Why is inflation so high, and what does the powers that be plan to do about it? Let's start our attempt at answering these questions by looking at the supply side, to which we have plenty of negative shocks in recent years. In particular since the discovery of the SARS-CoV-2/COVID-19 virus.

In 2020, virus fears and lockdowns changed consumption patterns, boosting demand for goods while limiting demand for services. You simply can't consume as many services if you stay indoors, whether voluntarily or not. This change in the composition of demand was inflationary for several reasons: it made goods scarce (few if any producers were prepared for such a huge pick-up in demand), goods prices are more variable, and goods production is more energy intensive than services production.

#### Figure 1. Composition of demand changed

![Composition of US household demand](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.6.19..11.22.45-composition_of_demand_vit.png)

The response to the pandemic also impacted labour supply negatively, in inflationary ways. Travel bans limited global mobility and hence global labour supply. Less immigration entails a better wage-bargaining position for local labourers, which has been good news for wage growth (and inflation). What's more, Biden's bonus benefits reportedly made some people better well-off economicially by sitting at home than looking for jobs. School and day care closures also led to a surge in home schooling and such, limiting labour supply further. 

Vaccine mandates and ~~movement licences~~ vaccine passports also limited labour market mobility and boosted structural unemployment (greater frictional unemployment in econo-speak). Rampant money-printing and ultra-low policy rates and yields boosted asset prices, which in turn led to a rise in early retirement which limited labour supply. Alcohol and drug abuse has also increased, also impacting labour supply [negatively](https://www.bloomberg.com/news/articles/2022-04-14/drug-and-alcohol-abuse-slowing-labor-force-recovery-fed-finds).

#### Figure 2. Labour market mismatches led to a shift of the Beveridge curve

![US Beveridge curve](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.6.19..11.22.45-beveridge_curve_vit.png)

The inflationary labour market angle is evident by the outward shift of the Beveridge curve (the relationship between job openings and the unemployment rate). Had the relationship between the two variables stayed the same as during the 2010 to March 2020 period, the current rate of job openings would have implied a negative unemployment rate(!). This outward shift is suggestive of a substantial rise in the natural rate of unemployment rate (the unemployment rate needed to keep inflation stable).

#### Figure 3. An incomplete list of negative supply shocks

![z](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.6.19..06.07.50-dumbflation_supply_list.PNG)

The powers that be have indeed been messing around with the supply side, and the list above is far from an all-encompassing one. So, what have they done to the demand side? Well, the answer is simple. They have been throwing around money willy-nilly.

#### Meme 1. Money supply growth - the elephant in the room

![The Joker inflation meme](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.6.19..05.11.13-broad%20money%20supply%20joker%20760.png)

Indeed, the pace of broad money creation in the US has been record-shattering. In comparison to previous QE programmes the Fed's money printing recently occured in tandem with fiscal stimulus, basically "[going direct](https://www.blackrock.com/corporate/insights/blackrock-investment-institute/publications/coronavirus-policy-response)" as suggested at the Jackson Hole conference in August 2019. Indeed, according to some estimates the fiscal spend "on COVID" was greater in dollars than the inflation-adjusted costs of World War II, the 2008 financial crisis and the 2009 great recession stimulus. Combined.

#### Figure 4. Money growth vs core CPI inflation

![US core inflation and M2 money growth](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.6.19..05.11.14-m2_core_cpi_vit.png)

#### Figure 5. A more complete list of inflationary factors

![Supply and demand list](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.6.19..05.14.34-dumbflation_list2.PNG)

So what's next? Let's now look the typical relationship between prices and stuff consumed in micro economics. The cheaper the price, the more stuff will be consumed (a downward-sloping **D**emand curve). But the cheaper the price, the fewer items will be produced (an upward-sloping **S**upply curve). Before the pandemic, we found ourselves at (1). Lots of stuff were being consumed at at fairly benign price level. 

#### Figure 6. Prices & quantities during a negative supply shock

![Marshall cross 1](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.6.19..05.06.00-1%20prices%20stuff.PNG)

As a result of the wrecking of the supply side, the **S**upply curve shifted to the left (S'). This has caused an inflationary shift from (1) to (2). 

