Can the law defeat inflation?
For those readers in a deep state of prolonged unconsciousness for the last couple of years, welcome to the world of inflation. Inflation – the devils economic playground. Inflation reduces the purchasing power of the dollar. Inflation manifests as in increase in the cost of goods and services. To put inflation in a correct theological context: a purse with useless money gives the devil happiness. Inflation practices no prejudices, political or otherwise. It affects anarchists and post-modern Marxists alike.
Let us look at two ways created by law to fight inflation. The first is based on federal law. Congress established the Federal Reserve Banking System and its Federal Reserve Board to oversee the nation’s banking system. Federal Reserve board members manage “the” monetary policy of the United States. The system uses its legal power to manage the U S money supply through lending policies to control, among other things, inflation. The board is fond of increasing interest lending rates in times of inflation. Modern economists, an unenlightened cabal of professionals, think inflation is ok and should continue at low rates. To fight inflation by increasing the interest rate on money lent by the fed is like running through a supermarket naked. Running naked creates a present commotion, but you still must pay for the groceries before you leave. The U S was once on a gold standard money supply policy. The policy was eliminated in favor of a floating dollar valuation not linked to a set price for gold under President Nixon. Since the abandonment of the gold standard the U S has no legal anchor which controls the baseline value for the dollar. A gold standard is a monetary system in which the country’s paper money has a value directly linked to the price of gold. Today the primary federal reserve monetary policy tools are interest rate setting and mandatory bank reserve requirements. Current U S legal monetary tools are a weak combatant against inflation.
Concerning the second method for fighting inflation we look to a reactive way in which individuals and businesses should engage in the legal battle. This approach is a limited option and only works prospectively. In the world of contracts and long-term agreements, individuals and businesses can protect themselves against future inflation with proper contract language. Cost-of-living clauses included in an agreement or contract are a legal mechanism for dealing with the eternal problem of inflation and government’s mismanagement of the U S money supply system.
Long-term projects as well as continuing service contracts are at the mercy of inflation. This past week, the CPI released data that prices grew 9.1 percent over the last 12 months from June 2021 through 2022. A party is naturally dissuaded from starting a new project when the party cannot reasonably predict its true end costs or its potential profits. While the most well-known approach is the cost-of-living adjustment clause (COLA), there are other approaches.
Some standard form contracts include payout provisions based on CPI costs. In general, the CPI covers a national market for a list of goods. This list of products may fluctuate in price with the season. In contrast, some materials under a particular or specialty contract have prices that move against these general fluctuations. By modifying the categories of the CPI or limiting the CPI index to the region where the contract is located, the clause will better reflect actual changing regional costs. Inflation clauses also often call for reevaluating a pegged indexed price on a yearly basis. Instead, one could track the prices on a semiannual basis. More frequent evaluations would more accurately reflect inflation.
Because the government’s monetary policymaking is intentionally insulated from substantive public input and common sense, the individual’s and a business’ efforts should pay more attention to inflation clauses within an agreement. This is an individual form of monetary policy.
