Most Americans think of inflation as a demand-vs.-supply problem. If demand outpaces supply, then prices will rise. In an economic environment in which market forces dominate, that is generally how inflation happens. But that is not what happens in the United States, and it’s all due to the meddlesome influence of the Federal Reserve. In this post, we will explore the underlying reasons for the Federal Reserve’s involvement in our economy – and how to avoid getting your hard-earned dollars mixed up in this financially precarious system.
Reason for the Federal Reserve’s involvement in our economy.
- The Federal Reserve believes that demand creates supply: In a free market, people who can afford to buy will buy, and inflation will be dictated by those market forces. But the Federal Reserve does not believe in letting market forces dictate how much people spend; it meddles by lowering interest rates on a periodic basis, thinking this approach will create jobs and growth.
- Low interest rates encourage people to borrow and spend: When the Federal Reserve lowers interest rates, more people who cannot really afford to buy start borrowing and spending. The Federal Reserve promotes this behavior; in fact, the money that people start borrowing and spending comes out of thin air: The Fed simply prints it.
- Excessive borrowing and spending creates artificial demand: When Americans spend money they’ve borrowed through artificially low interest rates, they create artificial demand. For example, pre-2008 U.S. home values went up dramatically because so many people could borrow at low interest rates to buy homes.
- More people spending causes runaway inflation: In the midst of an economic euphoria, people spend and spend and spend, creating disproportionate, short-lived inflation. Eventually, of course, the bubble bursts – and we all must cope with the economically devastating consequences.
These government-triggered boom-and-bust cycles are not healthy for the economy or for our personal finances. Artificial demand that encourages people to borrow and spend triggers unhealthy, unnecessary inflation. The best way out is simply to not participate at all. A whole insurance policy is the best way to grow your wealth independently of the traditional banking system.
For more information about how a whole life insurance policy can give you freedom from the commercial banking sector, visit Paradigm Life’s article about Austrian Economics.