#### Figure 7. ... and then during a demand shock

![Marshall cross 2](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.6.19..05.06.00-2%20prices%20stuff.PNG)

But at roughly the same time the authorities and the banking system, which is the chief engine for money creation, have been creating the most dollars in modern history as well as getting it directly into people's hands ("going direct"). This led to a shift of D to D', and from (2) to (3). Much inflation now. Big surprise.

So how can this situation be solved? The powers that be could try solving supply side issues (restarting nuclear reactors, incentivize energy and food production, implement measures to boost flexibility on labour markets, end or relax sanctions, [and so on](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.6.19..05.06.00-exxonquote.jpeg)). But since they for some reason seem dead set against doing just that, demand needs to be "solved" instead.

What does solving demand mean? In the words of ex-Fed William Dudley (who once argued the Fed should try to stop a [sitting President](https://www.nytimes.com/2019/08/27/business/trump-fed-william-dudley.html) from getting re-elected):

> (...) many U.S. households do hold a significant amount of their wealth in equities. As a result, they’re sensitive to financial conditions: Equity prices influence how wealthy they feel, and how willing they are to spend rather than save.

#### Figure 8. Monetary Poverty Policy

![Marshall cross 3](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.6.19..05.06.00-3%20prices%20stuff.PNG)

In short, barring successful attempts to solve supply chain issues, the Fed needs to crash household wealth (housing, equity, crypto) so that the demand curve can be shifted to the left (D''), a shift from (3) to (4).  

"Real disposable income per capita is on track to show the greatest yearly decline since 1932", [CNN](https://edition.cnn.com/2022/06/17/economy/inflation-wage-gains-economy/index.html) reported recently.

Maybe you won't own nothing, but you will own less. Will you be happy?




### Well, of course a recession is looming. 

In contrast to the PhD's in charge, the US yield curve (i.e. the difference between the 2y yield and the 10y yield on US Treasury bonds) has a fairly long history of being predictive of economic recessions. Most if not all mainstream economists will disagree with this conclusion. That doesn't mean that you should.

> The fault does not lie with the experts. 
>
> It’s that we have no experts. (*)

#### Figure 1. US 2/10 yield curve since 1976
![x](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.6.18..12.55.25-us_yield_curve_vit.png)

For instance, back in 2018 and 2019 when the curve was flattening like a madman, and eventually inverted in August 2019 around the time of the Fed's Jackson Hole conference, economists such as Fed Chair Powell and US Treasury Secretare (& ex-Fed) Yellen were all disregarding the implications from the inverted yield curve. 

Instead the powers that be were heard stating "this time was different", for instance as a result of negative interest rates outside of the US, or perhaps due to massive bond purchase (money printing) programs elsewhere. This prompted some of us to come up with the phrase "[yield curve apologista](https://twitter.com/search?q=yield%20curve%20apologista&src=typed_query)". 

As late as November 2019 Fed Chair Powell stated there's "no reason to think, that I can see, that the probability of a downturn is at all elevated".

Often wrong, but never in doubt, as it were. (One might note that central bankers are even paid to deliver fake news, though in economics jargon it's called forward guidance. Alas, pointing this out tends to be considered rude (for some reason).  

As usual however, the yield curve soon emerged victorious over the economics profession. The US entered a new recession a couple of month's after Powell's comments, on February 2020. The curve thus either predicted the pandemic (or the response to it), or it predicted a recession was overdue "because reasons", or it was pure lucky (but then it was as usual luckier than the economics profession).

Turning to recent developments, we see that the US 2/10 yield curve has been flattening since March 2021. It also inverted briefly already on March 31 this year. The curve then proceeded to close in negative territory on the first day of April 1, and it was not a joke. The curve has even been in the news over the past week, when it inverted [again](https://www.reuters.com/business/huge-selloff-rocks-treasury-markets-yield-curve-inverts-2022-06-13/).

What can recent history tell us about the timing of the next recession and the implications for the S&P500? Let's look at two simple tables.

