We Need a Golden Debt Ceiling

Would it surprise you to know that the "official" rate of inflation in Russia is a lofty 9%? It surprised us until we looked at Russian money supply which has grown at a compounded annual rate of 30% over the last ten years. In light of this, it is easy to wonder why the inflation rate isn't even higher than 9%. Well, according to the following Financial Times article, it is (http://www.ft.com/cms/s/0/be03d45c-a666-11e0-ae9c-00144feabdc0.html). At issue here is the propensity of governments to tactically understate the inflationary consequences of unrestrained public spending.

We have understated inflation in the US for more than a decade by promoting misleading statistics such as the Consumer Price Index (CPI).  Today we are taking this a step further.  As part of recent debt ceiling negotiations in Washington, one proposal emerged that would index Social Security payments to the Chained Consumer Price Index (C-CPI), an index that understates inflation even more than the CPI.  This is a gimmick designed to reduce payments to seniors by pretending that inflation is lower than it is.  Are Americans really that gullible?

While we can be creative with inflation accounting, it is challenging to look at the following chart without acknowledging that we face a daunting inflation problem that is global in nature:

U.S. Money Supply

In the BRIC nations where money supply growth exceeds 20%, inflation is already in the danger zone, even as measured by the understated "official" indexes:

Inflation Rate

The correlation here between BRIC country money supply growth and inflation is unmistakable.  While the rest of us (the non-BRICs) appear to have a modest amount of breathing room, real monetary reform is required to reverse our ascent into the circle on the above chart.  For the US, our proximity to that circle is closer than it appears as the recent trippling of the monetary base has not yet found its way into the broader money supply.

Our current effort to restrian spending by means of a so-called debt ceiling is futile.  The availability of unlimited central bank credit makes it possible to lift the debt ceiling, as congress has done 11 times since 2001, whenever a spending “crisis” emerges.  A modernized gold standard, on the other hand, would limit the ability of the central bank to provide such financing and it would compel the treasury to live within its means.  Tough talk?  Perhaps, but why not move forward to a more sustainable monetary regime now while we still have some flexibility?  If we wait, we will be forced to react within the confines of an inflation problem in which cost of living expenses are rising much more rapidly than wages.  By that time our choices will be limited and less attractive.