Inflation has not been around in western countries for some decades but now there is concern that inflation could return. Governments are printing unprecedented sums of money to pay for COVID recovery plans.
Meanwhile there have been disruptions caused by supply chains being damaged, and so there are global shortages of food, electrical components, resources and fuel. Some staff have resigned and so employers will need to pay more wages to attract new workers (in the US this is being called "The Great Resignation").
But the bottom line is that there is nothing new in this debate. Those of us who have been around for a few decades will remember previous concerns about inflation.
"Inflation" means that too much money is chasing too few goods and services. One of the most well known examples come from the early 16th century, with the influx of gold from the Spanish Latin American colonies. The gold poured in but there was not a corresponding increase in food and other items to soak up all the extra purchasing power and so, ironically, despite its new wealth Spain was actually damaged by stealing the Latin American wealth.
The opposite term is "deflation". This is where the prices of goods and services fall. Customers defer expenditure expecting prices to fall even lower and so a recession is thereby triggered.
The current system of coping with COVID in western countries has been influenced by the 2008 Global Financial Crisis (GFC). The US was the source of that crisis, rather than the backstop to solve it, and the US banking system's contagion spread to other countries.
The US Federal Reserve's eventual response was "whatever it takes". This was different from the "hands off" approach that characterized the Great Depression of the 1930s (which meant letting the market sort itself out because recessions were then seen a natural part of life, like floods and droughts, in which government had only a limited role).
Luckily Australia was already on that path in 2008 with "go early, go hard, go household". Therefore, Australia avoided the early austerity policies in UK, Europe and US, and so escaped largely unscathed that crisis (the UK magazine The Economist called Australia the "wonder downunder" because of its having the longest continuous economic boom in western history).
But can governments be trusted with money?
There has been a change in mindset with the rise of "Keynesian economics" (named after British economist John Maynard Keynes, 1883-1946). He argued (i) government does have a responsibility in the economy and (ii) individuals should shrug off Victorian notions of thrift, and instead go out and spend.
His critics warned that government would debase the currency and that the British Empire would go the way of the Roman Empire: debt destroys empires.
Ironically, the 2008 GFC showed that the financial regulatory system had been overwhelmed by the markets it was supposed to supervise. Therefore, can we trust politicians (and bureaucrats) with money? Should the market be left to work its magic? This may mean short-term pain but it will be better in the long-term.
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