How much money should there be in the world? It is an interesting question; to which, at any time, there is a correct answer that is unknown to anyone. It is the amount at which money is able to perfectly perform its two key functions – being a medium of exchange and a store of value. Too little money in circulation and it would cease being a fair store of value because its value would be increasing – something that hasn’t occurred in half a century. Most often, money ceases to be a store of value on the downside – losing its value – because it is far easier for states and banks to create new currency than it is to destroy it.
In practice, whether there is too much, or not enough money in the system is largely a matter of political economy rather than science. There are two broad economic camps – Monetarists and Keynesians – which largely correspond to conservative and liberal politics. The conservative-monetarist camp has been arguing for more than a decade that there is too much money in a system which should have been allowed to fail back in 2008. The liberal-Keynesian camp in contrast, argues that the absence of productivity gains, inflation and wage growth pressure show that there is too little money in circulation.
The liberal-Keynesian camp appears to be winning the argument for now. This is because the economic fallout from the pandemic and the response to it would – at least in the short-term – have been devastating were it not for the various grants, loans, bailouts, stimulus payments and public services spending embarked upon by states and central banks around the world. Moreover, by pumping trillions of newly created dollars into the system, the Biden administration may well create a short-term post-pandemic bounce which will prevent the immediate onset of depression.
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This Isn’t Your Grandfather’s (1960s) Inflation Scare
March 14, 2018
This Isn’t Your Grandfather’s (1960s) Inflation Scare
As soon as the GOP followed its long-promised tax cuts with damn-the-deficit spending increases (who cares about the kids, right?), you knew to be ready for the Lyndon B. Johnson reminders.
And it’s worth remembering that LBJ pushed federal spending higher, pushed his central bank chairman against the wall (figuratively and, by several accounts, also literally) and eventually pushed inflation to post–Korean War highs.
Inflation kept climbing into Richard Nixon’s presidency, pausing for breath only during a brief 1970 recession (although without falling as Keynesian economists predicted) and then again during an attempt at wage and price controls that ended badly. Nixon’s controls disrupted commerce, angered businesses and consumers, and helped clear a path for the spiraling inflation of the mid- and late-1970s.
So naturally, when Donald Trump and the Republicans pulled off the biggest stimulus years into an expansion since LBJ’s guns, butter and batter the Fed chief, it should make us think twice about inflation risks—I’m not saying we shouldn’t do that.
But do the 1960s really tell us much about the inflation outlook today, or should that outlook reflect a different world, different economy and different conclusions?
I would say it’s more the latter, and I’ll give five reasons why.
1—Technology
I’ll make my first reason brief, because the deflationary effects of technology are both transparent and widely discussed, even if model-wielding economists often ignore them. When some of your country’s largest and most impactful companies are set up to help consumers pay lower prices, that should help to, well, contain prices.
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