Backtalk I
RICHARD W. RAHN / GUEST COLUMNIST
Preventing The Next Great Infl ation
t is too late to prevent a sudden or gradual collapse in the dollar’s value. The U.S. federal debt of $30 trillion is now more than 130% of GDP — and that is just the “on the book”
amount and not the unfunded liabilities. The debt-to-GDP ratio is twice what it was back in 2008
and four times what it was in 1982 near the end of the last great infl ation. The Federal Reserve has been holding interest rates on
the debt at artifi cially low levels — at about 1.5% — which has hidden the true costs of the defi cits. With the rise of infl ation, the Fed will increase interest
rates. In 2001, the average interest paid on the federal debt was 5.4% or about three times the current level. There is a high probability that the interest rate on the
debt moves back to that rate or higher, which means that interest cost to the taxpayer will be about $1.4 trillion (as contrasted with $413 billion last year). To compare, last year, the Treasury collected about $1.9 trillion in personal income taxes. Infl ation is now running at 7.5% — and there is no real-
istic plan to reduce the current and projected future defi cits by spending rate reductions, which means either more infl ation or higher taxes (50% higher to attempt to obtain the needed extra trillion dollars?) or both. Infl ation is a non-legislated tax increase, particularly
brutal on those with low incomes. It is the same as if their employer cut their pay or if the government increased their taxes. High-income people and/or those with considerable real assets do not feel the pain of infl ation nearly as much as their less-affl uent fellow citizens. Wages are rising but at a slower rate than infl ation — so Americans are getting poorer — and there is no painless way out. If the Democrats had passed their proposed Build Back
Better bill, the situation would worsen because it would have resulted in even more debt funded by monetary expansion. Rather than criticizing Sens. Joe Manchin and Kyrsten Sinema, the Democrats ought to be thanking them for bringing a pause to the craziness. There was no central bank in the U.S. until Congress
passed the Federal Reserve Act in 1913, and likewise, there was no sustained infl ation before the creation of the Fed. The U.S. was on the gold standard, which limited the
ability of the government to borrow. Once the last tie to gold was removed in 1971, there was nothing to restrain
98 NEWSMAX | APRIL 2022
defi cit spending except having enough fi scally respon- sible members of Congress.
T
he founders were history students and understood why the early experiments, as far back as the ancient
Greeks, with direct or indirect democracy, failed. Unrestrained democracies almost always end up with majorities oppressing or taking away rights and/or prop- erty from minorities and giving in to the passions of the moment, which often leads to unnecessary wars and waste- ful spending. This historical knowledge led to Ben Franklin’s famous
quip to a waiting citizen when asked what type of government the founders had created, “a republic if you can keep it.” A constitutional republic is an undemocratic construct.
It does not allow simple elected majorities to take away pre- scribed individual liberties, such as freedom of speech, the press, religion, assembly, the right to bear arms, etc. It takes substantial supermajorities to amend the Constitution both in Congress and among the states. The Constitution also requires supermajorities for the impeachment of the president. (Think what would happen if all it took was a simple majority to get rid of an elected president. Every time a president became unpopular, the Congress [if under control of the opposition] would likely throw out the president — leading to temerity and instabil- ity.)
The Senate has historically some supermajority rules
and the fi libuster to again delay hasty action, which may prove unwise (as often it is). If the money — legal tender — is not tied to gold, sil-
ver, or some other metal or commodity of value, history illustrates the incentives to devalue (infl ate) the currency become overwhelming. Various balanced budget amend- ments have been proposed, but most contain serious fl aws. A better solution may well be a constitutional amend-
ment requiring a three-fi fths supermajority for all tax and spending bills. As noted, it is probably too late for our cur- rent dollar to be saved. Fundamental monetary reform, allowing for private
monies and supermajorities for all government taxing and spending, may be the only way to save the American republic.
Richard W. Rahn is chair of the Institute for Global Economic Growth and MCon LLC. This article first appeared in The Washington Times.
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