Federal debt solution
solution to federal debt
The measure of an economy is money. A large economy needs a larger supply of money than does a small economy. Therefore, a growing economy needs a growing supply of money. All money is a form of debt. Therefore, a growing economy requires a growing supply of debt. U. S. Federal Debt is the safest, most controllable form of debt. The federal government, alone among borrowers, never will default. Thus, there is no federal debt or deficit problem, and a balanced federal budget leads to a recession or a depression.
Inflation and Stagflation,
Recession and Depression The Causes and The Cures

What Is Stagflation?
Measuring Inflation: Nobody Can Do It
Common--And Wrong--Theories About The Causes Of Inflation
The True Cause Of Inflation
Steps Governments Can Take To Cure Inflation
To A Hammer, Every Problem Is A Nail
That Incurable Stagflation And How To Cure It
Do Low Interest Rates Make Borrowing Easier?
Does Unemployment Affect Inflation?

The links at the bottom of this page will guide you to other pages.

Please click the cover to see excerpts from FREE MONEY.
Questions? Ask the author, Rodger Malcolm Mitchell at: rmmadvertising@yahoo.com

         Inflation is "when prices go up." More precisely:
         Inflation is money's loss of value when compared to the average value of goods and services. Inflation always is a comparison, not an absolute. If money loses value, we must ask, "Compared to what?"
         If the price of milk goes from one dollar to two dollars, what has happened? Either the value of a dollar has gone down, the value of milk has gone up, or both.
         The person, who wishes to trade milk for dollars, has changed his attitude about the relative values of dollars and milk. He now demands more dollars in exchange for milk. The person who wishes to trade dollars for milk, now must offer more dollars for the milk.
         Inflation does not result from the increase in value of one product. To measure Inflation, the government averages the values of many products in many geographic areas, and even this is inadequate.
         Inflation is the average increase in dollar cost of all the products sold everywhere in our economy.

          Common wisdom holds that increasing the money supply causes inflation. History shows that is not correct. As you can see in the above chart, there is no relationship between changes in total debt (money) and inflation.
          The value of money is determined by supply and demand. So, it is true that increasing the money supply without interest rate control would lead to inflation, unless the demand also was increased. What increased demand? An increase in interest rates.
          In short, deficit spending does not cause inflation, because we have the power to prevent inflation at will.
           Purchasing is a form of barter. With barter, prices are based not just on one side of the trade, but on the relationship between both sides, ie the relative values of the goods on each side of the exchange.
          If you want to barter corn for wheat, the exchange will be based on the value of corn vs. the value of wheat. Similarly, if you want to barter corn for money, the exchange will be based on the value of corn vs. the value of money.
          Thus, corn is a commodity and money is a commodity, and the values of each are based on supply and demand. To have inflation, one or more of four things must happen:
1. The supply of corn falls and/or
2. The demand for corn rises and/or
3. The supply of money rises and/or
4. The demand for money falls.

          To cure inflation, the government has some control over all four of these events.
1. It can pay farmers to grow more corn (corn supply increases)
2. It can discourage the use of corn for ethanol (corn demand decreases)
3. It can run surpluses (money supply falls)
4. It can increase interest rates (money demand increases)
          Of these, I prefer #4, because the effort can be controlled and the results are quick.

What Is Stagflation?

         Stagflation is the Fed's worst nightmare. It is the combination of inflation and economic stagnation, recession or depression.
         The Fed prevents and cures inflation by raising interest rates. The Fed tries to stimulate the economy by lowering interest rates.
         So what can the Fed do about stagflation, other than wring its hands and complain about investors' "irrational exuberance" -- in short, blame the victim?
         The Fed's problem is that it believes cutting interest rates stimulates the economy. The Fed is wrong. Cutting interest rates stimulates just one thing: Inflation.
         Cutting interest rates to prevent recession or depression is like administering cough medicine for a broken leg. Not only does it not work, but it leaves the problem untreated.
         There is one cure, and one cure only, for stagflation : Increase interest rates to cure the Inflation (the Fed's job) and increase the federal deficit to stimulate the economy (Congress's job). Nothing else will work.
         Cutting interest rates to prevent recession or depression is like administering cough medicine for a broken leg. Not only does it not work, but it leaves the problem untreated.

