On Exaggerating the Consequences

Published at 09:09 on 30 April 2022

My last post mentioned in passing exaggerating the economic consequences of the pandemic.

I suppose I can take solace in how I am hardly alone in doing so. In particular, most central bankers did precisely the same thing, which motivated them to take actions to aggressively promote inflation and stimulate economic growth. We are now starting to pay the price (literally) of those inflationary policies.

In defense of the banksters, it is actually a logical choice to err on the side of avoiding a deflationary spiral. This is because the deflationary cycle is much harder to rein in than the inflationary one. During a period of deflation, one can profit simply by stuffing a mattress with cash, since falling prices mean that cash will become more valuable over time.

During a period of inflation, by contrast, it is best to be cash-poor and invested in physical assets. Central bankers can counter this trend by raising interest rates to the point where high compound interest more than cancels out how money is declining in value over time. Note that countering a deflationary cycle via adjusting interest paid (or in this case, charged) to savers is not possible, as it would imply negative interest rates, and if there are negative rates, one can easily beat them with a mattress stuffed with cash (0% interest).

(And no, it tends not to be literal mattresses stashed with literal cash. Safe deposit boxes full of bundles of C-notes are much more common.)

Central bankers know all of this, therefore their goal is never to stomp out inflation completely, as this is just too dangerous. (Remember, they will sometimes guess wrong, because economic forecasting is never 100% accurate.) Rather, the goal is to shoot for a low but not zero rate of inflation, a rate of inflation with enough of a safety margin to make triggering deflation extremely unlikely.

During the pandemic this was all complicated even more by being in something of unprecedented economic circumstances, and deflation did in fact start rearing its head in the early months. Seeing the danger in that, it is really no surprise the central bankers floored the economic accelerator pedal. It turns out they guessed wrong (also not a surprise, given the lack of precedent), so now we have an inflationary spiral.

But as bad as that is, it still beats the pants off an out-of-control deflationary spiral. Keep that in mind when you hear the righties moaning about big government, central bankers, fiat currencies, and (the lack of) gold standards.

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