HOW WILL INFLATION END? The Current Set of Monetary and Fiscal Policies Are Suicidal


By Richard W. Rahn, Co-Founder, and Chairman @ Luminium Coin – May 10, 2022

The good news is that inflation will end. The bad news is that, given who is making economic policy, it is more likely to end badly than benignly. The proper way to end inflation is to reduce the rate of government spending so that it is increasing at a slower rate than economic growth. The result will be to bring down the debt-to-GDP ratio, making the debt easier to finance (less money printing).

Illustration on inflation by Alexander Hunter/The Washington Times

Under the Reagan administration, CPI inflation declined from 13.5% in 1980 (the year Reagan was elected) to 3.6% in 1987 (his last full year in office). This was accomplished by reducing the growth rate of spending, while at the same time greatly increasing the rate of economic growth — by reducing tax impediments on labor and capital, and ridding the economy of many unnecessary and counterproductive regulations.

Unfortunately, the Biden administration has been and is proposing to continue doing just the opposite — increasing taxes, government spending and regulations. (Something about an old dog not being able 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 old white men are getting relatively richer from the 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 hedges against inflation) than younger people (who are more dependent on current income). If the Republicans were in charge, I expect that some Democrats would be calling inflation racist.

Having been in many countries over the decades suffering from very-high rates of inflation, I was often amazed at the ingenuity shown by people to cope. When I was in graduate school, I spent a summer in Brazil working on an ill-fated (aren’t they all) U.S. foreign aid project. Given the very high rate of inflation at the time, mortgages were almost impossible to acquire. So those wishing to build a high-rise apartment building would do it floor by floor, renting out the lower floors to obtain the cash to build the next floor. (Rents were adjusted for inflation every week or month.)

It was slow and inconvenient to both the construction crews and the tenants, but upon completion, the owner had a debt-free building. The Brazilians also had a policy of not replacing old tattering, worn-out currency, so eventually the old bills just disintegrated, reducing the money supply.

Bulgaria had a couple of hyperinflation occurrences during the early 1990s, but people could easily trade the Bulgarian currency for U.S. dollars or West German D-marks (predating the euro), which became the transaction and investment monies. By 1997, Bulgaria instituted a currency board tied to the euro, which has given them price stability in the years since.

Ukraine went through several bouts of hyperinflation in the early 1990s, and I vividly recall how restaurant prices changed during the day (it is not a myth) — but people coped by using the U.S. dollar as a reference point.

Russia went through hyperinflation in 1992, and again in 1998. In the mid-1990s, Russia instituted a new ruble (the U.S. dollar had become the de-facto currency, which was resented by many Russians) with a requirement that all prices be in rubles rather than dollars. When the next inflation arrived, to comply with the law, merchants priced items in “units” rather than dollars, and just by coincidence one unit was equal in value to one U.S. 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 inflation hedges — there are just not enough of them. Many are and will flee to bitcoin and some of its competitors, but not having a real anchor (just an algorithm) is likely to lead to continued volatility, making it useless as a store of value. The so-called “stable coins” to date, have been using government and other securities as a backing, but high rates of inflation will destroy such backings.

There are numerous experiments now going on with various types of digital and/or private monies. Some number are likely to be adopted by millions of users because the developers will have found ways to make those digital/private monies serve most of the functions of sound money. (By way of full disclosure, I am chair of a company that issues tokens fully backed by aluminum, called LuminiumCoin. We, like others who are developing similar products, think we have solved the problems. But as you read 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 hedges against inflation and irresponsible government authorities. Real estate and stocks are also favorite inflation and wealth preservation protections.

Perhaps the world will get lucky sometime soon, before it is too late, and politicians in the U.S. or Europe will realize that the current set of monetary and fiscal policies are suicidal and those now in power are going to lose one way or another — and no tears will be shed.

Richard W. Rahn was Chief Economist of the U.S. Chamber of Commerce (the world’s largest business federation), an advisor to the New York Mercantile Exchange, the first non-Caymanian member of the Cayman Islands Monetary Authority. He is the author of “The End of Money: and the Struggle for Financial Privacy” and of more than a thousand published articles. He has testified before the U.S. Congress on economic issues more than 75 times. You can also find Richard Rahn on Twitter:

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