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“The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.” – Milton Friedman
We are going to see a repeat of this over the next year or two. We are headed for recession, and possibly depression (although no one will call it that) even if the Republicans take over control of both houses of Congress next year. Part of that is due to existing inflation. But an even larger part will be due to government mismanagement.
Inflation (and deflation) is caused by two components: money supply and the size of the economy. As long as both components grow (or shrink) in the same proportion, everything is good. The money supply grows to match the demand for additional goods and services and prices remain stable. Usually inflation results when the money supply grows faster than the economy. That is because it is easier to print paper money than to grow an economy. If you have more dollars chasing the same amount of goods, the value of each dollar is less.
Deflation is caused by the opposite problem: more goods than money and the goods become worth less. Which gives an incentive to produce fewer goods until the economy shrinks to match the money supply. (Incidentally, that is what happened in the late 1930s and is why the government running the printing presses to pay for WWII did not crash the economy. The Roosevelt Administration deliberately kept the money supply too low, hoping to keep wages up. Yeah, they were crap economists.)
However, today we are experiencing a different phenomenon causing inflation: a reduction in the economy due to a scarcity of goods. Yes, the government is running the printing presses, increasing the money supply, but the economy is also shrinking. We are producing significantly less energy. Supply chain constriction is further limiting production. If a factory cannot get raw goods, it cannot manufacture finished goods. Plus, increased regulation makes it more difficult to provide goods and services.
Most people think if we get spending under control, inflation will go away. That would be true if inflation were only being caused by increasing the money supply. But what happens if, once you do this, the economy continues to shrink? You still have too many dollars chasing too few goods. The price of everything continues to go up.
Congress is responsible for spending. It can rein-in the budget. What it cannot do is rein-in executive orders that discourage production. Reagan did not tame inflation because Paul Volcker and the Fed raised interest rates. He also deregulated everything (especially the energy industry), which grew the economy. It was the combination of the two that killed inflation in the 1980s.
While controlling spending and the growth of the money supply is a necessary condition to control inflation, it is not a sufficient condition. The economy has to grow to match the money supply. Do you really see this administration reducing regulation to encourage production — especially on energy production? Yet that, too, is a necessary condition. For the Progressives, their policies are religion. You do not get anywhere arguing religion with a true believer.
I expect things to get worse until 2024 at the earliest. More likely, it will take a year of rational executive governance to fix the problems we now have. Make plans for hard times until 2025.Published in