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Harris Sherline: Spending Our Way Into Oblivion

Deficits and out-of-control bonds are sure warning signs of crushing inflation.

How much longer can the United States continue to spend more money than it takes in, and how much longer can we continue our spendthrift ways before something literally gives? The numbers are getting so big that they are beyond comprehension.

Harris Sherline
Harris Sherline
For example, billions and trillions of dollars are almost impossible to understand. Generally, we seem to know what a million dollars can buy. We see the number in the prices of real estate and homes, or perhaps the statistics about various businesses. But, we rarely see big numbers illustrated in terms that are easier to visualize. For example, $1 billion is 100,000 times 1 million, and $1 trillion is a million times a million.

Considering a billion dollars in terms that may be easier to grasp, at an average of $1,000 per month, based on Social Security Administration statistics, it would cover the Social Security benefits for more than 83,000 seniors (age 65 and over) for one year, and a trillion dollars could pay Social Security benefits for every senior in America, a total of about 36.8 million, for more than two-and-a-quarter years.

America’s politicians are rapidly spending our way into oblivion. Almost $1 trillion for the bailout package, including $25 billion for the auto industry, $150 billion for the Federal Deposit Insurance Corp., an $85 billion loan to insurance giant AIG, along with millions of dollars of “pork” for Hollywood producers, race track owners, Caribbean rum producers, Alaskan fishermen, and who knows what else. Remember, this bill was about 450 pages of text, and since it was handed to Congress only about one day before it was approved, it’s obvious that no one read it or really knew what was buried in it.

In addition, two bills sponsored by Sen. Barack Obama are currently working their way through Congress: the Jubilee Act (S. 2166) would cancel as much as another $75 billion worth of Third World Debt and the Global Poverty Act (S. 2433), at an estimated cost of $845 billion.

All this adds up to about $2 trillion, enough to pay Social Security benefits to the entire senior population for more than four-and-a-half years. We are told the money comes from borrowing, which amounts to putting more currency into circulation.

The ultimate result is inflation. How much and how fast is anyone’s guess, but history is clear about what happens to governments that increase the supply of their currency without appropriate controls and corresponding increases in production. It’s simply a matter of too much money chasing too few goods.

Argentina experienced chronic inflation from 1949 through the 1980s. Hyperinflation exploded to almost 5,000 percent in1989, when government expenditures reached 35.6 percent of GDP, or Gross Domestic Product, and subsequently topped out at more than 20,000 percent.

A more contemporary example is Zimbabwe, where hyperinflation reached 12,000 percent in 2006, then increased to the point where a single Zimbabwean dollar was eventually denominated as about $10 trillion of Zimbabwean dollars. The government was finally forced to lop 10 zeros from the currency so calculators could handle the numbers.

When this happens, people refuse to hold their own nation’s currency and convert their money to other assets that they believe will hold their value as their currency continues to rapidly depreciate. In Argentina, wealthy citizens tried to deposit their money in American banks or they bought stock in American companies. The less wealthy attempted to hold American $100 bills or bought houses or gold or commodities, such as rice — anything to get rid of their pesos. They also tried to offset the consequences of unbridled inflation by indexing contracts, which adjusted payments to compensate for the rise in prices over time.

The bottom line is that the currency of a nation that is experiencing runaway inflation becomes worthless, productivity decreases, capital takes flight, and there are a variety of other consequences, such as the government refusing to redeem the bonds it has issued, etc.

The United States is rapidly headed down this track. Running continuous deficits and issuing bonds far in excess of our ability to pay is the beginning of the cycle. We’ve been doing this since World War II, and Americans instinctively know that it’s not right. They may not be financial experts, but they know a con when they see one, and most of them seem to recognize what’s happening now with the $700 billion “bailout” and have protested very vocally. Unfortunately, only a few members of Congress have been listening.

It’s not too late to stop the train, if common sense is allowed to prevail. If not, we can only look forward to more and higher inflation, just as in Argentina or Zimbabwe, with all the consequences that go with it.

Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who has lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his own blog, Opinionfest.com.

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