#### Table 1. US 2/10y yield curve inversions and recessions since the 1970s 
| Curve inversion | NBER recession date| # months after inversion|
|:-:|:-:|--:|
| 1978-08-17 | 1980-01-01 | 17 |
| 1989-01-05 | 1990-07-01 | 6 |
| 1998-05-26 | 2001-03-01 | 34 |
| 2000-02-11 | 2001-03-01 | 13 |
| 2005-12-27 | 2007-12-01 | 23 |
| 2019-08-14 | 2020-02-01  | 6 |
| Median  |   | 15 | 
| 2022-04-01 | ? | ? | 

On data since the mid 1970s, an economic contraction on average starts some 15 months after an initial yield curve inversion. If we were to follow this timing the National Bureau of Economic Research (NBER) would declare a recession by May or June 2023.

#### Table 2. US 2/10y yield curve inversions and S&P500 since the 1970s 
| Curve inversion | S&P500 peak date | # months after inversion | % peak vs inversion date |
|:-:|:-:|--:|--:|
| 1978-08-17 | 1980-11-28 | 28 | 34 |
| 1989-01-05 | 1990-07-16| 6 | 32 | 
| 1998-05-26 | 2000-03-24 | 22 | 40 |
| 2000-02-11 | 2000-03-24 | 1 | 10 | 
| 2005-12-27 | 2007-10-09 | 22 | 25 |
| 2019-08-14 | 2020-02-19 | 6 | 19 | 
| Median  |              | 25 |   29 | 
| 2022-04-01 | ? | ? | ? |

Looking at the broad stock market index S&P500, the index typically continues to rise by some 29 months(!) after an initial inversion of the curve. This too would appear highly unlikely given that the Fed seems dead set to induce poverty ("reverse wealth effects") in order to dampen inflation pressures. 

To the author of this piece this sounds far too late, especially as we seem to be living in a time of acceleration and permacrisis. If we're not experiencing a global financial crisis, it's another [current thing](https://twitter.com/pmarca/status/1519525028370419712) such as BLM, Drumpf, COVID-19, or PUTIN-22...).

#### Figure 2. ISM manufacturing vs US recessions
![x](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.6.18..12.55.18-ism_recessions_vit.png)

Has the US economy already entered a recession? Perhaps, but the current levels of ISM manufacturing - a measure of business confidence in the manufacturing sector - is not yet at levels typically associated with an NBER recession. I'd thus venture a recession still lies ahead, sometime over the ~~rainbow~~ next 12 months.


#### Figure 3. US 10y yield vs ~40y downtrend
![x](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.6.18..12.55.21-nber_recessions_10y_trend_vit.png)

We are already firmly in "crisis territory" gauging by the level of the 10y yield, as the above chart shows. It should thus not be seen as a coincidence that fraud is being revealed in e.g. the crypto space, it's what usually occurs when the global tide of liquidity is ebbing. 

While there have been plenty of pain in crypto, in bonds, and in equities already, it's not as if we haven't been talking about the "everything bubble" for several years. Thus, expecting the pain to be over already at this juncture seems like an odd bet. Buckle up, if you haven't already... 

---

*) Or to be more precise: the fault lies in who gets anointed as an expert. It's not that knowledgable people doesn't exist, but somehow they seldom make it through the anointment process... 


On Gutenberg, Satoshi Nakamoto and political polarisation

Is technology political? The answer is a resounding yes! *All* technology is political, though some technologies *are more political than others*...

In society, we see a trend of increased polarization, there is talk about filter bubbles, and more and more people seem to be living in completely different worlds in terms of their opinions and their "knowledge" of the world at large. At the same time, confidence in legacy media is falling precipitously, and on a trend basis: fewer than half of Americans harbored trust in the media at the beginning of 2021 according to one poll... How did we get here, and what's next?

> Technology is neither good nor bad; nor is it neutral.

--- Melvin Kranzberg's [first law](https://ssrmc.wm.edu/technology-is-neither-good-nor-bad-nor-is-it-neutral-the-case-of-algorithmic-biasing/).

One way to explain what is going on with these trends is by revisiting one of the most important technological events during the Middle Ages, that is to say Gutenberg's invention of the printing press.

### On Gutenberg and Martin Luther

According to some historians (there is not *a history*, there are several histories - just ask a Japanese person about the origins of World War II to see what I mean), Martin Luther became uncomfortable when he noticed that his parishioners no longer seemed to feel any regret for their sins when they paid for letters of indulgence to rid themselves of their wrongdoings. Perhaps the reason why had to do with the church's usage of (Gutenberg's) printing presses to produce the letters had **cheapened them in the parishioners' eyes**.