Measuring Inflation--Nobody Can Do It

         It is impossible to measure this change. Inflation does not affect all people or products equally. If the average price of breakfast cereal were to rise, those families who buy the most breakfast cereal would be most affected. If you bought no breakfast cereal, you would say, "What Inflation?"
         Products come into existence, change and disappear. How has the price of television sets changed during the past twenty years?
         You might ask, "What kind of television sets? Black and white, or color? Floor models or table models? Twelve inch or sixty inch? Remote control? Picture-in-picture? Plasma? Cable-ready? DVD? Flat screen? Rear projection"
         You also might ask, "How will we weigh the most frequently purchased sets vs. the less frequently purchased, since this changes through time?" In short, how would you answer the question: Has the price of television sets gone up or down?
         There is one cure, and one cure only, for stagflation : Increase interest rates to cure the inflation (the Fed's job) and increase the federal deficit to stimulate the economy (Congress's job). Nothing else will work.
         What has been the change in price of eight-track tape players? The answer will not help you measure inflation. Eight-track tape players are obsolete, and no longer sold. If they once were included in the measure of average prices, what would you now include?
         Another problem: Averaging. If the average price (whatever that is) of long distance calls has dropped 20% and the average price of milk has risen 10%, what has been the inflation? How would you factor together the price changes in thousands of products to develop one inflation. figure?
         Trying to determine the "inflation" for even one product can be tricky. Now multiply one product by the millions of changing products we buy, and you see why the measure of inflation. is subjective.
         In 1997, the Bureau of Labor Statistics began an experiment. They attempted to estimate inflation. by recalculating price changes in only 207 items in just forty-four geographic areas.
         In 2000, the Federal Reserve Board told Congress, the approved measure of inflation. has overestimated "real" inflation, and should be changed.
         Since Congress long has been aware of the inflation measure's shortcomings, why the sudden discovery? Because lowering the official inflation rate reduces the government's obligation to increase Social Security benefits.
         Thus, despite massive and impressive statistics, the measure of Inflation not only is subjective, but politically motivated.
        Certain products and services have not changed much through the years, for example, unprocessed food products and unskilled labor. The prices of these basic products and services have tended to inflate. So whether or not Inflation is measured with scientific accuracy, it is clear that today more dollars are needed to exchange for most goods and services.
         Inflation is money's loss of value compared to the values of goods and services. So, has the value of money gone down or have the average values of goods and services gone up?
         Years ago, an unskilled laborer might trade a full day's work for five dollars. Today, the minimum hourly wage exceeds five dollars, and an unskilled laborer would expect more than forty dollars for an eight-hour day. Has the value of the man's labor increased or has the value of money decreased?
         If you were to ask the same kinds of questions about every product or service in existence, you would find that the value of a dollar has gone down compared to almost everything.
         True, many products are more sophisticated, more useful or just plain better than were comparable products of years ago. But, I believe Inflation is caused more by the loss in comparitive value of money than by the gain in value of goods and services.

Click the cover to see excerpts from FREE MONEY

Common--And Wrong-- Theories About Inflation

         One theory dates from at least the 18th century (David Hume). It continued to be popular into the 1950's. It said, inflation is determined by the quantity of money in the economy. The belief was that adding money to the economy caused inflation. (In this case, the definition of "money" is limited to currency and coins, which in itself is a serious weakness.)
         Many people continue to believe some form of this theory. That is one of several reasons put forth to reduce the federal debt.
         John M. Keynes felt there is a predictable gap between increases in consumers' income and consumption expenditures. He felt inflation is caused by consumer and government attempts to buy more goods and services than our economy can supply.
         This is the familiar, though false, concept that "inflation is too many dollars chasing too few goods and services."
         "Too many dollars" means "too much demand." However, for the vast majority of products and services in our economy, supply quickly accommodates to demand, and in fact, often overcompensates.
         If the demand for cheese were to rise, the price of cheese would rise. In response, farmers would produce more cheese, which would push prices back down.
         If the farmers and manufacturers miscalculated and produced too much cheese, the price could drop below its starting point -- an effect that occurs frequently with agricultural products.
         The degree to which supply, price and demand respond to each other is called "elasticity." The more necessary to life a product is, the less demand elasticity it has. If the price of heating oil doubled, the demand would not drop proportionately. The demand for heating oil is relatively inelastic.
         A third theory holds that price increases are caused by increases in production costs. Increased mechanization and computerization have increased production efficiency. So, production cost increases come primarily from increased wage costs, leading to the notorious, though fictional, "wage-price spiral."
         (The concept is: Increased wages cause production costs to rise, causing prices to rise, causing workers to demand higher wages.)
         One weakness of this theory is, workers always demand as much income as they think they can get, regardless of inflation. Price rises do not cause workers' salary demands to become more intense or more effective.
         A second weakness is: Manufacturers always charge as much as they think they can, to maximize total profits. There are businesses with 2 percent markups and businesses with 500 percent markups. In each case, the manufacturer charges as much as it can, competition and demand allowing, regardless of costs.
         Higher production costs do not necessarily lead to higher selling prices. They also can lead to lower profits, fewer producers, substitute products, increased mechanization (when labor costs rise), greater efficiency -- any number of effects. The wage-price spiral is a fiction.
         All these theories and their brothers and cousins are correct in the short run for individual products, and all are defective over the longer run for the economy as a whole.
         Even the federal government is confused about what causes inflation, as demonstrated by this quote from the Congressional Budget Office Outlook, September 1997:

