JULY 7 • 2022 | 15

and efforts at restricting
commerce to limit the spread
of the disease, resulted in
economic disruption around
the world. Supply chains
do not neatly recover from
disruption.
Sniderman points to another
factor that drives prices up:
A small number of giant
corporations control the
supply of one commodity after
another, from baby formula
to computer chips. In markets
with many suppliers, free
market competition should
theoretically keep prices in
check. In markets controlled
by a few players — called
oligopolies — the leading
corporations can easily collude
to raise prices.
Dr. Alan
Reinstein, CPA,
George R.
Husband Professor
of Accounting
at Wayne State
University,
identifies an
additional factor, specific to the
United States: deficit spending.
“For an extended period
of time” Reinstein observes,
“under both Democratic and
Republican administrations,”
the government has spent far
more money than it has taken
in in taxes.
“The Federal Reserve (the
Fed) increases the money
supply to fuel deficit spending,
feeding inflation,” Reinstein
adds. Because, by definition,
“inflation occurs when too
much money chases too few
goods, thus raising prices,”
the increasing money supply
generates inflation.
All these factors made
inflation inevitable, but
Reinstein notes that inflation
and recession are simply
characteristics of capitalism:

“Boom and bust cycles have
recurred throughout history.”

WHAT SHOULD
INVESTORS EXPECT?
In the past few decades, the
Fed has kept interest rates
unusually low. Bonds and bank
accounts were, consequently,
not attractive investments.
Reasonably enough, as
Reinstein notes, “Investors
receiving small returns on their
bonds often move funds to
stocks.” Persistent low interest
rates thus helped fuel dramatic
rises in the stock market.
But now, the Fed has begun
raising interest rates. In
Reinstein’s view, “Bond holders
may experience higher interest
income as interest rates rise,
but often interest rate rises
lag inflation rates, so the costs
of inflation are only partially
offset.”

After a long bull market
— stock prices rising year
after year — we may now see
declining share values.
Reinstein notes the
predictable impact of rising
interest rates on the real estate
market.
“Higher interest rates
predictably will also dampen
demand for new residential
construction,” he said. “
And
higher interest rates will reduce
demand for existing housing,
which, in turn, will cause a
decline in existing home prices.
Thus, an increasing number
of homeowners will find
themselves ‘under-water’ with
home mortgages exceeding
home values.”

WHAT SHOULD
CONSUMERS EXPECT?
Though inflation stresses
people on fixed income or

on limited salary, Reinstein
observes that some workers
may come out ahead. “Infla-
tion can inequitably benefit
some workers who can
demand higher salaries,” he
said.
Inflation may also benefit
those who owe money, and
can, in Reinstein’s words, “pay
off their debts with inflation-
ravaged, lower-value dollars.”

DANGERS AHEAD?
The Fed has begun to raise
interest rates — in the hope of
cooling off the economy — to
slow inflation. Businesses,
unable to get inexpensive
loans, may cut back on plans
to expand. Consumers, unable
to finance purchases, may cut
back on spending. This course
has a serious danger: We may
get, not just a cooler economy,
but a cold one, a recession.
If people continue to expect
prices to rise, we may even
still have inflation, the dreaded
combination of rising prices
and rising unemployment
called stagflation.
Other countries may
anticipate worse.
Stevenson lists the countries
that traditionally depend on
imported grain from Ukraine
and Russia, including Egypt,
Tunisia, Lebanon, Afghanistan,
Laos and Sudan. Drought
conditions in recent years have
made several of these countries
even more dependent;
climate scientists anticipate
worsening drought. Most of
these countries, according to
Stevenson, do not have cash
reserves to purchase food
staples to feed their populace.
Throughout history, the
prospect of widespread
hunger inspires political
unrest, revolutions and mass
immigration.

Dr. Alan
Reinstein