Martin Luther nonetheless reacted, and after a while nailed [his 95 theses](https://www.luther.de/en/95thesen.html) - all written in Latin - to the door of the Castle Church in Wittenberg (or so legend has it). Some time later, his works were translated into German, and at one point they comprised [a full third](https://www.history.com/news/printing-press-renaissance) of all books sold in Germany(!). He admitted to not understanding how his work could have become so popular. In a letter to the Pope he wrote "it is a mystery ... how they [the theses] could have become so widely spread."

**The printing press not only made it easier for the church to mass-produce indulgences, aggravating Luther, it also decentralized the information channels of the time**. The media topology changed suddenly. Owing to this technological shock, a *crisis of common knowledge* was imminent, and the [Reformation](https://en.wikipedia.org/wiki/) ensued.

After the translation of Luther's theses and the New Testament from Latin into German, the peasantry - at least the small proportion that were not illiterate at the time - could read these texts. What followed was natural: people eventually started to disagree on how to interpret the texts. **Disagreement arose, and common knowledge collapsed**. Several religious wars ensued, one of which was the bloody Thirty Years War (1618-1648).

That war ended with the [Peace of Westphalia](https://en.wikipedia.org/wiki/Peace_of_Westphalia) which one might argue gave us today's nation-states in a form of compromise: "You take care of yours and I take care of mine."

**Eventually however, new mechanisms for creating consensus emerged**.

Technologies - in the broader sense of the word - such as schools, universities, newspapers, radio and television had now been developed, through which **a few could send information to the many** - even to a majority. Economies of scale also made it possible for the majority of the population to take part in the same information to a very large extent. This strengthened the cohesion of society and *a new consensus-building system had been created*. Technology had thus created new societal glue, in the form of new *common knowledge*.

### A technological-media cycle

The scientific revolution did however not only bring about **centralizing forces** (radio, TV, and so on.), but some time later also brought us the Internet as we know it today, and **the internet decentralizes information channels similar to what happened after the advent of the printing press**. In short, an epistemic revolution...

##### Image 1: The printing press decentralised the information topology. Internet is doing the same today
![ The printing press decentralised the information topology. Internet is doing the same today](https://enlund.org/1/gutenberg_cycle.png)
Source: 




#### Stage 1 - an epistemic revolution

Not unlike how Gutenberg's printing presses eventually enabled the spread of Luther's and the reformists' work during the late Middle Ages, Tim Berners-Lee has given us the web, which has made it possible for almost anyone today to create their own radio or TV channels. Just look at Joe Rogan, he is estimated to reach [11 million people](https://www.newsweek.com/joe-rogan-dethroned-spotify-chart-new-gaming-podcast-sapnap-karl-jacobs-number-one-1634239) per episode, perhaps more than the popular Tucker Carlson show on Fox News...

Indeed, instead of a **few individuals or organizations being in control of information dissemination to the many** (as during the "TV era"), today **many can easily send to many**. Through youtube, instagram, tiktok, rumble, odyssey, bitchute. Or via twitter, parler, minds, gab, gettr or [urbit](https://urbit.org/).

#### Stage 2 - collapse of common knowledge

Much like in the late Middle Ages, there are no longer any guarantees that the majority of a nation's population will be reached by the same information. Instead, it is now possible to **live in different worlds, in terms of information and understanding.** Common knowledge is rapidly collapsing, if it has not already done so.
 
What's more, **just as a [commons](https://en.wikipedia.org/wiki/Commons) such as a sea can - and probably will - be polluted, today's information commons are experiencing massive pollution.** The Internet as we now know it is full of actors who sow division and spread disinformation to promote all sorts of agendas.

"Deep fakes" are about to make the situation worse. Due to AI technology, no one will soon be able to trust any audio or video. Maybe that's a conclusion that should have been drawn already? See for example this hobbyists' [Tom Cruise "impression"](https://www.youtube.com/watch?v=iyiOVUbsPcM). (What could a state actor do with the same technology?)

