Bending the Inflation Curve

Preventing Depression
Monetary and Fiscal Policy: Where We Are Today
Inflation Is Always and Everywhere a Function of Demand
The Utter Travesty of Unemployment
Thinking of the Enormity of It All

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. … A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth.”

—Milton Friedman, The Counter-Revolution in Monetary Theory (1970)

“Well, maybe…”

—John Mauldin, with more than a little hubris, 2020

I am widely known as the “muddle through” guy. I describe problems then explain how we will get through them, slowly but surely.

That analogy isn’t appropriate for problems like the coronavirus, which actually kills people. The most seriously affected victims are not muddling through at all, and there are way too many of them. And those who are still waiting for government aid are certainly not muddling through. As we will see below, unemployment rates are anything but “Muddle Through.” This will be the slowest and most difficult Muddle Through of our lives.

But thankfully, we are starting to see the curves bend. The lockdowns and distancing appear to be stabilizing the number of new cases. We aren’t out of danger but this is encouraging.

Nevertheless, much of the economic damage is already done. We are not likely to see anything resembling the previous normal for a long time. I heard someone say we will emerge from lockdown to an “80% economy”—mostly back, but with big pieces missing. That sounds about right. But losing a fifth of the economy will still mean a severe recession, if not outright depression, albeit hopefully not as long as that of the 1930s.

So, our next analytical challenge will be the intersection of previous economic trends, virus-driven behavioral changes, and the policy responses to both. To this point, governments and central banks have just been keeping their ships afloat. They haven’t even started “stimulus” yet. But they will, and it will have consequences. That will be today’s topic.

The first and most important question that we will deal with is prediction of significant inflation/hyperinflation coming from many quarters because of the massive amount of Federal Reserve intervention. This is wrong-headed fearmongering.