"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists."
Ernest Hemingway, Notes on the Next War: A Serious Topical Letter
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. (John Maynard Keynes, The Economic Consequences of the Peace, London, 1919, p. 220)
While most Progressives blame our economic ills beginning with the Global Financial Collapse (GFC) on capitalism, greed, and a lack of regulation, I would submit that this explanation misses the boat, and as a result, nothing has really been fixed to prevent another, even bigger, collapse. For example, our "Too Big to Fail" banks have gotten even bigger. But the cause of the collapse and our current woes can be summarized in one word: Inflation, and since "Inflation is always and everywhere a monetary phenomenon," to quote Milton Friedman, I would add that the inflationary monetary policy of the Federal Reserve is at the root of our economic malaise. But first let's address the theory that the collapse was caused by out-of-control capitalism and de-regulation. While I would be in favor of a new version of Glass-Steagall, separating investment banks from commercial banks, such a law would not have prevented the collapse of 2008 because both Bear Sterns and Lehman Brothers were strictly investment banks. However, such legislation could have mitigated some of the damage as the tentacles of the toxic loan packages reached far beyond the initial culprits.
Syria is a humanitarian disaster, of course, but it's an economic catastrophe too. The latter doesn't get much attention for obvious reasons, but 290 percent inflation certainly qualifies. It turns out you can't have much of an economy when your country is a war zone, and the regime is attacking civilians.
But functioning economy or not, the government still has to pay its bills. So what does it do when there's nothing to run or tax? Easy: It prints what it needs. That's what the pariah Assad regime has done to cover the difference between what it has to pay, and what its few remaining patrons have paid it. The predictable result of all this new money chasing fewer goods has been massive inflation.
Now, the regime has tried to hide just how massive inflation actually is with its "official" numbers, but Steve Hanke, a professor at Johns Hopkins, has estimated what it really is based off black market exchange rates. As you can see in the chart below, the ongoing civil war, foreign sanctions, and the threat of bombing have sent Syria's inflation rate well into the triple digits -- the latest reading, which isn't shown, has it at 292 percent, to be exact.
A question has haunted the aftermath of the Great Recession: where is all the inflation? If the Federal Reserve is going to spike the money supply most massively in the context of minimal economic growth, as it has since 2008, it would seem that a severe price inflation must ensue. Yet the consumer price index has grown at merely 1.5% for the past five years.
Back in the “stagflation” era, the 1970s and early 1980s, and cued up by President Nixon’s taking the dollar off gold in 1971, the Federal Reserve printed money like never before. Inflation duly roared. From 1971 to 1981, the CPI leapt a phenomenal 125%, 8%-plus per annum. And in the nine years after the 1973 peak, economic growth averaged less than 2% per year.
Economic stagnation plus Fed activism equals stagflation: we saw it all thirty-five years ago. What gives these days? Why only half of the stagflation bargain?
The recent break in the gold price, in which the king commodity has completed a 20% drop since the high point of late last year, holds a clue.
In the 1970s, “inflation” was a general phenomenon, one of whose manifestations was an increase in that pet statistic of the government’s, the CPI. However, the main way that investors responded to the Fed blowouts of the era was not to bid up consumer prices or anything like that, but to get their holdings out of asset classes that brought dollar returns.
Central bank governor Zhou Xiaochuan yesterday raised an alert about rising inflation and formally declared a shift to a tighter monetary policy this year.
The government may also roll out new measures to control the property market, he told a news conference on the sidelines of the National People's Congress.
Zhou's tough talk confirmed an observation made by many economists that the People's Bank of China has sought to curb credit from expanding too fast.
The remarks contrasted with Zhou's usual approach of treading delicately while speaking to the public on policy directions in order to avoid causing market jitters.
Some analysts said Zhou's comments were aimed at damping inflation expectations and highlighting concern about surging property prices fuelled by accommodative monetary policy in the past several quarters.
Last month, inflation rose unexpectedly to 3.2 per cent.
"Inflation merits high vigilance. We plan to stabilise consumer prices and inflation expectations through monetary policy and other tools," Zhou said, although he added that holiday effects may have distorted the number.
The Federal Reserve, which celebrates its 100th anniversary this year, is tasked by Congress with managing the money supply so as to preserve price stability while maximizing employment. But with the central bank having increased the money supply by 25% since the financial crash of 2008—while the federal government has borrowed $5 trillion—can inflation be far off?
It won't be the first time. Inflation has often been popular, especially in democracies, since it benefits debtors, who are always more numerous than creditors. Inflation allows debtors to repay in money that is less valuable than the money they borrowed. This was the case after America's Revolutionary War, when economically distressed debtors demanded that state governments ease their burdens. State after state enacted paper-money laws, so that debts contracted in scarce gold and silver could be repaid with infinitely expandable paper.
This sort of inflation was one of the principal reasons for the adoption of the Constitution, which forbids the states to "make any thing but gold or silver coin legal tender in payment of debts." In the Federalist Papers, James Madison referred to state paper-money laws as the sort of "improper or wicked project" that the new Constitution would prevent. Chief Justice John Marshall later recalled, in the 1819 Dartmouth College v. Woodward decision, that such laws had "weakened the confidence of man in man and embarrassed all transactions between individuals by dispensing with a faithful performance of engagements."