         "The benign behavior of inflation over the past year is puzzling. Conventional measures of inflationary pressures from both the product and labor markets suggested an increase in the underlying rate of inflation in late 1996 or 1997.
         "Several temporary masking factors may account for much of the 'missing inflation.' Alternatively, some analysts suggest that the economy has changed in a way that makes inflation less responsive to pressures from a buildup of demand.
         "Unfortunately, uncertainty surrounds both measures of demand pressures and the estimated size and timing of the inflationary response to those pressures. As a result, determining the precise reason why inflation has been so subdued is extremely difficult."

This is government-speak for, "We don't want you to know we have no idea what's happening."

The True Cause Of Inflation--Surprised?

         In the book, FREE MONEY you'll read that money is a commodity, like gasoline, lumber, corn or milk. The value of any commodity depends on the supply and the demand for that commodity. If the supply of milk grows faster than the demand for milk, the price (dollar value) of milk falls.
         Inflation occurs when the supply of a country's money grows faster than the demand for that country's money, compared with the supply and demand for goods and services.
         The formulas are:
         DG/SG = VG and DM/SM = VM
D=Demand; S=Supply; V=Value; G=Goods and Services; M=Money, I=Inflation
        To get to the formula for inflation, plug in the formulas for the values of money and goods/services:
        (DG / SG) / (DM / SM) = I which simplifies to:
        VG/VM = I
         The higher the value of goods, or the lower the value of money, the higher will be inflation.
         Inflation is the ratio of two ratios: The supply and demand for goods and services, and the supply and demand for money. Mathematically, both numbers in the VG/VM fraction are equally meaningful. Changes in either number affect world inflation. But the realities are much different.
         Air is in great demand, because we all must breathe it, but the supply is ample, so air has little or no commercial value. Supply outweighs demand so the price is low.
         Rabid dogs are in low supply, but the demand for them is limited, so rabid dogs have no commercial value. Again, supply outweighs demand, and again, the price is low.
         Many countries have had strong currencies, later to see the value of their currencies weaken. The most severe drop in the value of a country's money is known as "hyperinflation."
        Borrowing creates money, and inflation continues (erroneously) to be defined as "too much money relative to the supply of goods and services." Yet while the U.S. federal debt increased dramatically in 1980s and 1990s, U.S. inflation remained at an acceptably "low" level.
         This constitutes absolute proof that increasing federal debt does not cause inflation a proof ignored by those who expound on the inflationary dangers of federal debt.
         Return to our equations for inflation:
         DG/SG = VG and DM/SM = VM.
         And VG/VM = I.
         The formulas show: If the demand for goods and services goes up, their value goes up. If the demand for money goes up, the value of money goes up. And if the value of goods goes up faster than the value of money, you have inflation.
         However, DG/SG works much differently from DM/SM. First, the DG is a compilation of the demands for all goods and services. It never rises as a unit. The demand for some goods and services rises while the demand for others falls.
         Second, an increase in the supply of goods reduces prices which increases demand. This increase in demand modifies the price decrease and may actually raise prices over time (because new buying habits are formed). This is why producers distribute free samples and coupons.
         A decrease in the supply of goods raises prices and causes a decrease in demand. This may bring prices to below prior levels (because of production efficiencies.)
         DG/SG tends to move slowly and be at least partially self-leveling and market dominated. The market responds to price changes by adjusting both supply and demand.
         This cannot be said of DM/SM. Though money comes in many varieties, all varieties of money (in any one country) tend to move together. In this discussion, money can be considered a single product.
         The ratio between the total supply and demand for money is partly market-dominated and partly government-dominated. The government may increase the supply of money by selling Treasury bonds, notes and bills.
           We never again will have inflation, recession, depression or stagflation if we keep interest rates and the federal deficit high.
         Given this information, one might expect the increase in supply to reduce the price (interest rate) of money. However, the opposite can happen. To sell a large supply of bonds, the government might need to increase demand by paying a higher price for money (higher interest rates). This happens only in the very short term, however.
         While the government has limited control over the supply and demand for all goods and services (through its own purchases), it has more control over the supply and demand for money.
         The government controls supply when it creates and destroys money, and the government controls demand when it adjusts interest rates. Because of extensive government intervention, the value of money tends to be more controlled than self-leveling.
         On balance, the government's creation of money is related more to the government's need for money than to inflation considerations. The government's primary anti-inflation tool is its control over the price of money (interest rates), which affects the demand for money.

