Posted on August 3, 2016 by Charles
Hugh Smith.
This week, I’ve noted that Consumer
Prices Have Soared 160% Since 2001 while
under-the-radar declines in value, quantity and quality are forms
of Inflation Hidden in
Plain Sight.
What would happen if the real
rate of inflation was revealed? The entire status quo would immediately implode.
Consider the immediate consequences to Social Security, interest rates and the
cost of refinancing government debt.
Unbiased private-sector efforts
to calculate the real rate of inflation have yielded a rate of around 7%
to 13% per year, depending on the locale–many
multiples of the official rate of around 1% per year.
So what happens if the status quo
accepted the reality of 7+% inflation? Here are a few of the consequences:
1. Social Security beneficiaries
would demand annual increases of 7+% instead of zero or near-zero annual
increases. The Social Security
system, which is already distributing more benefit payments that it is
receiving in payroll tax revenues, would immediately go deep in the red.
(Please don’t claim the SSA Trust Fund will be solvent for
decades. I’ve dismissed the fraud of the illusory Trust Fund many times. The
reality is the federal government has to borrow every dollar of deficit
spending by Social Security by selling more Treasury bonds, just as it borrows
every other dollar of deficit spending.)
The Fraud at
the Heart of Social Security (January 17, 2011)
The
Problem with Social Security and Medicare (July 17, 2013)
The Social Security system would
be revealed as unsustainable if real inflation (7+% annually) were made public.
2. Global investors might start
demanding yields on Treasury bonds that are above the real rate of inflation. If inflation is running at 7%, then bond buyers would
need to earn 8% per year just to earn a real return of 1%.
Bond yields of 8+%
would collapse the status quo of massive government deficit spending.
3. Private-sector interest rates
would also rise, crushing private borrowing.How many autos, trucks
and homes would sell if buyers had to pay 8% interest on new loans? A lot less
than are being sold at 1% interest auto loans or 3.5% mortgages.
4. Any serious decline in private
and state borrowing would implode the entire system. Recall that a
very modest drop in new borrowing very nearly collapsed the global financial
system in 2008-09, as the whole system depends on a permanently monstrous
expansion of new borrowing to fund consumption, student loans, taxes, etc.
How many billions of dollars will be siphoned off the
debt-serfs, oops, I mean students, should student loans be issued at interest
rates north of 8%? (Some private student loans are already in the range of 8%;
where will those go if inflation is recognized as running at 7% per year?)
The grim reality is that real
inflation is 7+% per year, and this reality must be hidden behind bogus official
calculations of inflation as this reality would collapse the entire status quo. Super-wealthy elites earning 10+% yields on stock,
bond and real estate portfolios aren’t particularly impacted by 7% inflation;
their real wealth continues to expand nicely.
Who’s being destroyed by 7+% real inflation? Everyone whose income has stagnated and everyone who
depends on wages rather than assets to get by–in other words, the bottom 95%.
….
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