What the Great Inflation (1965-1982) taught us

I'll try to give you the most charitable read, but even if I do, the simple fact that inflation is happening world wide seems like there's no way the cause can simply be what you said.

It also ignores the flip side. COVID relief packages have also helped in many ways, it's unclear what outcome is worse, current inflation or what else would have happened without that assistance.

Finally, I tried to do some fact checking, and what I found is that Trump actually provided even more handouts, 2.2 trillion in COVID handouts through the Cares ACT under Trump, while Biden only provided 1.9 trillion as part of the American Rescue Plan.

And if you look at the direct payments of those plan, Trump totalled 459 billion in direct handouts, and Biden totaled 402 billion.

So Trump actually gave more Covid handouts than Biden did.

Now the argument that COVID handouts might play a role in the inflation is okay, maybe it does a little, but your singling out of Biden seems biased partisanry, and it makes it even harder for me to take you in good faith.

While you're right that this was bipartisan, worldwide inflation could well have been least partly the result of the US government handing out too much money. Here's how: the US actually had the highest inflation in the G7 until earlier this year. In order to get that under control, the Fed has been hiking interest rates more aggressively than the rest of the developed world. This has caused other currencies to lose value against the dollar, increasing the cost of imported goods priced in dollars like oil and gas and driving up inflation elsewhere: https://edition.cnn.com/2022/08/07/investing/strong-dollar/i...

The US dollar's status as the world's reserve currency has strange and counterintuitive effects like this which make their screw-ups everyone else's problem.

The big inflation spikes are always extremely multi-variate and difficult to turn into simple stories. Whereas ordinary inflation tends to be a somewhat simple story of demand running excess of supply, both of the big inflation spikes had large elements of supply side limitations. Indeed, possibly great inflation becomes "great" because it is the supply side problems riding on top of the normal demand pressures, and the two sometimes multiply each other in complex ways.

The Great Inflation of 1965 to 1982 came in the second half of the era when the great European empires were coming to an end (1947-1986). The most obvious event of the Great Inflation is the OPEC crisis, which obviously would not have been possible if the MidEast had still been owned by Britain. The independence of the Third World was a necessary pre-condition for the Great Inflation. One possible angle to explore is the extent to which independence allowed the nations of the Third World to demand better prices for their goods -- obviously in the case of oil, but possibly in the case of many other commodities -- and then possibly the way to break the power of the Third World nations wanting better prices for their commodities was for the developed nations to inflict a brutal period of austerity on themselves, cheating themselves so as to cheat the commodity-supplying nations.

This was an era in which the number of nations increased, dramatically, as the world transformed from a few big empires to 212 independent nations. Therefore, there was also a dramatic increase in the number of currencies that existed in the world. And so, there is another avenue of research that needs more exploration: whether the increase in the number of currencies that existed in the world lead to a kind of chaotic interference in the markets for currencies -- a world with just 11 currencies is a world where one can almost model the interactions in one's head, whereas a world with 212 currencies is far too complex for anyone to model it in their head. Did the sudden increase in the total number of independent currencies make it difficult, even temporarily, for the markets to send a rational signal about the value of those currencies?

Given such a complex situation, it is almost impossible to develop a properly multi-variate model, unless one is willing to devote one's life to the study of the subject, but as a method of getting traction on such complex subjects, it can be instructive, and even fun, to go through a single-variable account of the history, to see what impact a single variable might have had, for instance, in this case, the currency valuations of the various nations:

https://demodexio.substack.com/p/why-did-the-west-deindustri...

Such single-variable explanations always need to be taken with a grain of salt, but they do provide a way into a subject, without demanding 10 years of study.

Inflation is mostly caused by two things. The first and most obvious are external commodity supply price shocks which crash demand because essential inputs and their dependent outputs become unaffordable. (The demand is still there of course, but it becomes too expensive to satisfy it.)

The second is misdirected money supply which steers money towards sweatable assets like property and stock ownership, and away from productive investment, original invention and research, and small business creation.

Effectively this causes an internal supply shock which raises the prices of the sweatable assets for the ownership class and impoverishes everyone else, to the point where essentials like housing become unaffordable and demand starts to seize up. Small businesses are forced to close rather than being encouraged to open.

Inflation has very little to do with money velocity, interest rates, unemployment, wage rises, or any of that other supply side nonsense.

> This has caused other currencies to lose value against the dollar, increasing the cost of imported goods priced in dollars like oil and gas and driving up inflation elsewhere

If I have Pounds (GBP) and I need to buy Oil and settle in Dollars (USD), I exchange my Pounds for Dollars, and then I exchange my Dollars for Oil. The price of the Oil in Dollars doesn't matter to me, only the overall price of the Oil in Pounds. It has no effect on how many Pounds I spend if the GBP:USD is weaker now than it was 1, 2 or 5 years ago, it only matters what the net GBP:Oil exchange rate is.

The only time strengthening/weakening of the Dollar can have an effect is if the price moves between the two exchanges, but given how short settlement windows are, this is somewhat irrelevant.

In a system of free-floating exchange rates and absent of supply side shocks, inflation is entirely a domestic phenomenon. The reason why the entire G7 have the same problem is because they all experienced the same pandemic, and their respective Central Banks all took the same action (to increase the money supply).

Foot notes:

[1] We have since layered a supply-side shock on top of this, which has pushed up energy prices in many currencies, but this is not because of the strengthening of the Dollar, it is because many nations wish to minimise the amount of Oil & Gas they buy from one of the largest exporters of said Oil & Gas, effectively reducing supply.

[2] A strong Dollar can cause problems when foreign nations borrow in Dollars (i.e. they borrow Dollars rather than their domestic currency). As the Dollar strengthens, this means they have to sacrifice much more of their local currency to repay the debt, which can cause significant problems. (Editors note: try not to borrow in someone else's currency if you can avoid it.)