         Inflation is not "too much money relative to the supply of goods and services." Given enough money for production and purchasing, the supply of goods and services has and will continue to increase endlessly, to satisfy infinite human desires.
         In all of human history, there never has been an economy that had too much money relative to the supply of goods and services -- not prewar Germany, not Brazil, not China, not any of the inflation-afflicted economies.
         If the supply of money increases more than the demand for money, there will be inflation. Insufficient demand is not caused by the absence of things to buy; it is caused by the insufficient reward, when compared with the risk of owning money.
         Governments can control the value of money through gross measures such as devaluation (reduction of value) or the rarely considered, revaluation (increase in value). Devaluation means the government pays more units of its money for units of other countries' moneys. Many governments have devalued their currencies, trying to encourage exports.
         The effect is instant inflation, because the nation must pay more for imported goods. A money devaluation of 50 percent will cause an immediate inflation of about 100 percent, for imported goods.
         As our economy becomes more a part of a world economy, the supply and demand for goods and services will continue to have less impact on any one nation's inflation. If the supply of domestic products drops, imported products will fill the gap. If the supply of labor drops, goods will be produced overseas.
         In the VG/VM relationship (value of goods/ value of money), VM is far more important to inflation.
           We never again will have inflation, recession, depression or stagflation if we keep interest rates and the federal deficit high.
Bottom line:
  • Inflation is caused by interest rates that are too low.
  • Recession and depression are caused by lack of money in the economy
  • Lack of money can be cured by federal deficits
            The federal government exerts modest control over the supply and demand for goods and services. Though the government does order certain kinds of products produced -- for war, infrastructure, health care, etc. -- and other kinds of products purchased (corn, milk, etc.) a great deal of time elapses before a government project goes from discussions in Washington, D.C. to actual fruition of the project. Government manipulation of the VG factor provides a ponderous, and therefore, inadequate control over inflation.
            Though a country may control the prices of goods, either by open market operations (for example, the U.S. government's buying of vast, unusable quantities of cheese) or by fiat (for example, President Nixon's price controls), such attempts always injure our economy, and at last, seem to be growing out of favor.
            When Germany, Brazil and other countries experienced hyperinflation, the reason was not that there was too little available to buy or too little the people wanted to buy. Initially, there was much to buy and the people wanted to buy it.
            The problem was that the world -- including the citizens of the countries themselves -- did not want to own the German or Brazilian monies. The reward (interest) was too low compared with the risk that these currencies would devalue in the future. When demand for the money fell, the price (value) of the money fell. That was inflation.
            On the surface, inflation is too large a supply of money relative to the demand for money. Bottom line: Inflation is caused by interest rates that are too low.

