Volume 10, Issue 16
In everyday life, the meaning of this term is that a price can increase for a particular product or service until consumers are not willing to pay it, or they will find an alternative product. A price may increase due to other intervening elements such as everything from supply chain disruptions to increased demand. Elasticity means that there is some tolerance for a price increase that a consumer is willing to accept. However, there is a price point at which one balks and the terms of the transaction break. Like a rubber band, its elasticity has limits. When stretched beyond its point of tolerance, it snaps.
And, so it is with currency.
The Wall Street Journal recently reported on economic conditions in Argentina. The compendium of the article was, if you think inflation is high in the United States, try balancing a budget in Buenos Aires. Current inflation in the United States is projected to be approximately 8.5% annually. In Argentina, it is 55.1%. Why the huge difference?
A country is able to deficit spend based upon the size of its economy and the regional reach of the circulation of its currency. Argentina destroyed the purchasing power of the peso by printing and borrowing too much money in a government controlled socialistic system. Developing countries struggle with buying and selling critical world commodities in dollars. Exchanging local currencies for dollars to participate in international transactions costs an additional premium of 5%-7% depending upon the strength of the local currency. Inflation is now a worldwide problem. Deficit spending, the accumulation of sovereign debt, the Covid pandemic, supply chain realignments, scarcity of products, and post-Covid rescue financial rescue packages are the underlying causes of persistent inflation. Argentina contributed to their own crisis through mismanagement of their economy, overextending their currency.
What is now seen in Argentina is the beginning of an established barter system. People buy toilet paper in bulk knowing that in a week, it will be worth more in trade than in the original payment in pesos.
There is also an elasticity formula to bartering. For at least a short time period, citizens are able to trade items of surplus in their homes for products they need for immediate consumption. At some point, the rubber band also snaps as demand for critical current products exceeds the supply of products used sporadically or seasonally.
Some laborers are now paid in cryptocurrency. That can solve the problem in part only. Cryptos are valued in dollars. They can be transferred from account to account cheaper by bypassing the banking system. But the price of a crypto is still subject to fluctuation and inflation. Depending upon the country, exchanging cryptocurrency for the local sovereign currency can be onerous and expensive.
Citizens of the United States have the privilege and benefit of operating in an economy wherein the sovereign currency is the world’s reserve currency. Businesses in the United States do not have to get out of the dollar to conduct virtually any transaction. There is no exchange rate cost. Inflation is minimized by the force and effect of the size of the U.S. economy and the worldwide distribution of its currency.
Yet, the rule of economic elasticity applies to the dollar.
True economic expansion can only be achieved through sound money policy facilitating free economic choice, productivity, and creative development of needed products and services. Free enterprise is the economic system that has proven itself to allow each individual to maximize their economic impact through their labor and their intellect for the collective good.
No country can print and borrow money forever. Sovereigns have tried repeatedly throughout the ages. Kings in the mid-centuries abused every attempt to instill a command economy. With all of their power over the people, they each failed miserably. The latest modern example of a country to double down on socialism is Venezuela. Inflation there is now calculated to be 251%. No currency can be overextended beyond its economic elasticity.
The United States government, in its attempt to revive its own economy, has wreaked havoc on certain developing countries’ ability to create stability in their own local currencies. A few like Guatemala have controlled inflation through discipline in monetary policy. The current inflation rate in Guatemala is 4.47%, better than the United States. There are other factors involved. One-third of the population in Guatemala lives below the poverty line. The standard and expectation for basic support of the population is less costly. Yet, they are energy dependent and have managed to purchase strategic oil and other commodity needs while keeping inflation under control.
Now what is critical for the United States government and the Federal Reserve to do is to manage the dollar to control inflation in the best interest for the entire world. The U.S. economy is recovering. Supply chains are being reestablished. China, however, presents a challenge. Their strategy is to inaugurate a new closed system of economic structure to include Russia in a self-contained economic system. In a sense, they are doubling down on the old Soviet Union communist model. The difference is that the USSR did not trade with the rest of the world. China, as the governing country of this new “iron curtain economic system,” intends to not only trade with the rest of the world, but to dominate it financially. The first step is to establish the yuan as a competing reserve currency, particularly for the purchase of strategic commodities.
The price to partner with China will be the loss of economic freedom and the loss of individual liberty. China’s intention is to make developing countries choose between a false currency they think they can afford or the freedom they have learned to cherish.
The United States must recognize the economic conditions that developing countries are facing. As a country, America must remember that the essence of our existence is to not only to protect freedom worldwide, but to coordinate the opportunity for other countries to choose freedom. U.S. politicians must respect the economic elasticity of currency. It cannot print and borrow forever. Restrained spending and genuine efforts to move towards a balanced budget must be national priorities and objectives.
Too many generations in America have sacrificed unconditionally for freedom to be realized as the world’s hope.
Only America’s lack of discipline and commitment can extinguish the flame of universal liberty.
My name is Marc Nuttle and this is what I believe.
What do you believe?