Advertisement

A warning from history about the return of inflation

The message from past crises is clear: money-printing on the scale we’re seeing it now brings inflation. And while that might feel good at first, says Dominic Frisby, the endgame is grim.

US mint worker holding sheets of $20 bills © AFP via Getty Images
Printing money on this scale will bring inflation © Getty

In 1974, inflation of more than 10% gripped the US. President Nixon had unpegged the dollar from gold three years earlier; the oil price had risen by 400%; prices were out of control.

An American lawyer by the name of Ronald H. Marcks decided to write a book about inflation, specifically the spectacular episode that all but destroyed Germany in the early 1920s and the American inflation that had steadily gained force since 1962.

Advertisement - Article continues below

He couldn’t get a publisher, so he decided to self-publish, and 1,000 copies of Dying of Money – Lessons of the Great German and American Inflations were printed.

Marcks didn’t want to upset any of his clients and so he did it under a pseudonym – Jens O. Parsson was the name he chose.

Writing under a pseudonym limits the extent to which you can promote, and the book never became a household name. Even today there is no Wikipedia entry. But copies lurked in libraries, PDFs changed hands on the net and the book never went away. And a good thing too, because it’s terrific.

What’s more, its message is extremely pertinent to today.

Why we need to re-educate ourselves on inflation

Paperbacks are trading hands on Amazon for over $800, so, good though it is, I don’t recommend you rush out and buy a copy. However, I’m going to quote a couple of passages here and let’s see how true they ring to this strange Covid world around us.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

Inflation and deflation are slightly ambiguous terms that mean different things to different people. When definition is not clear, dispute often follows and so it is with inflation and deflation. Economists are forever arguing about which it is we are experiencing, when, often, they mean different things by the terms. As a result we now have terms like “stagflation”, “disinflation” and “reflation”.

Originally, inflation meant a growth in the supply of money and credit, with the consequence of higher prices. As you would inflate a tyre or a dinghy, so you inflate the money supply. The consequence of more money is higher prices. Deflation meant the opposite. Less air in the dinghy – with the result that it sinks.

To most economists, inflation simply means rising prices, and deflation means falling prices. They don’t look at the amount of air in the dinghy, just at how high or low certain waves go.

Advertisement - Article continues below

Rising and falling prices are defined by measures such as CPI. But the Consumer Price Index, to give it its full name, only measures the prices of certain consumer goods and services.

It doesn’t measure house prices, copper prices, share prices and many of the other prices that feature in our lives. These prices, what’s more, are prone to the deflationary forces of improved productivity and distribution and market competition, which push things down.

Research by Positive Money shows that only about 13% of newly created money and credit actually goes into the goods and services measured by CPI. So CPI is not a true measure of inflation.

The extraordinary money supply created by central banks in the post-2008 era did not make its way into the real economy and CPI was fairly muted over the period. Instead, the money made its way into financial assets – where there most certainly was inflation. Ordinary Joe in the real economy, however, did not see any of the “benefits”.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

Today, though, via furloughs, loans and all the other means of bailing out the Covid crash, the money is, very definitely, going into the real economy. And it’s starting to look like this time it will show.

You’d think the economy was booming. Stocks are up, commodities are rising and the biggest inflation canary of the lot, silver, is going ballistic, up almost 30% in little more than a week.

I’m even noticing signs of inflation in the supermarkets – far fewer “3 for 2” deals, reductions and other bargains. Many people, as a result of not spending during the lockdown, are actually feeling cash rich. This is something of a crack-up boom: inflation is here.

So, to Parsson.

Inflation feels good at first – but the endgame is grim

“Everyone loves an early inflation,” Parsson says. “The effects at the beginning of an inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stockmarkets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle.”

Advertisement - Article continues below

This is what we are experiencing now. It’s what, according to Parsson, comes next that we should all be worrying about:

“In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the later effects, but the later effects patiently wait.

“In the terminal inflation, there is faltering prosperity, tightness of money, falling stockmarkets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies.

“Everyone pays and no one benefits. That is the full cycle of every inflation.”

Advertisement
Advertisement - Article continues below

The question is whether Parsson’s bad inflation will ever manifest.

Nothing is ever as simple as it seems in a book. Real life has twists and turns and false signals galore. But take a step back from the daily noise and consider the long-term picture, and Parsson’s description seems rather apt.

Advertisement - Article continues below

Will central planners be able to manage the later, bad inflation (assuming it comes)? After 2008, their confidence is surely up. My view is that they got away with it then – they dodged a bullet. They might not get so lucky this time round.

To Parsson again: “Scarcely a person … was untouched by inflation's handiwork. Every citizen, in his daily life and with his earthly fortune, danced to a tune he mostly could not hear, played for him by the government's inflation.

“It was up to every citizen to learn for himself what was happening and to look out for himself if anyone was going to, because no one else was looking out for him. The government certainly was not.

“The government was compelled by its other duties not to protect him but the opposite, to continue to steal from him by the inflation as long as it could. The forces at work were such that there was no practical possibility the inflation would end or abate".

If Parsson is right, the government’s priority is not you, it is itself. It is its predicament and staying in power. If it needs to debase its currency to do that, it will. The way to protect yourself from the government debasement is via non-government money. Every penny you put into gold or bitcoin is a penny that government can’t debase.

We thought the bad inflation was coming after the post-2008 money print, but it never quite came. If inflation “patiently waits” as Parsson suggests, then perhaps its time is coming now. The gold and silver price action certainly suggests that it is.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is available at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere. If you want a signed copy, you can order one here.

Advertisement
Advertisement

Recommended

Visit/520584/weak-inflation-data-may-gives-the-bank-of-england-an-excuse-to-cut-rates
Economy

Weak inflation data may gives the Bank of England an excuse to cut rates

UK inflation is edging lower, and is now well below the Bank of England’s 2% target rate. That could mean even lower interest rates. Here's why. 
15 Jan 2020
Visit/519022/money-minute-wednesday-4-december
Economy

Money Minute Wednesday 4 December: Britain's economic sentiment and American job figures

Today's Money Minute looks ahead to the UK's latest all-sector PMI survey, and America's private payrolls report.
4 Dec 2019
Visit/509411/inflation-little-changed-in-may
Economy

UK inflation little changed in May

The inflation rate in the UK was little changed in May, compared to last month. Here, John Stepek looks at what's been happening to prices in the UK.
19 Jun 2019
Visit/economy/uk-economy/601429/mervyn-king-why-the-covid-pandemic-is-a-classic-example-of-radical
UK Economy

Mervyn King: why the Covid pandemic is a classic example of radical uncertainty

This week, Merryn talks to ex-governor of the Bank of England Merryn King about the pandemic and how to prepare for a future that is unknowable; the g…
2 Jun 2020

Most Popular

Visit/economy/uk-economy/601427/covid-bounce-back-loans-and-inflation
UK Economy

What bounce back loans can tell us about how we’ll pay for all this

The government will guarantee emergency "bounce back loans" for small businesses hit by Covid-19. Inevitably, many businesses will default. And there'…
1 Jun 2020
Visit/investments/commodities/601433/commodities-possibly-the-biggest-opportunity-in-todays-markets
Commodities

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020
Visit/investments/commodities/gold/601444/these-seven-charts-show-exactly-why-you-must-own-gold-today
Gold

These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020