    Click the cover to see excerpts from the book

    Steps Governments Can Take To Cure Inflation

            The book, FREE MONEY, describes two good steps any country can take to cure or to prevent inflation, and both steps boil down to the same thing:
            1) Increase the demand for its money by raising interest rates.
            2) Increase the demand for its money by reducing the risk the currency will be devalued. A country must demonstrate its willingness and determination to prevent inflation by raising interest rates.
            There also is one bad way a country can cure or prevent inflation. It can increase the value of its money by decreasing the supply. This will cause a depression. The cure would be worse than the disease.
            The U.S. Federal Reserve Board has demonstrated its determination to prevent inflation from rising to above 3 percent. The world feels the risk of inflation in America is reduced to that level.
    The Fed's efforts to stimulate the economy by cutting interest rates always have failed, will fail and are failing, and do great harm. The only thing low interest rates stimulate is inflation.
             This belief allows the Federal Reserve to control inflation with lower interest rates than if the world were less confident about America's potential for inflation. If the Federal Reserve vacillated in its determination, interest rates would need to be higher, just to maintain the demand by a world nervous about risk.
            The perceived willingness to raise interest rates reduces the need to raise interest rates.

    To A Hammer, Every Problem Is A Nail

            The Federal Reserve has one major tool: interest rate control. Sadly, it attempts to use that tool to solve all economic problems. Recently the Fed used its tool for the wrong problem. It believed inflation came from an "overheated" economy, an economy that grows "too fast."
            When the Fed detected our economy growing above its arbitrary target (about 2%-3% a year), it raised interest rates, which prevented inflation by increasing the demand for money, but did nothing about the "heat" of the economy.
            And what is "overheated"? The Fed has no idea, just some vague notion that if the economy grows "too fast" (?) this is cause for concern. Thus, the Chairman of the Fed pontificated about "irrational exuberance," and the nation nodded solemnly, as though some great Truth had been revealed.
            There is no evidence a fast-growing economy is more inflation-prone than a slow-growing economy. There is much evidence to the contrary. Our "irrational exuberance" did not cause inflation. Those economies experiencing hyperinflation were not "overheated."
             The economy just prior to the Great Depression wasn't overheated; it was under funded. "Irrational exuberance" is meaningless.
             Chairman Greenspan reduced interest rates in a desperate effort to stimulate the economy. He failed. The public discovered the emperor has no clothes.
             History shows low interest rates do not stimulate the economy and high rates do not "cool" it. To a slight degree, the opposite is true, because high rates force the government to pump more money into the economy, which stimulates it. The Fed's efforts to stimulate the economy by cutting interest rates not only always will fail, but do great harm. The only thing low interest rates stimulate is inflation.

    What do these data tell you?
              1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
              1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
              1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
              1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
              1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
              1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
              1998-2001: U. S. Federal Debt reduced 9%.   Recession began 2001

    That Incurable Stagflation And How To Cure It

             Stagflation is a stagnant economy with inflation. This problem is the Fed's worst nightmare, because the Fed's one tool won't cure it. The traditional cure for economic stagnation, low interest rates, leads to inflation. And the cure for inflation (raising interest rates) is felt to cause economic stagnation (though it doesn't).
            Inflation is the opposite of deflation, not recession, so the same tool used to cure inflation, can't be reversed to cure recession.
            The existence of "stagflation" proves there is no relationship between inflation and economic growth. President Nixon faced stagflation and made the disastrous decision to freeze prices.
            Hyperinflation most often occurs in countries having modest or even no economic growth. Further, the countries that had the greatest postwar economic growth, for example Japan and Germany, have not suffered from inflations unacceptable to their governments.
            How can the government cure stagflation? Cure each of the two problems. A stagnant economy can be revived by pumping enough money into it. This increases both the supply of, and the demand for, goods and services, which increases productivity, jobs and purchasing. Poof! Stagnancy is gone.
            Inflation can be cured by raising interest rates, which increases money's value. Increased interest rates also make federal money creation easier.
            And, rising interest rates do not stagnate our economy.
            The Fed's anti-inflation policy of controlling the demand for money (via interest manipulation) works well, so long as the supply of money keeps growing. When total debt stops growing, a recession results. At that point, reducing interest rates causes stagflation. The Fed's tool is useless.

    Do Low Interest Rates Make Borrowing Easier?

