In a piece at Project Syndicate economic historian Harold James makes some good points. Inflation isn’t just inflation. Historically, inflation has been known to bring societal upheaval. Monetary policy and fiscal policy are joined at the hip (by law). Here’s the key snippet:
History is replete with examples of high inflation driving systemic breakdowns. By trying to bind societies together with money, central banks have repeatedly sown the seeds of broader political and social dissolution. In federal states, such as Germany in the early 1920s or the Soviet Union and Yugoslavia in the late 1980s, inflation fueled a centrifugal dynamic and separatism. The public harbored a gnawing suspicion that the center (Berlin, Moscow, Belgrade) exercised unfair political control over the distributive levers. For the federated republics, secession and monetary autonomy became ever more attractive.
By breeding uncertainty, inflation can easily destroy large, complex political entities. We know that Russian President Vladimir Putin believes the breakup of the Soviet Union was the greatest political catastrophe of the twentieth century. He may also believe that energy- and food-price inflation – and government efforts to buffer the impact with even greater subsidization – will destroy the British, American, and European unions.
I’m of mixed mind about this. For one thing I think he’s instantiating one of my pet peeves—conflating inflation with hyperinflation. While I agree that lax monetary and fiscal policy over the period of the last 20 years has increased the risk of hyperinflation, I don’t believe that hyperinflation is a species of inflation. I think it’s sui generis. Inflation is a decrease in the value of money. Hyperinflation on the other hand is a catastrophic loss of confidence in the currency. Under certain conditions inflation can go on indefinitely without producing hyperinflation. What conditions? Well, we’ve had them for the last 200 years or more. That’s another way of saying that deficit hawks are wrong.
Does ordinary inflation bear the risks of which Dr. James warns? I think it can produce misery and political unrest but I remain unconvinced it can produce the sort of upheaval that occurred in Weimar Germany. We are nowhere near hyperinflation at this point.
How do we mitigate the risks of hyperinflation? Electing better leaders would be a start. My definition of better leaders is individuals who value the public good over their own personal good. That’s a tall order. Conflating their own personal good with the public good is endemic in politicians. It can’t be stamped out. We can only limit its impact.
Limiting the reach of government is another measure that could mitigate the risk of hyperinflation. Hyperinflation is inflation plus a generous dose of stupidity coupled with political pigheadedness. Political leaders start spending to address the misery caused by the previous round of spending, the central bank covers that tab, and people come to expect that. It’s a positive feedback loop.
“Political leaders start spending to address the misery caused by the previous round of spending, the central bank covers that tab, and people come to expect that.”
That would describe both the last (at least) 30 years, and as best I can tell the current administration and the progressives preferred strategy today.
But something has changed. The all commodities producer index printed at 20% a couple days ago. There is more consumer level inflation coming down the pike.
I understand you separating hyperinflation and today’s inflation; Weimar and Venezuela had different effects. But I disagree with the sui generis descriptor. Its a continuum. One can have stage 1, 2, 3, 4 cancer, with different effects and different expected outcomes, but they still have cancer. None of it is OK.
To be more specific, today’s inflation is inflicting tremendous pain on fixed income and lower income individuals; less on the wealthy. Yes, hyperinflation would affect everyone. But to differentiate “regular” and “hyper” inflation is to discuss inflation on economic class terms, with callous disregard for those most affected.
This FRED data series I posted yesterday shows that Yellen’s notion that consumers have dry powder is just insane (toggle the 5 year view; consumers are again all debted up):
https://fred.stlouisfed.org/series/REVOLSL
With probably at least another year of current levels of inflation, where will people be? What level of misery?
A final point. Biden keeps touting strong employment. BS. Jobs have not yet fully recovered. I don’t know if the size of the workforce is back to where it should be, or permanently reduced. But view the unemployment rate through that prism. And a bottom line notion: real wages are down. Also, check out new unemployment claims. Rising now for 60 days. The next report is due out tomorrow AM. Worth noting.
That’s what the MMTers think. That’s why they’re so confident that the Fed can extend credit indefinitely without a risk of hyperinflation.
I have used the phrase “in a box” in economic comments recently. We, and the Fed, are in a box. The Fed can’t goose the economy and satisfy politicians spending nostrums anymore. The resulting inflation drains the consumer’s pocketbook out the other side, probably at a net loss to purchasing power.
From where I sit its 1979-1982 all over again. Its going to be bitter medicine. If voters had any sense they’d cast out any politician who presided over this the past 30 years. McConnell gone. Pelosi gone. Schumer gone. Sanders gone. Durbin gone. Murkowski gone………………..
MMT ought now to be in the garbage bin of history. As I said, if you want to draw a line between 10% inflation, 100% inflation or 1000% inflation all you are doing is determining who can be bled the longest before succumbing.
They did something similar in the Coliseum didn’t they?
“Electing better leaders would be a start.”
Unfortunately, the trend in our leadership is strongly downwards. What we have today is demonstrably worse than in the 60’s and 70’s, and the ones who come next will be worse than what we have today, if that is even imaginable.
Coupled with the long-term downward trend in living standards for the working class and middle class,
and the growing drug crisis,
and the continuing loss of our manufacturing capacity,
and the failures of our education system, pre-K to post-doc,
and our interminable meddling and interventions and wars with other countries,
and the alienation of our youth from America and its history,
the US is clearly a declining power.
Europe is in the same boat.
â€If voters had any sense they’d cast out any politician who presided over this the past 30 years. McConnell gone. Pelosi gone. Schumer gone. Sanders gone. Durbin gone. Murkowski gone……………â€
I agree 100%! But, I also wouldn’t count on it.
Bob Sykes also makes some valid observations about the general erosion of our society. Reminds me about the downfall of Rome.
@Drew
I rarely comment upon inflation because the concepts and mechanics are complicated, at best. I am “breaking radio silence” because you should have a good idea of what I mean.
With the existing Modern Monetary System (MMS), hyperinflation is almost impossible. The dollar is a mostly regulated monetary unit. It is neither hard or fiat, and it is created by the financial industry not the government. (The Fed is a quasi-government agency, but it is private.)
The dollar based financial securities are what determine the dollar’s worth. As the dollar decreases in value, those financial securities will decrease, as well. Actually, all dollar based transactions will decrease in value.
Hyper-deflation will be the result, and dollar based financial wealth will decrease. The top 1% will snuffer more than the bottom 99%.
If hyper-inflation were to occur, it would be in the financial industry, but it would be a hyper-bubble. It would be similar to the 2008 Financial Collapse, but on a much, much larger scale. It would require TARP to be tens or hundreds of trillion dollars.
The amount of “debt” the government would need to create would stagger even an MMTer. Simply increasing M1/M2 is not sufficient, M3+ would need to be increased an order of magnitude, at least.
While I am philosophically a hard money guy, I have come to realize it has problems, as well. With hard money, the economy becomes hide-bound because of insufficient liquidity. (Ongoing deflation would occur.)