We are all about to get a lot poorer — that much is baked in. The question is, who gets the blame? Will we take out our frustration on incumbent governments or attribute our fall in living standards to the global crisis?
The only meaningful way to measure wealth is to look at the ratio of time worked to goods or services purchased. How many minutes did you need to put in to afford, say, a haircut, a cup of coffee, an hour of artificial light, or a journey to the nearest city? By that measure, human beings have been getting steadily richer for several hundred years. But there are occasional downswings, and this one looks especially nasty.
The Ukrainian war has exacerbated the surge in prices but did not cause it. The roots of the problem go back to before the 2009 crisis, when central banks around the world left interest rates too low for too long, inflating an artificial bubble. When the bubble burst, they responded with more of the same, cutting interest rates even further and printing more money.
To some degree, they were spared the immediate inflationary consequences of their actions by China’s continuing integration into global markets, which drove down the price of goods and services. But this, sadly, made politicians and central bankers more blasé about quantitative easing.
Then came the pandemic and the lockdowns. Countries around the world responded by paying people to stay home and magicked up even more money to cover the cost. A sharp increase in the money supply combined with an equally sharp fall in the production of real-world goods and services can only mean inflation. Almost all of us will find that we must work longer hours or that we can afford fewer things — or both.
I don’t think we are remotely ready for what is about to hit us. Some economists and politicians, in the name of what they call “Modern Monetary Theory,” have even taken to arguing that because governments can’t legally go bankrupt, money printing is not a problem. Seriously? Who knew it was so easy? There we were for centuries, wrestling with the problem of limited resources, and all along we just needed to print more bills!
Perhaps the lesson needs to be relearned every generation. You have to be nearly 60 to remember the inflation that President Ronald Reagan described as being “as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.”
I am perhaps unusual in that my inflationary memories are not of Jimmy Carter’s America, or even of Edward Heath’s Britain, but of Alan Garcia’s Peru. During my 1970s childhood, the Peruvian sol was a solid enough currency. Old people still called 10 sol notes “libras,” a folk memory of the years before 1930 when the currency was pegged to sterling at the rate of 10 soles to 1 pound. Then the debt crisis took hold, and the printing machines began to hum. In 1985, the government created a new currency: the inti, worth 1,000 soles. But the zeroes continued to proliferate, and in 1991, 1 million intis were declared to be 1 new sol. A new sol, in other words, was worth a billionth of what an old sol had been worth six years earlier.
The impact on the economy was catastrophic. No one would innovate or invest, and productivity collapsed. But there was one upside for the government: The value of its debt fell. Inflation works as a sneaky tax, reducing the government’s liabilities even as it impoverishes everyone else — especially people who don’t own houses or other solid assets.
As John Maynard Keynes put it: “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily.”
So, to return to the opening question, will governments be able to deflect the blame for what is coming? An astute observation was offered last week by Andrew Scheer, the former leader of Canada’s opposition Conservative Party:
“Trudeau defenders say Canadian inflation can’t be his fault since other countries have inflation, too. That’s like me arguing: ‘Not my fault I’m putting on weight since some of my neighbors are, too.’ Countries that also printed money also have inflation.”
Perhaps voters would be more forgiving if they saw governments pulling every lever and hitting every button to reduce the cost of living — scrapping tariffs, busting open cartels, deregulating, allowing easier oil and gas production, cutting personal taxes. But hardly any governments in the world, and certainly not President Joe Biden’s America, have the appetite for these reforms. They will pay a heavy price for their timidity.