            Money is the credit/debt twins. For every debt there is a lender and a borrower. Low interest rates make borrowing more attractive, but what about lending?
            Would you buy a bond (lend) paying a low interest rate? Wouldn't you rather put your money into stocks or real estate, if all you could get for a bond investment were 2%? On the other side, would you like to issue a bond (borrow) if you had to pay 30%?
            High rates encourage lending. Low rates encourage borrowing.
            Because there are two sides to every loan, neither low interest rates nor high interest rates affect the overall ease of private borrowing/lending.
            That is yet another blow to popular wisdom. Low interest rates do not make borrowing easier, because they make lending less attractive.
            One exception to this rule makes our prosperous economy possible. Find a borrower who doesn't care what interest rate he pays. Then, high interest rates will bring forth more lenders, which makes borrowing easier.
            And who is this borrower who doesn't care what interest he pays? The federal government.
            U.S. federal debt must compete for lenders with the debt of all other nations. The higher the domestic interest rates, the easier the borrowing.
            High interest rates make government borrowing easier.
            No matter how high the interest rates, the government borrows what it needs, neither more nor less. U.S. debt is considered a low risk investment, lower than land, gold, diamonds, stocks, municipal bonds, corporate bonds or most other nations' money, because the world believes:

            1) The U.S. government will not default on its debts.
            2) The Federal Reserve will not allow high inflation.

            With risk already low, demand for U.S. credit/dollars may be stimulated with modest increases in interest rates. More people will want to buy Treasury bonds, notes and bills when interest rates are higher than when rates are lower.
            The demand even for currency, a form of money that pays no interest, is stimulated by increasing interest rates. The Treasury sells U.S. Treasury bonds, notes and bills in exchange for U.S. money. A foreigner who wants to purchase U.S. federal debt, first must buy U.S. money from someone who exchanges money.
            If U.S. currency were cheaper than other forms of U.S. money, buyers would gravitate to currency. The increased demand would raise currency's price.
            Corporate bonds pay a higher interest rate than do U.S. bonds. Even the best corporations have poorer credit ratings than the U.S. government.
            Prewar Germany, Brazil, et al, generated too little demand for their money. Had these countries acted quickly to raise interest rates, they would have avoided hyperinflation.
            For every level of risk, there is some level of reward that makes the risk worthwhile.
            Those who did not buy Brazilian money when the Brazilian government was paying 15%, would have bought it at a return of 50%. Or 150%. Or 5,000%. At some level, demand for Brazilian money would have been stimulated, and the hyperinflation would have ended.
            Where would Brazil have found the money to pay those interest rates? By selling bonds, notes and bills, which would have been made possible by the high rates.
            Consider the pitiful case of Henry Figgie, Jr., the wealthy author of a 1993 book titled, Bankruptcy 1995. Based on our increasing national debt Figgie predicted we would suffer massive inflation, the loss of our property to foreigners and, of course, bankruptcy.

             The only thing approaching bankruptcy was Figgie International, which acted upon its boss's beliefs.
            As demand for Brazilian money rose, confidence in the Brazilian monetary system and the Brazilian economy would have grown, and the Brazilian government would have been able lower interest rates. Inflation would have been defeated.
            During the fastest federal debt increase in our history, inflation remained low -- proof that a large federal debt need not be inflationary. Inflation can be prevented or cured by setting interest rates high enough to generate sufficient demand for credit/dollars.
            Year after year "debt hawks" tell us a high federal debt will cause inflation. Year after year they were proved wrong. You receive more accurate predictions from the local palm reader.
            Consider the pitiful case of Henry Figgie, Jr., the wealthy author of a 1993 book titled, Bankruptcy 1995. Based on our increasing national debt Figgie predicted we would suffer massive inflation, the loss of our property to foreigners and, of course, bankruptcy.
            The only thing approaching bankruptcy was Figgie International, which acted upon its boss's beliefs.
            Do these spectacular failures deter the debt hawks? In November 1996, Morton Kaplan, publisher of The World and I magazine, referred to America as "A nation barreling toward bankruptcy (because of) the fiscal burden of entitlement programs like Social Security and Medicare."
            Year after year, we have been "barreling" and year after year Mr. Kaplan and his experts worried, while our healthy economy kept growing.
            Does it surprise you that a brilliant expert from the University of Chicago (America's premier producer of Nobel prizes), cannot see the plain facts before him? It shouldn't, if you understand the power of cognitive dissonance.

    Click the cover to see excerpts from the book

    Does Unemployment Affect Inflation?

