user396040

The Importance of Economic Discipline

Hyperinflation creates all sorts of problems - I was in Brazil in the 1980's and stayed at a hotel where the rates rose every day; incidentally, the hyperinflation was occuring under a military dictatorship that imposed "discipline" in some very brutal ways but did not seem to have a handle on monetary policy. Obviously, hyperinflation is a disaster which leads to all kinds of inefficiencies. A more difficult issue is the debate between the implicit policy of low and controlled inflation we have had since 1940 and a policy of no net inflation long term which we seemed to have under the gold standard. Between 1800 and 1940, it appears that prices remained stable on a net long term basis although there were wild swings between inflation and deflation over the 140 year period and the deflationary times were characterized by enormous economic hardship. Since 1940, we have tried to avoid deflation at all costs and the result is net long term inflation so that prices now are roughly 10 times higher than they were in 1940. We have avoided hyperinflation, although we got close in the late 1970s and early 1980s - the Fed was able to bring inflation under control by raising interest rates. So it appears that with some use of intelligent monetary policy we can have low inflation without hyperinflation but the price may be periodic recessions brought about by higher interest rates. Anyhow, I am not convinced that the pre-1940 world was better nor that the current policy leads inevitably to hyperinflation. This is a complex issue that cannot be resolved by generalizations like "inflation is bad", "discipline is good," "we must have a strong dollar," etc.