Inflation Control: Mission Not Accomplished

Central bankers in the United States and Europe have had a primary mission to keep inflation under control. They may have well proclaimed “mission accomplished” with inflation having consistently averaged less than 3 percent in the last 10 years, only to be rudely awakened. Like a doctor judging an athlete by muscle tone and not internal organs or functions, our underlying condition went undetected.

The steroids of credit made consumer prices grow when otherwise buyers would have enjoyed a reduced cost of living, thanks to the productivity gains of capitalism and globalization. In a league filled with contestants on steroids, who could compete without them?

Academia has been supportive of the methodology behind the operation of our central banks and treasuries, but now its halls are aghast and repopulated with experts who would convincingly offer new, ever bolder solutions.

Once challenged by a crisis of finance, it convincingly supported our effort to break free from the chains of gold that bound the world together, and our majority voted in landslides to adopt social contracts to protect the weakest. Twice confronted, our paper fetters are aflame and the institutions formed to protect us from the unkind strangers of the free market are dilapidated and looted, themselves in need of our wallet.

Have we the economic literacy to understand what has brought us here? Ignorance is widespread, and where it isn’t, sharp disagreement between schools of thought has become germane to deploying a solution. Our problem is simple: We have repeated a mistake of the ages. We have protected ourselves from harm for so long that we have extended our vulnerability beyond any previous scale.

Until recently, the private sector was so encouraged by the prospects offered by the rising tide of paper money that it indebted itself to the tune of over $40 trillion; our government promised entitlements with a present value of over $50 trillion. Combined with public debt of over $10 trillion, these obligations are more than seven times as large as gross national product.

But in defiance to this state of affairs, our experts are about to solve a debt problem by adding more debt, by adding banking credit, and by spending money raised from selling Treasury notes and bonds.

[Editor’s note: This passage is reprinted from William W. Baker’s book, Endless Money: The Moral Hazards of Socialism, with the permission of John Wiley & Sons, Inc (©2010). You can get your own copy here.]