            The theory: When unemployment is low, business must pay higher wages to scarce workers. Higher labor costs cause higher production costs, which lead to higher prices.
            In 1994, unemployment was above 6.5%. By 1996 it had fallen more than 15% to below 5.5%, which seems to imply that wages must rise, causing inflation.
             Inflation remained low.
            Low unemployment does not cause inflation. To quote from the March 3, 1997 Chicago Tribune: "The unemployment rate hit a 23-year low as the number of jobs grows, but inflation doesn't."
            By November, 2000, unemployment "reached its lowest point since 1969" (Time Magazine, January 8, 2000), and inflation remained low.
            We are in a world economy, and the U.S. economy is influenced by world events. Imports, exports, the value of money in all other countries, worldwide production, weather, wars, politics etc., affect our inflation rate more than does our domestic unemployment.
            Inflation describes the relationship between the value of money and the value of goods. The fact that the cost of producing goods goes up, does not mean the price of these goods must go up. If there is insufficient demand at a higher price, the price will come down, and manufacturers will settle for lower margins.
            When the value of money goes up, the price of goods comes down. Those shoppers who traveled to Europe in the early 1980's came home with bargains, not because the cost of producing European goods had gone down, but because the value of the American dollar was high.
            Experts have difficulty predicting effect from cause in our economy. It is complicated and any single factor will be overwhelmed by the myriad other factors. Using unemployment to predict inflation is like predicting this year's weather based on the "greenhouse gas" emissions from one car.
            Inflation is less product-driven than money-driven.
            "In fact, every time at least since World War II the Fed has tried to slow the economy by inducing unemployment increases of more than three-tenths of a percentage point, it has produced a recession. Chicago Tribune, June 25, 2000.
            Reduced unemployment has not caused the inflation that experts at the Federal Reserve Board thought it must. (The Fed continues to use unemployment as a strong predictive factor for inflation another example of cognitive dissonance.)
            Of the four factors affecting inflation risk and reward (for money), and desire and scarcity (for products and services) -- the most significant in terms of the U.S. economy, and also the most controllable, is money reward, i.e interest rates.
            On a micro scale, owning one form of money can have high risk. An individual corporation that has issued bonds can go bankrupt overnight.
            But on a macro scale, the risk of default for all U.S. money in total, changes very slowly if at all. It is the reward that can change quickly and without notice. The Federal Reserve, which controls interest rates, never gives notice of its plans.
             U.S. inflation is determined by the value of U.S. money, which is driven by the demand for money, which is driven by interest rates.
            Preventing inflation requires us to maintain sufficient demand for U.S. dollars. Since our credit rating scarcely can be improved from its near-perfect level, the best way to maintain demand is to make sure interest rates are sufficiently high.

    For a more complete discussion of the causes and cure for inflation, please see the book, FREE MONEY

    1. Stagflation
    2. Federal Budget Deficit
    3. Social Security and Medicare Solutions
    4. National Debt Letters
    5. Federal Deficit Solution
    6. Concord Coalition.
    7. Balanced Federal Budget
    8. Federal Deficit Problem
    9. Federal Government Budget
    10. US National Debt
    11. National Debt Solution
    12. A Child In Arms
    13. Inflation and Stagflation
    14. Glossary of Economic Terms Debt, Money, Deficit, Spend, Owe
    15. U.S. National Debt
    16. US National Debt Clock
    This is the most important paragraph in economics: A large economy needs more money than does a small economy. Therefore, a growing economy needs a growing supply of money. All money is debt. Therefore, a growing economy requires a growing supply of debt. Federal debt is the safest, most controllable form of debt.
    The Interest Rate Fallacy | Social Security Solutions And Reform | Medicare Solutions And Reform | Solutions To Our Economic Problems | Recessions, Depressions, Inflations, Stagflations: Causes and Cures | Federal Debt of the U.S. | Why We Need The Federal Budget Deficit | Stagflation: What It Is And How It is Prevented And Cured | Interesting Letters To The Media | Is There A Federal Deficit Solution? | Should We Have A Balanced Federal Budget? | What Is The Federal Deficit Problem? | How The Federal Government Budget Affects The Economy | A Discussion Of The US National Debt | The National Debt Solution | Short Stories: A Child In Arms | Glossary of Economic Terms Debt, Money, Deficit, Spend, Owe | US National Debt Clock | The Solution to Inflation and Stagflation | What Is Pseudoeconomics?   | How Is Money Supply Like The Weather? | Do Low Interest Rates Help The Economy? | The Solution to Federal Tax Reform | What Is The Relationship Between Gold and Money? | Why Do You Pay Taxes? | Social Security Reform | Does Federal Debt Cause Inflation? | The 5 Myths That Damage Our Economy | 10 Reasons to Eliminate FICA | Rodger M. Mitchell -- Ideas |