The Federal Reserve insists that current price inflation is “transient. âHowever, each sign points in the opposite direction and we need to understand the economic and political implications of what is about to begin – an era of high inflation.
Between the end of World War II and 1980, the West, including the United States, price inflation experienced. It ended in the early 1980s after the traumatic 1970s that saw the collapse the post-war Bretton Woods monetary arrangement, including the convertibility of US dollars into gold, and the emergence of oil-producing Arab dictatorships as major players in world politics. We are about to enter a new era dominated by inflation.
For years, the United States and other Western countries have spent colossal sums and incurred huge debts with only modest increases in consumer and producer prices. Inflation has occurred elsewhere (in financial assets, for example), but the Fed’s money printing has generally not resulted in higher prices, as families and businesses, shaken by past excesses, have paid off debts and cut spending, while banks have focused on restoring their capital base rather than lending.
But it all had to end. A country cannot increase its debt by 40% in two years (as the federal government has done since 2019, according to my calculations of the Monthly Debt Statements from the Treasury Library) or spend over $ 6 trillion in 2020 and suffer a budget deficit of 15% in addition to years of previous debauchery, all without consequences. The Fed also cannot spend money to buy assets, increasing its balance sheet to more than 8 trillion dollars (up from $ 4.3 trillion in 2019) and don’t expect that money to flow into the economy at some point. There are signs that this is already happening – and this is just the start.
The consumer price index increased by the equivalent of 5.4 percent one year in July, almost triple the magic 2 percent target used by central banks, and the producer price index has reached a 7.8 percent. This is clearly linked to the fact that money changes hands more and more frequently as economic activity picks up. This is why M2, which measures “Easily convertible cash, deposit checks and quasi-money”, is now expanding to 27 percent per year. Meanwhile, shortages are popping up everywhere you look, including in the labor market.
The dollar is still the world’s reserve currency, but it is doomed to lose that status over time, just like the pound sterling. lost for the dollar in the 1920s and other currencies lost their dominance before that. It is fascinating to see the American authorities pushing hard to encourage the process. Why would they be so eager to facilitate the weakening dollar? Because it is the easiest way to mitigate the consequences of too much spending and borrowing. There is simply no way for the US government to pay what it owes, but it can inflate much of that debt.
The government calculated that as more and more baby boomers come knocking on the doors of Social Security and Medicare, it will become impossible to maintain current financial arrangements and meet its obligations. Inflating the debt and debasing the currency is the only solution. You can be sure that the Fed will continue to characterize inflation as “temporary” (as will other major Western countries) so that it can continue to inflate.
Anyone who has lived under high inflation knows the havoc it causes. But while destroying savers and workers, inflation is a boon for debtors, who can repay in devalued currency. There are also likely to be international implications. In the age of inflation, holders of durable assets, including commodities (whose prices are already under pressure by supply and demand imbalances), will thrive. Look for dictators or potential dictators from the Middle East and Latin America to win and may the Tsar of Russia regain some economic strength as the liberal democracies of the West struggle with domestic issues.
The financial chickens have finally come home to roost. The age of inflation will have a major effect on our lives. The image will not look pretty – at home or abroad. We better start facing the facts. They are not transient.
Ãlvaro Vargas Llosa is a senior fellow of the Independent Institute in Oakland, California. His latest book is “Crossings of the world: immigration, civilization and America. “