If you were to tell an economist, who had been sleeping in a cave for the past decade or so, that the United States was now $13 trillion in debt, running $1.4 trillion deficits and that the Fed was engaged in “quantitative easing” (creating more money), he or she would likely guess that we also had runaway inflation and sky high interest rates. We don’t, and it’s not because of anything the government’s doing. In fact, although they wont say it out loud, they’d like to see some inflation to help alleviate their debt problem. Instead, deflation now seems more likely. So where’s the inflation?
Inflation is a loss in purchasing power of the dollar. In the past this has occurred when there were more dollars in circulation than the economic activity at the time necessitated. We have an economic slump going on in much of the developed world, but we also have a massive number of newcomers to the world economy who value a buck much more than we do. Their influence seems to be making itself known in the form of deflationary pressure. With today’s technology, goods, services and information travel around the world more frequently and faster than ever before. Most people on Earth live far below the level of income of the average American or European. Even in China, the average annual income is $3,600. It’s much lower in other countries. If you’re running a global corporation, the $5 you take in selling a tall latte in a paper cup can buy you 20 man/hours of labor in some countries. Hence, the competition for dollars among international corporations is still fierce and will remain so as long as this wage disparity exists. That is likely to go on for many many years. Sorry Federal Government. No, inflation for you.
Does that mean our government will collapse under its debt? No. It means the government is going to have to hold its spending level steady or lower it for a decade or decades. Now, if a developing country or two became strong and vibrant enough to create a new currency that was widely accepted across the globe, that could be a game changer. But for the time being, the world is short on currency and that means the value of what’s out there is going to go up (deflation) not down (inflation) even in the face of massive debt held by the issuers. Ultimately, when we get closer to parity in global living standards and wages, countries with massive debts will face hyper-inflation. For now, it looks like that will be a challenge for a later generation.