beyond the purchasing power of Americans. As the dollar gets worse and worse as a store of value, its role as a medium of exchange also deteriorates. Eventually, foreigners will stop holding and using depreciating dollars for their transactions in favor of other alternatives. This is already happening in China and Russia, and in parts of the world under the growing spheres of influence of these nations.
Although the dollar has been remarkably strong recently against the euro and other foreign currencies, this is more a reflection of weakness elsewhere than strength here. The dollar is poised for a hard landing once the effects of stimulus and money supply expansion are fully integrated into global currency markets, which will eventually reflect the reduced value of the dollar.
If the dollar is no longer a valued global reserve currency, the role of the United States as a force for good in the world is also diminished. James Rickards, an expert on currencies and monetary matters, once wrote: “Although all currencies by definition represent a store of value, the dollar is different. It is a store of economic value in a nation whose moral values are historically outstanding and therefore a light to the world. The debasement of the dollar cannon takes place without the debasement of these values and this exceptionalism.
Policy decisions by the Biden administration, particularly on energy but also reflected in trillion-dollar stimulus packages, are worsening inflation and a corresponding depreciation of the dollar. Let’s hope that Washington will eventually come to its senses and take the necessary steps to bring inflation under control before it’s too late. But don’t hold your breath while you wait.
The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are intended for general informational purposes only and should not be construed or construed as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or other personal finance advice. Epoch Times assumes no responsibility for the accuracy or timeliness of the information provided.
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