It was furthermore recently discovered that British, Dutch and Baltic parliamentarians sat [in video conferences with a "deep-fake" chief of staff](https://nltimes.nl/2021/04/24/dutch-mps-video-conference-deep-fake-imitation-navalnys-chief-staff). (The Chief of Staff of the Russian dissident Navalny...)

#### Stage 3 - a war of religion, a culture war, or an information war?

Gutenberg and [the reformation](https://en.wikipedia.org/wiki/Reformation) led to the [Wars of religion](https://en.wikipedia.org/wiki/European_wars_of_religion), of which the [Thirty Years' War](https://en.wikipedia.org/wiki/Thirty_Years%27_War) was one (1618-1648). Today we can often read about a [culture war](https://en.wikipedia.org/wiki/Culture_war), not a very bloody war, but still a serious conflict it would seem...

##### Image 2: Gustav II Adolf "The Lion from the North" and his wounded horse Streiff (1632)
![](https://enlund.org/1/schwedenschimmel760.jpg)
Source: Wikimedia Commons

One technique used today by polluters of the information commons - a kind of "information violence" - is spreading rumors. This is something that many if not most large organizations are now keenly aware of. The associated "reputation risk" does not necessarily imply caring about having done something wrong, but **instead about reducing the risks of being perceived as such.** ([Baudrillard](https://en.wikipedia.org/wiki/Jean_Baudrillard) comes to mind). Of course, this also applies to individuals, who unfortunately can - and do - have their lives ruined by all sorts of rumors - whether true or not.

> A lie can travel halfway around the world before the truth puts on its shoes.

--- (Often attributed to) Mark Twain, though this is probably [fake news](https://www.professorbuzzkill.com/twain-lie-travels/).

The author Neal Stephenson recently popularized the idea of ​​enabling almost anyone to ruin someone else's reputation on the internet in his book *Fall; or, Dodge in Hell*. The idea is that if **everyone can do it, it will contribute to many fewer trusting such rumors** (in *the miasma*, according to Stephenson). Perhaps this will be a natural development due to the decentralizing technologies at work?

The so-called *cultural war* can at least partly be said to resemble the religious war phase that followed the advent of the printing press. Perhaps it's only in its starting phase, as in Churchill's worn quote: "[t]his is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning".

#### Stage 4 - a new consensus-making system

There are scant signs of new consensus-building systems. Sure, one could argue that media conglomerates and social media companies and so on attempt to fact-check and censor as an attempt to create **more societal glue** (cohesion) in the form of common knowledge. Though one might also suspect less-than-benigh reasons behind their attempts. "[ктокого?, kto kogo?](https://en.wikipedia.org/wiki/Who,_whom%3F)".

Nor does it seem that we as a society or a culture are close to a compromise such as the one around the Peace of Westphalia. Instead, many attempts to censor, deplatform or, frankly, demonize are more resemblant of the bans used by the (to-become) Catholic Church in the late Middle Ages.

Since Martin Luther refused to apologize for his provocations (as defined by the central power of the church at the time), he was excommunicated by the pope in 1520, and he was later declared an outlaw in 1521 by the German-Roman emperor.

**The dissidents who today do not denounce their prior beliefs may not be excommunicated by a pope or declared outlaws (yet). But they are instead deplatformed by twitter**, facebook, amazon or other platform companies. China has its own ["social credit system"](https://en.wikipedia.org/wiki/Social_Credit_System) which is not very different. (If one were to propose that all so-called dissidents actually deserve to be deplatformed, I recommend reading Paul Graham's essay on the [Orthodox privilege](http://www.paulgraham.com/orth.html).)

##### Image 3: Martin Luther burns the [papal bull](https://en.wikipedia.org/wiki/Papal_bull) in 1520 
![Martin Luther burns the papal bull](https://enlund.org/1/lutherbranner1520_760.jpg)
Source: Wikimedia Commons

#### Stage 5 - common knowledge arises

Perhaps a new compromise like the Peace of Westphalia is needed before the current "epistemic crisis" has passed, or, alternatively, common knowledge will be required.

What seems clear is that today's societies face great challenges, something that also applies to the internet as we know it...

