By Kevin D. Williamson
Monday, August 31, 2020
Because ideas become ideologies and ideologies become
cults, political narratives often are accompanied by apocalypse stories. For
libertarians, the preferred apocalypse is hyperinflation, which is always right
on the verge of happening but never actually happens.
(Except when it does.)
The world’s central bankers convened in Jackson Hole last
week, as they do every year, and Federal Reserve chairman Jerome Powell
announced a significant policy shift: While previously the Fed had kept its eye
on 2 percent inflation as an upper limit, going forward the central bank will
look to maintain an average inflation rate of 2 percent, meaning that
inflation could run in excess of 2 percent for . . . “some time,” as Powell put it with perfect
vagueness.
Libertarian ears pricked up, and libertarian noses
snuffled the prevailing winds as gold futures climbed and the U.S. dollar
weakened slightly.
Apocalypse . . . now?
There is good reason to fear hyperinflation. There is a
lot less reason to fear hyperinflation now.
Hyperinflation happens in different places with different
economies and different political systems, but it happens generally in more or
less the same way: A government wants to spend a certain amount of money (for
social programs, national emergencies, or to pay existing debts), but it does
not have the money to spend as much as it wants to, and it either cannot or
will not raise the money through taxes or borrowing. And so it creates money to
spend.
Sometimes it does so in the crude, old-fashioned way,
going to some nice firm such as Giesecke+Devrient of Munich and having them
print up pallets of cash. Giesecke+Devrient were the guys printing up Zimbabwe
dollars when the country’s inflation rate was at 500 billion percent and a loaf
of bread cost ZIM$100 billion.
The more sophisticated method is “monetizing debt,” i.e.
having the government sell bonds while the central bank buys them. The central
bank doesn’t have to buy the actual bonds the government currently is selling;
instead, it can simply buy up bonds from current creditors in order to increase
the demand for government debt in the markets. That’s what our Federal Reserve
currently is doing, and has been for some time. It holds more than $2 trillion
in federal debt. Trillions more are held by government entities, such as the
Social Security Trust Fund and the Military Retirement Fund.
We have seen hyperinflation most famously in Zimbabwe and
in the Weimar Republic, but also in Venezuela, Bolivia, Brazil, and other
countries. Yugoslavia and the Soviet Union both suffered hyperinflationary
episodes. There is high
inflation, though short of technical hyperinflation, in Iran, Sudan,
Nigeria, and Turkey. (High inflation becomes hyper when prices rise 50
percent or more in one month.) The government of revolutionary France, hindered
by its reliance on gold money, created a new form of paper money, the assignat,
which ended up being a kind of a cross between a fiat currency and a
real-estate derivative. What could go wrong did go wrong, and the new paper
money was shortly devalued to the point of worthlessness. Similar problems had
plagued pre-Revolution French governments.
It is an old and familiar story.
But there is not much reason to think that this is our
story — in the here and now.
If I were designing the United States from scratch, like
a kid with an ant farm, I probably wouldn’t include a central bank, or a
central bank like the one we have. Among other things, I think that the Fed’s
“dual mandate” (stable prices, low unemployment) is unwise: Asking the central
bank to do two things asks one thing too many. But we have a Federal Reserve,
and the fact is that it has worked . . . pretty well. Since the
Reagan-Volcker effort to crush the persistent high inflation of the 1970s, the
highest annual inflation rate the United States has seen was 5.4 percent in
1990. And that was an outlier: Our inflation rate mostly has been under 3
percent, and from 2009 to 2019 it ran about 1.6 percent on average. There is
always risk, and many risks are understood only in retrospect. But there is
very little in the economic data to support fear of galloping inflation in the
foreseeable future.
We should watch carefully changes in Fed policy such as
the one just announced. When something is working well, we should always be
conservative about change. But flexibility and discretion are necessary, too,
especially in extraordinary circumstances such as our current situation. One of
the difficult questions for us as citizens is which people and institutions to
trust with such discretion and flexibility. The independent nature of the Fed raises
hackles in critics, but when you consider the most likely alternative — that
monetary policy should be determined by a federal government run by either
Donald Trump or Joe Biden — then Jerome Powell et al. are much more attractive,
reassuringly sober and careful if nothing else.
Sober and careful goes a long way.
The United States has urgent short-term problems. One of
them is the current terrorist campaign of left-wing political violence intended
to sway the 2020 election. Another is the loss of confidence in police and
other municipal agencies in cities such as Minneapolis and Kenosha. Another is
the coronavirus response. These are all problems of institutional failure, most
spectacularly the failures of American cities dominated by Democratic-machine
politics, but also bipartisan failures at the state and federal levels. The
United States has long-term problems, too, prominent among them the imbalance
between what Washington has to spend and what Washington desires to spend.
That, too, represents institutional failure — one that will be, if left
unreformed, catastrophic. Faced with so much institutional failure, we should
guard jealously the institutions we have that are functioning reasonably well.
There are people who want to sell you gold coins who
insist that we are on the precipice of hyperinflation. They said so yesterday,
and they will say so again tomorrow, irrespective of what actually happens in
the real world. There are situations in which investing in gold is intelligent
and prudent, and there are situations in which the case for gold is hysteria,
marketing hype, and narrow financial self-interest on the part of the
fearmongers. Sorting out the prudent and the intelligent from the dishonest and
the hysterical is difficult at the best of times — in the marketplace, yes, but
also at the ballot box.
It is easy to get carried away with an apocalypse story:
Ask any partisan or partisanship peddler, and we are on the brink of a second
civil war, a second Bolshevik revolution, a white-nationalist uprising,
environmental collapse, etc., depending on your political stripe. Such
narratives are exciting and invigorating, and they require almost no math.
The actual business of governing — and the actual business of citizenship — is something else entirely.
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