A question has haunted the aftermath of the Great Recession: where is all the inflation? If the Federal Reserve is going to spike the money supply most massively in the context of minimal economic growth, as it has since 2008, it would seem that a severe price inflation must ensue. Yet the consumer price index has grown at merely 1.5% for the past five years.
Back in the “stagflation” era, the 1970s and early 1980s, and cued up by President Nixon’s taking the dollar off gold in 1971, the Federal Reserve printed money like never before. Inflation duly roared. From 1971 to 1981, the CPI leapt a phenomenal 125%, 8%-plus per annum. And in the nine years after the 1973 peak, economic growth averaged less than 2% per year.
Economic stagnation plus Fed activism equals stagflation: we saw it all thirty-five years ago. What gives these days? Why only half of the stagflation bargain?
The recent break in the gold price, in which the king commodity has completed a 20% drop since the high point of late last year, holds a clue.
In the 1970s, “inflation” was a general phenomenon, one of whose manifestations was an increase in that pet statistic of the government’s, the CPI. However, the main way that investors responded to the Fed blowouts of the era was not to bid up consumer prices or anything like that, but to get their holdings out of asset classes that brought dollar returns.
Central bank governor Zhou Xiaochuan yesterday raised an alert about rising inflation and formally declared a shift to a tighter monetary policy this year.
The government may also roll out new measures to control the property market, he told a news conference on the sidelines of the National People's Congress.
Zhou's tough talk confirmed an observation made by many economists that the People's Bank of China has sought to curb credit from expanding too fast.
The remarks contrasted with Zhou's usual approach of treading delicately while speaking to the public on policy directions in order to avoid causing market jitters.
Some analysts said Zhou's comments were aimed at damping inflation expectations and highlighting concern about surging property prices fuelled by accommodative monetary policy in the past several quarters.
Last month, inflation rose unexpectedly to 3.2 per cent.
"Inflation merits high vigilance. We plan to stabilise consumer prices and inflation expectations through monetary policy and other tools," Zhou said, although he added that holiday effects may have distorted the number.
The Federal Reserve, which celebrates its 100th anniversary this year, is tasked by Congress with managing the money supply so as to preserve price stability while maximizing employment. But with the central bank having increased the money supply by 25% since the financial crash of 2008—while the federal government has borrowed $5 trillion—can inflation be far off?
It won't be the first time. Inflation has often been popular, especially in democracies, since it benefits debtors, who are always more numerous than creditors. Inflation allows debtors to repay in money that is less valuable than the money they borrowed. This was the case after America's Revolutionary War, when economically distressed debtors demanded that state governments ease their burdens. State after state enacted paper-money laws, so that debts contracted in scarce gold and silver could be repaid with infinitely expandable paper.
This sort of inflation was one of the principal reasons for the adoption of the Constitution, which forbids the states to "make any thing but gold or silver coin legal tender in payment of debts." In the Federalist Papers, James Madison referred to state paper-money laws as the sort of "improper or wicked project" that the new Constitution would prevent. Chief Justice John Marshall later recalled, in the 1819 Dartmouth College v. Woodward decision, that such laws had "weakened the confidence of man in man and embarrassed all transactions between individuals by dispensing with a faithful performance of engagements."
Rep. John Duncan Jr. believes that the U.S. should return to the gold standard in order to “protect our money” from the threat of inflation.
Appearing on “The Mike Church Show,” Duncan, R-Tenn., responded to Church’s question about the relationship between the fiscal cliff and the Federal Reserve. “Isn’t the fiscal cliff and our fiscal malaise at least partly to blame on the Federal Reserve and our reckless monetary policy?” Church asked. “Wouldn’t it be prudent for Republicans to gently begin urging their fellow citizens to return to gold?”
“Yes, I agree with you completely,” Duncan responded. He continued: “The best way to protect our money and keep us from facing things like I mentioned a few minutes ago about our pensions and so forth becoming almost worthless is to return to a gold standard or non-inflationary policies.”
Duncan is not alone in pushing for a return to the gold standard: Newt Gingrich made a similar proposal in January, and Rep. Ron Paul, R-Texas, has been a proponent of the gold standard and of abolishing the Fed for some time. Most mainstream economists oppose reinstating the gold standard.
For decades, the Iranian economy has been cobbled together by religious-bureaucratic regimes that have employed mandates, regulations, price controls, subsidies and a wide variety of other interventionist devices, in an attempt to achieve their goals. It's all been kept afloat – barely afloat – by oil revenues.
Shortly after Mahmoud Ahmadinejad took power as president, Iran began to draw the ire of the United States, Europe and their allies over a number of issues related to Iran's nuclear ambitions. Of late, this loose coalition of ‘allies' has ratcheted up economic sanctions against Iran.
Has the cascade of sanctions had an effect? The Iranian rial's exchange rate tells the tale. When US President Barack Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act in July 2010, the official exchange rate for the rial to the US dollar was very close to the black market rate. Since these sanctions took effect, however, the official and black market rates have increasingly diverged.
The sanctions began to bite especially hard in early September, when the slide in the value of the rial began to accelerate – punctuated by two dramatic collapses in the demand for the Iranian currency. With each collapse, there has been something akin to a ‘bank run' on the rial – with a sharp rise in the black market (read: free market) exchange rate to the greenback. Ironically, Iranians are clamoring for US dollars.