Suppose you were selling lemonade on a hot day, and really raking it in – people were buying your lemonade hand over fist. Then you suddenly realize that you’re running out of lemonade. Do you close up shop, and miss all those additional sales? Or do you water the lemonade down a bit, reducing the quality just a little, but increasing the number of cups you can sell?
Assume you decide to water it down. You start out with just a little bit – maybe 5% water. It’s only a small change; people don’t notice it. But it also doesn’t increase your supply much. So you add a little more water.
At some point, people will notice. And at some point beyond that, your lemonade will be so watery that people won’t even consider it to be lemonade anymore. Your business, and your reputation, are both ruined.
The Federal Reserve is at some point on that spectrum with our money supply.
They’ve said publicly that their goal is to water it down 2% per year (i.e., inflation). But in reality they’re doing much more than that. The Chapwood Index puts inflation down at around 9% or 10% (their measure varies by city). Our money is losing value at an incredible pace.
Now, if you’re selling lemonade and watering it down, your customers may put up with it for a while if you’re the only one in the city selling lemonade. But if there are other vendors, sooner or later your number is going to be up.
In terms of money, the US Dollar has been the global currency standard for quite a while, and people continue to use it despite our efforts to erode its value. (Probably because all the other countries are doing the same.)
But that’s changing. A group of countries that we’ve either antagonized (Iran, Russia) and/or that have visions of being a global power (China) are moving away from the dollar. They’re starting to trade in their own currencies, offering financial tools backed by hard assets like gold or oil, and abandoning the US dollar in favor of other currencies.
Changes tend to take more time than you would expect – but I think we’re at the beginning of the end of the Fed’s lemonade business.