Sultan in a Madhouse

Money don’t get everything it’s true
What it don’t get I can’t use

I need money
That’s what I want
That’s what I want
That’s what I want

– Barrett Strong

All money has a bit of the Trickster in it. When everyone is richer, no one is richer. But give them enough free money — even real money — and they will all be poorer.

The wealth that counts is relative. You probably have air-conditioning…maybe even central air. Does that make you feel superior to Ramses II, who must have sweated through the Egyptian summers?

No? We didn’t think so.

Productivity increases can make us all better off. But our shabby little hearts want money — more of it than our neighbors have. Yeah, that’s what we want.

Trump offers to give Americans more dollars — 5,000 of them — if Republicans are re-elected. CNBC:

With Election Day less than a month away, President Donald Trump is touting two federal cash payment programs already underway while renewing a much larger $5,000 check promise contingent on Republicans retaining Congress.

On Friday, Trump announced one-time $90 payments to 20.8 million Medicare beneficiaries. A day later, he revived an earlier promise to give every adult U.S. citizen $5,000 — but only if Republicans retain control of Congress in November.

People will feel richer when they get the money. They may even feel richer before they get it — which is what Donald Trump seems to be counting on.

But, once again, we have to ask the question that ruins every political giveaway: where does this money come from?

Trump isn’t planning to part with his own money. And he wouldn’t have nearly enough, even if he were willing to share it.

The feds are already running over budget by $2 trillion a year. They don’t have any money to pass around, either.

All POTUS could conceivably give to the voters is newly-minted, ‘fake’ money — money backed by wealth that has not been earned yet…and probably never will be. That’s how inflation works. You have a certain number of enchiladas…and a certain number of pesos to buy them. Double the number of pesos; the number of enchiladas remains the same. But now there are twice as many pesos per enchilada — rough result: prices double.

So, even if he made good on his promise — which is very unlikely — it wouldn’t have nearly the effect that people expect. This is just classic, textbook inflation. Trump can print all the new money he wants; he can’t make people richer…or better off. He can’t add a single enchilada.

The promise is a fraud.

But here’s something worth considering. For the last fourteen years, the Fed has maintained that a little bit of fraud — 2% inflation per year — is good for the economy. It reduces the value of debt…and nobody seems to notice or care about small price increases. We’re getting ripped off. We expect it. We accept it.

But if the rate of inflation goes much above 2%, the plain people begin to gripe. Inflation has been running hot for many years. And the losses — to consumers — are cumulative.

Over the last seven years, for example, coffee is up 124%. Fuel oil is 84% more expensive. And ground beef is up 79%. And so on, all up and down the aisle. It adds up. And even if inflation were stopped cold tomorrow…those higher prices would remain.

As we saw last week, in the early stages of ‘inflation’ the Fed can wag the tail of debt and scratch the head of interest rates. But as the debt grows, the playful pet becomes vicious. It growls and the Fed tosses it some red meat. Now the debt controls the Fed, not the other way around.

What can the poor Fed do? It cannot raise interest rates; the nation can’t afford it. But it can’t lower them either. Lower rates would unleash more borrowing…leading to more inflation…causing interest rates to rise on their own.

Throughout the land, households are squeezed. But on Capitol Hill, Wall Street and in the White House the funny money spending spree goes on. Already, there’s some $13 trillion in federal debt to finance or refinance next year. If Trump keeps his pledge, that will be another $1.3 trillion.

That’s when we see the razor claws and sharpened teeth of this monster. In the beginning, the feds surprise the public by ‘printing’ more money than it expects. In the end, the public surprises the feds by spending it so fast the feds can’t keep up. The presses melt down…and the whole ‘inflation’ scheme blows up.

In those later stages, the nominal currency is devalued so fast that real prices — in real money — actually go down. Go to a high-inflation country with real money in your pocket and you can see for yourself; you can live like a sultan in a madhouse.

And here’s another surprise. Occasionally, societies have suffered from too much real money. That is what happened in Spain in the 16^th and 17^th centuries. So much gold and silver came back from Spain’s conquests in the New World that its money supply went up dramatically. Prices rose too.

That was real money…and real inflation. Prices rose to meet the increase in the money supply. This money wasn’t ‘printed.’ It was stolen or mined. And when it ran out…the inflation stopped.

But even real money can ruin a nation — if there is enough of it. Like America in the late 20^th century — which uses its reserve currency status to run persistent trade deficits — the Spanish and Portuguese used their new money to buy what they wanted from other countries. They ‘neglected their own industries,’ say the historians, and the Iberian Peninsula became the ‘sick man’ of Europe for the next 200 years.