This is rather highfalutin stuff, important but maybe less so than the concrete fact that inflation grinds down the middle and working classes into serfdom or debt-slavery.
Although the headlines each month are about the CPI and the PPI and the PCE deflator we also make a point to have a separate post on 'real personal income' and the reality behind those numbers is just horrific. Here's the April version: "War on the Working Class: Real Wages Collapsing"
Now back to highfalutin. From Finanz und Wirtschaft, July 11:
History is replete with examples of high inflation driving systemic breakdowns. By breeding uncertainty, inflation can easily destroy large, complex political entities. A column by Harold James.
«The US and the UK have the highest inflation rates in the G7, and they also both enacted massive central-bank-assisted fiscal-stimulus packages in response to the COVID-19 shock.»Rich Western industrialized countries appear to be caught in a time loop, with unexpectedly higher inflation bringing back not just memories of the 1970s but also that era’s policy debates and the political insecurities. Is inflation always and everywhere a monetary phenomenon, as Milton Friedman insisted? Or is it a consequence of fiscal over-extension – or simply a symptom of a more general democratic malfunctioning?
The debates of the 1970s were not just about technical matters of macroeconomic management. They also raised doubts about the sustainability and legitimacy of the Western model of democracy. The world was beset by geopolitical instability, and the United Nations General Assembly endorsed calls for a New International Economic Order. And now that many of the same old political and geopolitical issues are heating up again, inflation is a thermometer. As more money chases fewer goods, prices rise – the economy becomes feverish.
During periods of monetary innovation, however, it becomes harder to tell what money even is. No one would dispute the fact that monetary innovation has been proceeding at a breakneck pace over the past decade. But it is worth remembering that the 1970s also featured a financial revolution, one that blurred previously hard distinctions between money and non-money. This was partly a consequence of inflation, which prompted bank customers to flee from non-interest-bearing checking accounts to alternatives such as certificates of deposit or accounts in non-traditional banks.
Connection between fiscal and monetary policy
Friedman was contemptuous of all the conservative voters and politicians who thought that fiscal policy was to blame for inflation. But his disdain was misplaced, because there was indeed a connection between fiscal and monetary policy: high government deficits had been financed through the central bank. In both the United States and the United Kingdom, the treasury and the central bank had come to be seen as a unified «macroeconomic executive.» Regarding themselves as globally dominant powers, both countries aimed to use their monetary sovereignty to secure advantages at the expense of the rest of the world.In the event, the US and UK ended up with higher inflation compared to most other industrialized countries, and this same distinction is apparent again in 2022. The US and the UK have the highest inflation rates in the G7, and they also both enacted massive central-bank-assisted fiscal-stimulus packages in response to the COVID-19 shock.
The UK is a particularly dramatic example of this. In the first financial year of COVID-19, the Bank of England bought up 99.5% of government debt – and over 100% the following year. Under these circumstances, it is not credible to argue that the central bank is independent.
Central banks not that independent
The same logic applies in the US, where policymakers’ biggest mistake was to pin their hopes on higher inflation being «transitory.» This lasted until November 2021, with the Biden administration pressuring the US Federal Reserve to keep monetary policies loose by delaying the nomination or renomination of Fed officials. This political intervention was as obvious as Richard Nixon’s efforts to pressure Fed Chair Arthur Burns in the 1970s....
....MUCH MORE
The writer, Harold James, is Professor of History and International Affairs at Princeton University. His latest at Finanz und Wirtschaft is dated today, August 2:
