Yes, we do need to talk about inflation, just as British economist Stephen D. King helpfully proposes in his new book—but where to begin? A definition seems in order. Let’s poll the economists.
Inflation, Milton Friedman famously said, “is always and everywhere a monetary phenomenon.” No, counters John H. Cochrane, the Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution, inflation is mostly and mainly a fiscal phenomenon. Not at all, contended John Maynard Keynes, inflation is rather a case of overinvestment in a time of full employment. As for the 21st century consensus of economic opinion, we turn to Wikipedia, which lays it down that inflation is neither monetary nor fiscal in origin but the product of demand shocks, supply shocks, and human expectation.
No wonder economists can’t predict inflation. They can hardly agree on what it is or where it comes from. It’s as if physicists were still haggling over the laws of motion.
King, a well-regarded economist himself, quotes innumerable analysts on a range of inflation-themed topics, but he passes over one of my favorite 20th-century authorities. Writing in the late 1950s, German economist and social critic Wilhelm Röpke (1899–1966) cut to the heart of the matter. “Inflation,” he said,
is the way in which a national economy reacts to a continuous overstraining of its capacity, to demands which are extravagant and insistent, to a tendency towards excess in every sphere and all circles, to a presumptuous overconfidence in oneself, to a frivolous attempt always to draw bigger checks on the national economy than it can honor and to a perverse desire to combine what is incompatible.
Röpke’s words sting, as he surely intended, because inflation is partially a moral phenomenon. Life is short and work is hard. Money is the worker’s recompense. To willfully cheapen the purchasing power of his or her wages is to steal human heartbeats.
Inflation is as old as clipped Roman coins, as King briskly demonstrates, but we moderns have written a new chapter to the story. Kings and emperors inflated on the quiet. The Federal Reserve inflates openly, as a matter of policy and, as it believes, for the economy’s own good. It defines “price stability” not as the absence of inflation but rather a 2% annual rate in inflation—in other words, a 2% rise in prices or, to say the same thing, a 2% loss of heartbeats and purchasing power.
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Always, in a well-tempered market economy, some prices are rising as others are falling. The dance of the prices coordinates production with consumption and saving with investment. Inflation is the sustained rise in average prices. It’s a social disease. We the people, in casting our votes, choose to contract it.
In fairness, we haven’t always known what we were getting into. The Federal Reserve Act of 1913 was meant to create a more “elastic” currency, not an ever-expanding supply of currency. The Social Security Act of 1935 and the Medicare and Medicaid Act of 1965 were laws to eliminate destitution and broaden the delivery of medical care, respectively, not to assure that entitlement spending would eventually come to absorb (as it does today) almost half of federal outlays.
And when, in 1971, President Richard M. Nixon chose to default on America’s promise to redeem dollars from foreign governments for gold at the rate of $35 an ounce, the intended effect was to end an anachronism (as the president and his economists regarded the Bretton Woods monetary system), not to accelerate the unchecked growth of public debt. Intentions aside, the consequence of these decisions has been, as Röpke put it, to produce an “overstraining” of economic capacity and “to draw bigger checks on the national economy than it can honor.”
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Inflation, as one might also define the word, is the measure of a society’s determination to consume more than it produces and to finance the difference with money that didn’t exist before a central bank whistled it into existence. The Congressional Budget Office (CBO) has performed a public service by turning this abstraction into comprehensible, kitchen-table grade arithmetic.
Assume, the CBO proposed to the nation in 2022, that the median American family, earning $74,580 a year, managed its affairs as Congress does the government’s. Taking Washington’s lead, that typical family would spend $102,961 a year. It would finance its deficit, $28,381, on its credit card, if Visa or Mastercard would be so foolish as to allow it. Certainly the card companies would not, given that our hypothetical family-cum-government already owes $564,749. The actual government, of course, easily borrows its shortfall, confident in the cooperation of the Federal Reserve, which prints the money and sets, or heavily influences, the cost of borrowing.
We Need to Talk About Inflation is a concise, readable, and accessible survey of the nature, history, and inner workings of the money disease. King, who was early in warning his London Evening Standard readers about the coming spurt in prices, proffers history and analysis and some well-considered thoughts on what to do about the problem. A one-time chief economist at HSBC Holdings, the former Hong Kong Shanghai Banking Corporation, and adviser to the House of Commons Treasury Committee, the author knows all about the dodges and pretensions of the monetarily culpable parties. He writes for the practical reader on the go, with short summaries concluding each of his seven chapters.
The plain fact, King points out, is that central bankers were cultivating inflation long before the 2021 lurch higher in consumer prices. The U.S. Federal Reserve, under Chairman Ben S. Bernanke, suppressed interest rates and implemented “quantitative easing,” a technical form of money printing, during and long after the Great Recession of 2007–09. Better a little inflation, Bernanke would say, than even a whiff of deflation, the state of things in which average prices fall and debts become unwieldy and, to not a few borrowers, unpayable.
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By the late summer of 2020, another Fed chairman, today’s incumbent Jerome Powell, was vowing to hold the line against a rate of inflation that he judged to be too low. Two percent was the Fed’s line in the sand. Why a target of 2%? Like the pandemic-era “social distance” of six feet, it was a figure pulled out of a hat. Nor did Congress, which the Constitution invests with both the taxing power and the monetary power, do the pulling. Instead, monetary technocrats from near and far—the Reserve Bank of New Zealand was a thought leader in this voyage of discovery—achieved a technical meeting of the minds.
“[I]f,” Chair Powell patiently explained at the annual Jackson Hole, Wyoming, Federal Reserve retreat (conducted on Zoom in the lockdown year of 2020),
inflation runs below 2 percent following economic downturns but never moves above 2 percent even when the economy is strong, then, over time, inflation will average less than 2 percent. Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down. To prevent this outcome and the adverse dynamics that could ensue, our new [policy] statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.
Reading the speech, you wish that Powell had had the impossible good fortune to possess an advance copy of the book that King hadn’t written yet. Rather than worrying about too little inflation, the chairman could have presciently warned against too much. And with King’s admittedly unprinted pages open before him, the central banker could have skipped the passage in his remarks that lent official credence to the fashionable, incredible doctrine that “inflation expectations,” not money supply or debt or wages, govern the rate of rise in the Consumer Price Index (CPI). “[T]he typical economic models in which expectations are incorporated,” King correctly points out, “have bizarre properties—at variance with economic reality and sometimes downright implausible—suggesting that the economics profession has yet to get to grips with a topic that is supposedly of the utmost importance.”
As of this writing the CPI shows a year-over-year rise of 3.3%. To force it down to 2%, Powell has pledged to continue holding interest rates higher than they have been in many years. You wouldn’t want the chairman’s job just now. Long years of ultra-low borrowing costs facilitated speculation, overreaching, or, as Röpke would have it, “a presumptuous overconfidence in oneself.” Today’s relatively high interest rates are straining the many who borrowed at yesteryear’s absolutely low interest rates.
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Interestingly, King points out that it’s easier to solve hyperinflation, like the notorious Weimar Germany episode of the early 1920s, than moderate inflation like today’s. Because outright monetary destruction benefits few, the many who suffer are prepared to support radical strokes of currency reform, no matter what the short-term pain. No such consensus of public opinion supports determined action against mild inflation (especially, perhaps, in a presidential election year). For one thing, a slow rate of currency debasement benefits some debtors and a certain class of leveraged speculator. For another, Congress has charged the Fed not only with delivering price stability (as the Fed perversely defines that concept) but also with supporting maximum employment. Tight money, whatever its salutary effect on consumer prices, may temporarily wound the economy, and therefore the job market and the stock market. Perhaps Powell recalls some unnamed diplomat’s rueful quip about the Balkans: “Anything you do is going to be wrong, including nothing.”
King, in reference to British experience, notes the arresting fact that “the twentieth century—and, for that matter, the first two decades of the twenty-first century—have witnessed more monetary destruction than any other period in economic history. And that’s just in the U.K., which, unlike Germany, Austria, Hungary and so many others, has never succumbed to hyperinflation.” What the world has rather succumbed to is paper money, the kind that central banks create with the stroke of a computer key and which the economics profession esteems against all preceding monetary forms. King repeats, with evident approval, the conventional view that the gold standard belongs in “the dustbin of history.” Be that as it may, the revered money of the Byzantine Empire, the 4.55-gram gold bezant, circulated for more than 600 years, intact and undevalued, “from end to end of the earth.” Conversely, the dollar, from the time of the Fed’s founding in 1913, has relinquished 99% of its value against gold.
Inflation is a disease you choose, and we moderns have cast our ballots.
