Sound the alarm bells on inflation

Sound the alarm bells on inflation
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America is at a crucial crossroads. Our government is spending money like never before. We now have debt that is larger than gross domestic product for the first time since World War Two. There are warning signs the bill collector will be knocking at some point in the near future.

As a real estate developer and investor, I have lived with several kinds of economic eras. I know that excessive spending could lead to dangerous inflation. How did our country get into this situation? It started in the last administration with $1 trillion stimulus plans to lift us out from the Great Recession, but it has continued under the current administration, and is now badly exacerbated by the world pandemic of the coronavirus.

Republicans and Democrats in Congress have tried to outdo themselves with costly relief bills, and they are not done yet for the current crisis. In the latest package with consideration in Congress, Republicans want to give money to households and Democrats want to give money to states. This is pushed out with election rhetoric as each side panders to its own base. Since the spring, these packages have had more than $3 trillion in spending on several initiatives, with another $1 trillion in the works.

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What is the philosophy behind such spending? Believe it or not, there are economists who believe that a government can spend its way out of debt. What is the wisdom of that? The reality may be that more inflation means paying back in dollars that would be worth less tomorrow, but countries continue to pursue the same strategy, as the world is awash with money. Gold is almost $2,000 an ounce, the price of silver has doubled from its low, the value of the dollar is falling, and housing prices are rising.

To give you an example of the impact from inflation, after World War Two, my father built industrial buildings for $10 a square foot for Queens. I saw how such value of property and services have inflation over time. I mostly remember the massive inflation of the late 1970s and early 1980s was not cured by more spending. It was cured by higher interest rates. The prime rate was more than 21 percent. At one point, the Federal Reserve tried to find rationale for a 5 percent inflation rate. Our bonds had been yielding 12 percent versus our notes now yielding somewhere at 1 percent.

It was only in the 1980s, after Federal Reserve Chairman Paul Volcker had spent years drastically hiking interest rates, that inflation had finally come down. That was unfortunately his only option at the time, and it was years before the market was stable. What does that tell us? My advice is “gather your rosebuds while you may” and prepare for an inflation repeat.

I believe it is inevitable that interest rates have to move much higher. The massive federal spending will inevitably lead to inflation. In fact, there are already signs it is coming close. With artificially low interest rates, people are creating a housing bubble, with few homes and many buyers. For the 1980s, much was made about “trickle down” economics. What is starting to occur now might better be named “trickle down” inflation. As building material prices increase, that will have an effect for everything else. This great volcano of inflation has been dormant for years, but it is starting to smoke, and an eruption is bound to happen in the near future.

Meanwhile, just as we may be entering a period of higher prices, we are entering a period of changing work environments. Store sales have been declining and online sales are rocketing thanks to the lockdowns. So our leaders in Washington have to stop inserting politics in spending. We all know that we cannot spend trillions of dollars we do not have.

There was once a salesman on television named Crazy Eddie who told us, “Our prices are insane!” Those words are true today, but we have time to bring sanity back to our federal spending and our way of life. 

Earle Mack is a partner with the Mack Company, a real estate development and investment firm, and is a former United States ambassador to Finland.