The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Once burnt, twice shy

I’ve never been in a movie theater when someone yelled “FIRE”, but I’m told that people completely overreact and panic, but I have been in an economy when someone yelled “INFLATION” and people do completely overreact.

One more time — this is not your father’s inflation! He got burned by inflation decades ago!

Full year inflation for both 1979 and 1980 was double-digit, 13.3% in 1979 and 12.5% in 1980. Yet, we freaked-out last year when the one-month inflation for June reached 9.1% on an annualized basis. Last month, it was only 4.9 percent, after falling every single month.

Apparently, we wanted inflation to fall from 9.1% to only 2.0% over lunch one day?? We could do that . . . by defaulting on our debt and accepting a depression. It’s amazing how quickly inflation would fall but at what cost?

We’re doing fine!

The first reason is the rapid – very rapid – increase in interest rates, which dampened demand. The second reason is that our new tool – quantitative tightening – reduced growth of the money supply, which also put upward pressure on interest rates. Generally speaking, a zero growth rate in money supply will feed thru the economy into a zero growth rate in prices. With rising interest rates and falling growth rate of money supply, inflation never had a chance!

If you want to over-react to a problem, find something else, because inflation is already fading. What I worry about . . . is doing TOO much to dampen inflation for TOO long . . .