• Posted by: Aaron Wright
• In: Accounting & Finance

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Federal Reserve Board members attending the sixth Federal Open Market Committee meeting on September 20, 2006 have decided to maintain the current short term federal funds rate at 5%. The Fed Chairman, Ben S. Bernanke probably had his eye locked squarely on future inflationary projections as a key unknown element that could potentially derail the U.S. economy’s prosperity. News media outlets will undoubtedly broadcast insightful analysis on the Fed’s actions explaining if inflation’s illusive force will be kept at bay. Unfortunately, mass hysteria surrounding inflation- which is simply an increase in price levels on products/services, does not reveal the entire reason why buying capacity of the dollar is declining. The main cause is consumers’ insatiable appetite for interest bearing debt. It is the 800 pound elephant in the room no one dares mention.

The United States overtly promotes a deficit spending environment. That statement shouldn’t shock anyone. Interest accruing debt has a more profound yet lasting impact on household income than inflation. This fact becomes more apparent when statistics show there is approximately $5.9 trillion in consumer debt coupled with a growing $8.5 trillion U.S. Government liability. Consumer spending accounts for an estimated 70 percent of U.S. Gross Domestic Product (GDP). It has evolved into the spark that fuels the economic engine. Since median annual earnings for Americans are $43,000 with most people not receiving salary cost of living adjustments, their fixed income must stretch to make ends meet. Major purchases like homes starting at prices above $200,000 and new cars average cost just about $23,600 are compelling individuals to make loans often at exorbitant interest rates siphoning off extra dollars from wages to buy essential goods. In order to fulfill the perceived “American Dream”, consumers have resorted to living beyond their financial means.

Real inflation is usually 4% and average interest on credit cards is 14.94% per year, respectively. This vividly illustrates that borrowing money from sources other than family and friends takes a larger proverbial chunk from your wallet than inflation. Besides you can’t control rising gasoline prices which produce inflation, but you do have influence over how much debt to take on. Eventually, persistent high monetary expenditures in relation to GDP will lower a country’s currency value. Reducing the debt load, the interest rate on debt or both may go a long way towards improving the U.S. dollar’s purchasing power as well as our nation’s savings rate.