Should We Brace for Upcoming Inflation?

Should We Brace for Upcoming Inflation?

Show Notes

Let’s flashback to the 1970’s, a really interesting use-case for economists to explain what the central bank deals with today, the fear of inflation!

If you know anyone who was alive during that time, they probably remember the long lines in gas stations! This is because Nixon, in 1971, made oil price increases illegal (Effectively, a price ceiling) and also cut the link of Gold to the dollar, in an attempt to control inflation. The spending on the Vietnam War and Johnson's “Great Society”, a government spending initiative to reduce poverty levels, was thought to be the root of even-higher inflation.

From the 1970’s to the 1980’s, more than 50% of Americans thought that inflation or general price increases was the single biggest problem facing the economy. Contrast to today, when you mention inflation, some people have been looking for it for the past decade or so! That’s because inflation has remained low. Despite the printing of money in the 2008 financial crisis, inflation has largely stayed around 2%. The doomsday warnings of economists who have long-studied Monetarism (ie. the link of excessive money printing and inflation), have been ignored.

Every economic policy for a while now, are rooted on the premise that inflation will be low. It is the reason our central bank has been buying up billions of dollars worth of bonds and are cutting interest rates to near-zero. Records being broken in 2020 for how much the government is spending on both monetary and fiscal policy.

How does 2021 expect to unfold? How can the Fed defend against the blow-up of prices?

  1. The amount of cash in the economy grew about $3 trillion in 6 months. We can expect inflationary pressures to hit at least some parts of the economy.
  2. Fiscal Policy will have to be ready to deal with the recession that comes with the sudden rise of interest rates. Another stimulus package, if needed, when GDP growth slows again, basically a round 2 of 2020. This is probably not the best idea given our current state of M2 or excessive money supply.
  3. Monetary Policy’s main tool against inflation is hiking the interest rates! Similar to what Volcker did in the 70’s. Since the recent policies of the federal reserve has not worked to push inflation even to the 2% target, economists are skeptical on what the federal reserve can actually do.
  4. We hope you’ve learned enough about inflation and are considering taking it easy when increasing your own consumer spending.
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