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Magazine Article

Is Inflation Dead?

Mainstream economists are telling us that "there's little or no danger of inflation." The rates of inflation have come down significantly in recent years and can be expected to remain benign in the future.

  • Hans F. Sennholz,
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Mainstream economists are telling us that "there's little or no danger of inflation." The rates of inflation have come down significantly in recent years and can be expected to remain benign in the future. In the developed countries, average price inflation in 1995 was about 2.5 percent. In most less developed countries, it moderated to 8 percent. In Latin America, the Middle East and Eastern Europe, it continued at above-average rates, some even at triple-digit rates.

When compared with the 1970s and 80s the rates of inflation in developed countries, no matter how you may define it, have indeed come down. Yet, despite the visible improvements in central bank behavior in recent years, it is certainly premature to say inflation is down for the count. The monetary system that bred past inflations remains unchanged. It grants legislators and regulators the right to manipulate the county's money supply to suit their political ends.

At the present, the central banks of the developed countries are aggressively expanding their credits because of the fear of recession. With unemployment running high, the German Bundesbank recently cut its discount rate to a record low of 2.5 percent, hoping to revive the dragging economy. The Bank of Japan, which is an important creditor to the U. S. government, last year lowered its fiscal discount rate to a record low — to one half of one percent. When compared with these "stalwarts" of hard money, the Federal Reserve System, which presently is charging 5 percent for its credits, looks like a miser and tightwad. Actually, it has no choice but to keep its rates high because the United States is a low-saving, high-consumption, heavily indebted country with a chronic current-account deficit.

In developing countries, inflation is still an everyday experience. In Asia the rate remains relatively high at some 12 percent. Turkey is the worst, with an inflation rate over 75 percent. In the economies of the former Soviet Union the average rate is estimated at 150 percent, with that of Belarus at 700 percent, Ukraine at 300 percent, Azerbaijan at 460 percent, and Tajikistan at 390 percent.

Everywhere central banks are creating new credits and printing new money. The stock of money is growing faster than at any time in the 1990s. Moreover, the United States is experiencing an explosive growth of securitized debt, what most economists call "rising money velocity." Yet, the price inflation of goods and services remains rather moderate. The rampant growth of leveraged speculation and corporate acquisitions point at a different kind of inflation: that of existing capital assets. Instead of soaring prices of goods and services, we see the effects of easy money and credit in the financial markets. Inflation is not dead but very much alive. It has moved from Main Street to Wall Street.

Most developed countries are mired in economic stagnation or even recession. Japan continues to suffer the readjustment pains from its credit expansion binge of the 1980s. The European countries are chafing under crushing loads of welfarism and soaring rates of unemployment. The European monetary ease, led by the Bundesbank, is failing to stimulate economic production but instead is fueling a great financial-asset inflation; European stock prices are hitting one record after another. The United States, which is the only country not mired in stagnation, is leading the way in asset inflation.

Our age of inflation has deep roots in doctrines and theories that disparage economic freedom and deny the freedom of contract. Faulty monetary thought paved the way for the age of monetary destruction by allowing governments the world over to create monopolistic banks of issue and make their money "legal tender," which everyone is forced to accept no matter how depreciated it may be. To refuse to accept it is to forfeit income and wealth.

It was in 1971, finally, that the U. S. government opened the inflation flood gates by removing the last deterrent, the gold reserve requirement. Building on political force and managerial discretion, it created the paper dollar standard.

Depend on it, the legislators and regulators who gave us such a system will bring us more inflation in years to come.