The good news is that inflation will stop. The bad news is that, given who makes economic policy, it is more likely to end badly than well. The right way to end inflation is to reduce the rate of government spending so that it grows at a slower rate than economic growth. The result will be to lower the debt-to-GDP ratio, making debt easier to finance (less money printing).
Under the Reagan administration, CPI inflation fell from 13.5% in 1980 (the year Reagan was elected) to 3.6% in 1987 (his last full year in office). This has been accomplished by reducing the rate of growth in spending, while dramatically increasing the rate of economic growth – reducing tax barriers on labor and capital, and ridding the economy of many unnecessary and counterproductive regulations.
Unfortunately, the Biden administration has done and proposes to continue to do the exact opposite: increase taxes, government spending and regulation. (Something about an old dog unable to learn new tricks.) The result will be higher or persistent inflation and slower economic growth. Many of those responsible for the disastrous economic policy will be the first to complain that many older white men are getting relatively wealthier because of inflation while many women and children are getting relatively poorer – which is true.
Older people tend to have more assets (which can be used as an inflation hedge) than younger people (who are more dependent on current income). If Republicans were in charge, I expect some Democrats to call inflation racist.
Having been to many countries over the decades suffering from very high rates of inflation, I have often been amazed at the ingenuity people show in coping. When I was in college, I spent a summer in Brazil working on an unhappy American (aren’t they all) foreign aid project. Given the very high rate of inflation at the time, mortgages were almost impossible to obtain. So those wishing to build a high-rise apartment building would do so floor by floor, renting the lower floors to get the money to build the next floor. (Rents were adjusted for inflation weekly or monthly.)
It was slow and inconvenient for construction crews and tenants, but when it was completed, the landlord had a debt-free building. Brazilians also had a policy of not replacing old, tattered and worn currency, so the old notes eventually disintegrated, reducing the money supply.
Bulgaria had a few episodes of hyperinflation in the early 1990s, but people could easily exchange Bulgarian currency for US dollars or West German D-marks (pre-euro), which became the funds of transaction and investment. In 1997, Bulgaria instituted a currency board linked to the euro, which provided them with price stability in the years that followed.
Ukraine went through several episodes of hyperinflation in the early 1990s, and I vividly remember how restaurant prices changed throughout the day (not a myth) – but people faced using the US dollar as a benchmark.
Russia experienced hyperinflation in 1992 and then again in 1998. In the mid-1990s, Russia instituted a new ruble (the US dollar had become the de facto currency, which was resented by many Russians) with the requirement that all prices be in rubles rather than dollars. When the next inflation came, to comply with the law, merchants priced items in “units” rather than dollars, and just coincidentally, one unit was equal in value to one US dollar.
As the new great inflation hits the dollar and the euro, it is going to be difficult for Americans and Europeans to acquire enough Swiss francs and the few other well-managed currencies as a hedge against inflation – there are none just isn’t enough. Many do and will leak to bitcoin and some of its competitors, but not having a real anchor (just an algorithm) is likely to lead to continued volatility, rendering it useless as a store of value. So-called “stable coins” to date have used government securities and other securities as backing, but high rates of inflation will destroy these backings.
Many experiments are currently underway with different types of digital and/or private currencies. Some are likely to be adopted by millions of users, as developers will have found ways to make these digital/private funds perform most of the functions of a sound currency. (By way of full disclosure, I’m the president of a company that issues fully aluminum-backed tokens called LuminiumCoin. We, like others who are developing similar products, believe we’ve fixed the issues. But in reading this, realize I have a vested interest. The market will ultimately decide which groups are right.)
Real assets – like gold, silver, diamonds, etc. – have always served as a hedge against inflation and irresponsible government authorities. Real estate and stocks are also preferred hedges against inflation and wealth preservation.
Maybe the world will get lucky soon, before it’s too late, and politicians in the US or Europe realize that the current set of monetary and fiscal policies is suicidal and those who are currently in power will lose one way or another – and no tears will be shed.
• Richard W. Rahn is President of the Institute for Global Economic Growth and of MCon LLC.