The dollar is buying less food, fuel, and other necessities these days. Inflation, something Americans who were around in the 1970s contended with, is making an unwelcome comeback. Contrary to the repeated assertions of the Biden administration and its allies, inflation may be with us for a while.

The Consumer Price Index (CPI) jumped by 0.9 percent in October, rising 6.2 percent from 12 months prior. If annualized, that 0.9 percent rate would hit a double-digit inflation pace of 11.4 percent. The last time inflation hit double digits was from 1979 to 1981, when that three-year run devalued the dollar by 11, 13, and 10 percent annually before Federal Reserve Chairman Paul Volker and President Ronald Reagan wrung it out through tightened monetary policy and productivity increases.

We’re not likely to see either soon, as any increase in interest rates would immediately lead to a catastrophic increase in interest payments on the national debt, while President Biden’s regulatory policies and tax uncertainty are acting to discourage productivity investments.

The gloomy inflation news comes on the heels of a terrible Department of Labor third-quarter productivity report showing a 5 percent decline, the steepest drop since 1981. The same report indicated the price of labor per unit of output increased 8.3 percent at an annualized rate. The productivity decline was deepened by the early retirement of older, highly productive workers who were replaced by less experienced workers who are being paid more to entice them into the workplace, E.J. Antoni, a Ph.D. economist colleague at the Texas Public Policy Foundation told me.

The CPI was particularly bad for Americans at the lower end of the income spectrum, Antoni added. Middle-class consumers have started to substitute less expensive food in the place of higher-cost beef (up 20.1 percent year over year) and pork (up 14.1 percent). As a result, prices for eggs and chicken parts, staples for lower-income Americans, rose 11.6 and 10.2 percent, respectively. Energy was up 30 percent from a year earlier.

So, how much inflation might we still have in store? How might it compare to the President Jimmy Carter era of stagflation — a time of low productivity and high inflation?

Gauging Pent-Up Inflation

One way to roughly gauge the amount of pent-up inflation would be to look at the national debt and GDP from a similar year to this one.

Comparing today to 2007, the onset of the Great Recession, when the United States last embarked on a splurge of massive deficit spending, we can get an idea of the built-up potential for inflation. We see that U.S. GDP was $14.5 trillion compared to $23.2 trillion in the third quarter of 2021. The national debt was $9 trillion in 2007 and is now $28.4 trillion. Inflation over the period devalued the dollar by 33.5 percent.

Considering these three basic factors together implies that the dollar could lose another 55 percent of its value, because when the increase in the money supply exceeds the value of economic growth, that means there are more dollars in the system relative to the amount of goods and services available for purchase.

That inflation has only just started to materialize is likely due to another factor: velocity of money. In other words, how quickly do all those trillions of dollars out there change hands? Velocity is almost half of what it was at its peak in 1997, just before the Great Recession.

When the dollar loses its value, inflation is the practical result. A 55 percent loss of value equates to inflation of 122 percent, meaning that you’d need about $2.22 after that much inflation to pay for what a dollar pays for today.

Why Government Deficits Devalue the Dollar

Why does deficit spending by the federal government put the dollar at risk of losing value? In simple terms, inflation happens because more dollars are chasing relatively fewer goods — there’s only so many goods and services available at a given time and when the number of dollars goes up and more goods and services aren’t produced, then prices start to rise.

Here it’s important to note that the national debt isn’t necessarily inflationary by itself. When the government spends money, that money can come from three basic sources: taxes, borrowing, and printing more money.

Raising taxes to pay for spending isn’t necessarily inflationary, as dollars are taken out of the economy and then those same dollars are spent in the economy, just on different things than people would have if they had kept their money. Borrowing money also isn’t necessarily inflationary because dollars are taken out of the economy and loaned to the government to spend.

But when the government borrows money, it creates an asset — Treasury securities. Created bonds and notes, as assets, can be borrowed against. Their creation increases the money supply. Lastly, if no one loans the government money to purchase its debt, the Federal Reserve does so. In this case, the amount of money in circulation jumps immediately. It’s inflationary.

It’s sobering to realize that at the end of 2007, the Federal Reserve held about $891 billion in securities. By the first week of November 2021, that amount grew almost ten-fold to $8.6 trillion.

But the overall national debt is $28.4 trillion. What happened to the other $19.8 trillion? Well, that’s held by individuals, funds, and other governments.

How Would Dollar Devaluation Affect Inflation?

The dollar’s further decline, potentially quickly, could happen if holders of U.S. debt decide it is too risky relative to the return to hold those assets. As the debt is sold off, the Federal Reserve becomes the buyer of last resort with highly negative implications for the dollar, since dollars not loaned to the federal government must be, in essence, printed by the Federal Reserve when it buys debt with nothing more than an entry into an accounting ledger.

What might a 55 percent monetization of the dollar — a decline in the value of the dollar that reduces the value of debt at the same time — look like? As an example, if it was spread out over six years, we’d see the price of goods and services go up at 14 percent per year.

At this point, all the national debt we’ve accumulated to date would come back into balance with the size of the economy (in real terms, not inflated dollar terms) as it was before the onset of extraordinary monetary and fiscal measures meant to address the Great Recession — the same amount of dollars chasing the proportional amount of goods and services.

But the Biden administration anticipates another $7.4 trillion in federal deficit spending over the next six years, bringing the national debt up to $35.8 trillion. Assuming the economy grows at a sluggish rate (due to Biden’s anti-growth policies) of 2 percent per year over those six years, the dollar might lose a total of 65 percent of its current value, essentially being worth 35 cents of today’s dollar.

No Clean Formula for Inflation

We also know from history that inflation isn’t simply a clean formula — psychology, economic variables, and even international affairs affect inflation. For instance, the inflation of the 1970s wasn’t just about soaring federal deficits relative to GDP. When President Richard Nixon imposed wage and price controls in 1971, that discouraged domestic oil production. At the same time, Nixon took America off the gold standard.

These actions had a significant effect on OPEC, a cartel of oil-producing nations, which found that its leverage over America significantly increased. American oil production peaked in 1970 — and it would take until 2018 to surpass that record year.

Meanwhile, the U.S. dollar, no longer convertible into gold at a guaranteed rate by the U.S. government, became a less valuable store of wealth. As a result, OPEC wanted more dollars for its oil. This led to two oil shocks in 1973 and 1979, which pushed inflation higher while hurting U.S. productivity. Things got bad enough that the Carter administration initiated a phased deregulation of oil prices in April 1979, a policy Reagan accelerated in 1981.

During most inflationary times, wages are what economists call “sticky,” meaning they generally rise more slowly than the inflation rate, resulting in a decline in the standard of living for workers. Inflationary times are thus also usually associated with increased labor strife and demands for higher wages and benefits.

Devalued Dollar’s International Ramifications

Lastly, and perhaps most ominously, a dollar losing its value — with the expectation of more loss to come — has an effect internationally. Most obviously, this can take the form of foreigners being less willing to accept dollars, invest in the United States, or hold our growing debt. This can happen quickly — within hours and days.

Further, this borrowing can also result in a significant increase in interest rates, since, seeing the risk of higher inflation or the greater likelihood of default, lenders demand a greater rate of return in the form of higher interest. Interest rates can also rise when the Federal Reserve cuts back on its purchasing of the Treasury’s securities. Recall that the bank prime rate hit 21.5 percent in December 1980 as the Federal Reserve acted to cool inflation by limiting its Treasury purchases; it’s 3.25 percent today.

Interest rates are an important consideration since national debt payments must be kept current. The federal government will spend about $300 billion on interest payments for the national debt this year — about $2,400 per household. If interest on 10-Year Treasury notes doubles from 1.5 to 3 percent, interest payments would reach $640 billion, almost as much as the $753.5 billion that America will spend on defense this year.

There’s another consideration as well. A nation’s currency is a component of its national strength. A currency being buffeted by inflation shows other countries that the nation issuing that currency has troubles, both economic and political. As a result, a declining dollar may embolden America’s adversaries, who may correctly surmise that America is weakening and less capable of generating the effort needed to defend its national interests.

Thus, the sustained inflationary surge crushing our financial security doesn’t just risk cutting the value of our dollar savings by almost a third, it also risks seeing the United States plunged into conflict far more deadly than the desultory wars of the past 20 years.