Theories on inflation will soon be tested — Richard Strozinsky

Prices went up (inflation) because the local currency lost purchasing power. As the economy continued to contract, the currency continued to lose purchasing power and prices moved higher.

In 1970, the dollar index was 120 and fell to 85 by 1979. One could rationally argue that the loss of purchasing power in the dollar was the root cause of the inflation in the 1970s (We went off the gold standard coincidentally in 1971.).

If the current recession drags on, the dollar could precipitously fall, and the U.S. would face its own fiat-currency event, causing inflation due to the loss of purchasing power in the dollar.

Actually, the inflation of the 1970's was only indirectly related to the US going off the gold standard in international trade. The direct factor was the increase in the price of oil, then set by Saudi Arabia as swing producer. (US oil production dried up in the early 70's.) Thus, the ensuing inflation was from the side of supply and not of demand.

But going off gold was an indirect factor. The oil producers were fearful that removing the currency anchor to a real resources would lead to inflation. So they demand a higher price for their oil, which itself was inflationary.

However, there is another aspect to supply-side inflation, which is increasing demand with contracting supply. While the world awash with oil right now, it is unlikely that the 1970s would repeat.

However, if the government continues to increase money flows in the face of contracting supply, theoretically higher prices could follow as demand outpaced supply.

MMT economists have already cautioned  about this possibility and recommended that spending be targeted to where it is vital instead of showering the economy with money in the hope of stimulating investment.

Pandemics are new territory. Policy needs to be developed for addressing the economic shift they produce. The toilet paper shortage followed by the PPE shortage and then a shortage of medical personnel and equipment were a warning. Things can get progessively worse fast.

Union-Bulletin — Letters to the Editor
Theories on inflation will soon be tested
Richard Strozinsky