Inflation: the Most Fatal Threat
for consumers, therefore the economy
The foundation of the economy is credit. Credit is the (normal*) source of all money in the existing economic system, and money is the fuel that allows the economy to function.
[People have argued with that metaphor, but I don’t say money of itself ‘makes things happen’, only that in the existing economy it must be present for the economy as a process (the process of producing and acquiring goods and services) to proceed: fuel doesn’t make my car go, but it must have fuel for it to go.]
Credit is sustained by income (referred to, for businesses and government, as ‘revenue’). If income were to become insufficient to sustain the existing level of debt, the collapse of the economy would ensue.
It is true that some (‘nonperforming’) debt can be safely ‘written off’ by creditors. It happens all the time. There is some point, though, at which nonperforming debt could become such a problem that the entire banking system — for that matter, the entire financial sector of the economy — would fail, causing the complete collapse of the economy.
What is that amount? No one can say for sure.
Debt is interrelated, though: the repayment of this debt depends on the repayment of other debt. That means that the amount of debt that can be safely written off is less rather than more. Also, different types of bad debt have different effects on the overall economy.
That brings us to the main point of this article. At least two thirds of the economy of this nation (the U.S.) is consumption: people buying goods and services. That makes us as consumers the most important single part of the economy. Our expenditures on goods and services support the entire economy. Those expenditures are what allow everything else that goes on in the economy to happen. They are the flow of money, as income, that sustains the structure of debt that is the foundation of the economy. Without (a sufficient portion of) those expenditures, the economy cannot continue to function. It cannot simply shift to a permanently lower level of output because a lower level of output (with less employment and less total income) would mean that too much debt would not be repaid: again, only so much debt can safely go unpaid.
Here is the ol’ bottom line: If consumption collapses, the economy collapses. There is no getting around it. There is no ‘bail out’ that can be fashioned.
Consumers in this nation are in deep financial trouble. Most of us are in over our heads in debt. Most survive from paycheck to paycheck, turning to unsecured credit (credit cards) whenever any unexpected need for money arises. Take away any noticeable amount of people’s incomes, and a serious situation will become dire very quickly.
That is what inflation does. It effectively shrinks people’s incomes — on which paying their debts depends, on which the whole economy depends. However important a person’s credit score might be, all people will put the necessities of life itself ahead of making payments on nonessential debts. If it comes to it, people will put money for food ahead of paying on a mortgage or paying rent (which is income for the landlord) — and it was coming to that for more and more of us even before inflation in food and energy accelerated.
That is why keeping inflation at an ‘acceptable’ level, especially for consumers, is always the primary concern of the central bank/central government economic Leviathan. Ironically, the ‘best’ way for it to do that, if inflation is becoming a real threat to the system, is by creating a recession, a drop in total output that is presumed to be temporary. It is better for the economy as a system for some people to lose their jobs, even if that means being unable to sustain their debt, than for too many consumers to lose too much income to inflation, with the implications of that for the economy as a whole. That is why inflation is, for the economic powers that be, public enemy number one. Within the economy, it is the most dangerous threat there is.
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*Before ‘quantitative easing’ all money came from new debt; QE is the creation of money (as currency) without the creation of new debt.