Don’t worry too much about this latest inflationary bout. The government is on the case! And it’ll soon prove transitory moderate.
Every now and then, I hear someone say that economics is making progress. That we understand things better now. That we learn the lessons from history. That we won’t make the same mistakes again. And I laugh.
There’s something so arrogant about the idea that people didn’t know basic economics in the past. And that they made bad political decisions out of economic ignorance.
I mean, do you think policy-makers didn’t understand inflation in the 1970s? The 1920s were within living memory! And stupid economic theories about stimulus were less developed back then, making them less enticing.
No, the explanation for “truly stupid” economic policy lies elsewhere. But where?
Here’s a hint, from the European Central Bank’s former chief economist in 2016. It’s about how the euro was created, despite economists knowing that it was a bad idea (emphasis added):
The vast majority of German economists advocated the so-called economists’ view that monetary union should be the final step in a long process of European integration. But in 1999, 11 heterogeneous countries embarked on a highly ambitious act towards European Economic and Monetary Union (EMU), despite concerns the euro might fail. As an economist, I shared the German view. But as a central banker (who joined Germany’s Deutsche Bundesbank in October 1990), I had to accept this political decision to create a monetary union and to abandon national currencies. The decision was taken unanimously by 11 governments and ratified by 11 parliaments, in some cases accompanied by referendums. The role of the central banks – independent of government or not – is to make the best out of the political decisions.
You see? Political stupidity takes precedence over economic common sense, whatever Bill Clinton might have said about it.
And so monetary policy can become a political phenomenon, whatever academics might claim it should be. (That was the topic of this month’s issue of Gold Stock Fortunes, by the way.)
Indeed, at this point, inflation is not a monetary phenomenon, it is a political one. (Not that I’d have the guts to tell debater-extraordinaire Milton Friedman this in person if he were around.)
After all, central banks would be able to get inflation under control with tighter monetary policy if it weren’t for political reality. They know how to do it, they know why they should do it, and they’re not doing it because there are more important things at play – politics.
Even moderately reasonable monetary policy today would probably bring inflation back down… not to mention trigger an epic debt crisis.
But we live in a bailout economy and sovereign debt is at dangerous heights already. If anything goes wrong, a government will go down with it. And only central banks can keep that charade going by creating the money the government needs to keep going, and by keeping interest rates low enough for the government to refinance continuously.
In the 1970s we escaped this cycle when politics, not monetary policy, shifted. The central banks were able to act under political cover, not by going against the political pressure. Paul Volcker was appointed by somebody, after all. Not to mention being reappointed by someone else. But that’s another story.
Policy-makers today probably understand all this. But they’re playing dumb for now. And so the same, and age-, old political games are in session.
Those games involve blaming foreigners and greedy capitalists for inflation, while advocating for price controls and other hare-brained schemes to bring inflation down.
Just as we repeated history to generate inflation, so too shall we repeat history in bizarre ways to bring it back down – or try to bring it back down, I should say.
This particular comment from the Intercept is a real cracker:
THE MAIN DRIVER OF INFLATION IS A MURDEROUS MANIAC IN RIYADH
Saudi Arabia is withholding oil production because Biden won’t meet with Mohammed bin Salman after the murder of Jamal Khashoggi, the president [Joe Biden] suggested.
[…]
SAUDI CROWN PRINCE Mohammed bin Salman is enacting revenge on Democrats in general and President Joe Biden specifically for the party’s increasingly standoffish attitude toward the kingdom — by driving up energy prices and fuelling global inflation.
Sound familiar?
Leave aside how stupid it is. I mean, a nation that is shutting down oil infrastructure over environmental policy asking other nations to produce more so that the former oil producer can burn it up!?
Blaming them for higher prices?! Over a political murder!?
It’s not all that’ll sound familiar though. Blaming the greedy capitalist pigs is back too. Or, in this case, the pig processors. US President Joe Biden suggested that meat companies were behind the higher prices.
But that’s a porkie-pie, unless there has been a sudden and unexpected increase in the amount of greed felt by butchers…
The Bank of England, meanwhile, is worried that all this inflation will trigger pay increases, according to Reuters:
The BoE’s main concern is not so much about what inflation does in the coming months but whether it triggers longer-term inflationary pressures, principally in wage settlements.
Wouldn’t that be terrible?! If pay increased now that prices have…
There’s nothing like trying to prevent pay increases in the face of inflation to keep people calm.
The best example of crackpot economic policy history repeating itself played out in the Guardian, which published an article advertised on Twitter as “We have a powerful weapon to fight inflation: price controls. It’s time we use it”.
This led to a great deal of ridicule, even from prominent economist Paul Krugman, who called the idea “truly stupid”, before apologising for this criticism of his ideological side’s lunacy. (It’s only truly stupid if the other side says it.)
And so the Guardian article became a question instead: “Could strategic price controls help fight inflation?”
The answer is of course “no”, but that’s not the point. The point is that such policies are back in fashion.
Have we forgotten they’re truly stupid? Nope, we’re just not allowed to say it any more.
The irony is that calls for price caps are growing despite rather recent experiences with the UK’s “Marxist” and “socialist” price caps on energy. And those descriptions came from the political party which imposed them, the so-called Conservatives.
Reuters claims that, in the UK, gas bills will rise 50% in April unless the government acts. As though prices weren’t going to rise 50% because government acted in the first place…
This rise will come after a bunch of energy companies have gone bust, of course, showing how government intervention gives you the best of both worlds – bankruptcy and price increases.
But you know what? At least the world of technology remains one step ahead of the government and its regulatory ways.
We are looking at the first inflationary spurt in the age of the internet, 24-hour news cycles, social media and influencers. And there’s nothing to encourage more inflation than a constantly reinforced discussion of it…
Good luck censoring that!
Nick Hubble
Editor, Fortune & Freedom
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