##### Image 4: A celebration in Amsterdam following the Peace of Westphalia
![A celebration in Amsterdam following the Peace of Westphalia](https://enlund.org/1/munsterfirandet760.jpg)
Source: Wikimedia Commons

## Today's internet is misdesigned

Think about the fragility present in today's internet (internet 2.0). Recently, 500 million individuals' phone numbers were leaked from Facebook, something the company has said it will try to ["normalize"](https://www.vice.com/en/article/7kvp7y/facebook-normalize-mass-scraping-personal-data).

When that same company discovered that "some" user passwords were stored unprotected, they meant [600 million](https://twitter.com/enlundm/status/1113147300434640898)... Does it really make sense to "normalize" such massive leaks of private data?

Oracle CEO Larry Ellison once [said](https://www.wsj.com/articles/SB121962391804567765) "the privacy you care about is mostly an illusion. All you have to give up is your beliefs, not your privacy. Because you have no privacy".

**But what would happen in society if all instant messages ever written on Facebook or Twitter were leaked and made searchable by the public?** Is that a society we want? Or would one then question the reasonableness of centralizing all information to a few IT giants (often in other countries than the one you're posting from)?

Apart from unnecessary centralization, the existence of **free social media accounts is behind much of the pollution of the information commons** on the internet, through [Sybil attacks](https://en.wikipedia.org/wiki/Sybil_attack).

**Anonymous free accounts allow almost anyone to create troll armies** to influence people's flow of information, for example on twitter and facebook [social graphs](https://en.wikipedia.org/wiki/Social_graph).

**It is indeed possible to envisage a future system where the claims of forecasters, seers or researchers must be registered on public blockchains** if they are to be taken seriously. Such procedures would simplify the tracing of those polluting the same commons, which ought to be damaging for one's reputation. Nor could one falsify history as easily for this would leave traces in the blockchains.

Unlike Twitter's verified checkmarks (a mark of shame in some cirlces), a blockchain system would not be dependent on a central authority (see Facebook's problematic leaks above).

**By using blockchains it would also be possible to register who first wrote a certain text or created a certain image.** This ought to make it more difficult for fraudsters to claim that they are theoriginators, which would further reduce the pollution of theinformation commons.

Perhaps a part of a future solution is [Urbit](https://urbit.org/), which strives to be *a new internet*?

### Tim Berners-Lee or Satoshi Nakamoto?

Who is today's Gutenberg - Gutenberg 2.0? Perhaps it's [Tim Berners-Lee](https://en.wikipedia.org/wiki/Tim_Berners-Lee), the creator of the web - which the author of this piece assumed until recently. But perhaps it is the pseudonymous [Satoshi Nakamoto](https://en.wikipedia.org/wiki/Satoshi_Nakamoto) who through Bitcoin and crypto currencies has created and popularized the idea of blockchains?

A perhaps even more interesting question is **who is the Martin Luther of our time**. 

Martin Luther once remarked "**printing is the ultimate gift of God and the greatest one**". What would Luther have said today about the web (3.0), or about cryptocurrencies? 

**What are you thinking?** Feel free to leave a comment below, reach out to *millyt-dorsen* (or via the [bird app](https://twitter.com/enlundm)).

---

##### Video 1: A Mona Lisa-deepfake - done with a simple app...




Note: Mona Lisa was painted by Leonardo Da Vinci between the years 1503 and 1519.



Is the US about to experience a new "Great Disorder"?

US inflation has recently been surging and is now "trotting". From Gerald Feldman's description of Germany's inflationary episode a century ago, one is struck by many similarities with today...

US CPI inflation recently hit 7.9% - not only is this a 40-year high but it's also a pace one might refer to as "trotting" inflation. If inflation keeps rising, we - or at least the Americans among us - might be about to experience "galloping" inflation. 

A shift from trotting to galloping inflation is described in Gerald D. Feldmans great book "The Great Disorder" which analyses Germany's economic and political situation between 1914 and 1924. One comes away with the conclusion that Germany probably had a theoretical ability to combat inflation in the early 1920s, as well as the intent - at least among some key decision-makers - but in the end the country's political ability was shown to be lacking. 

##### A trotting horse and its driver
![A trotting horse and its driver](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.3.16..11.33.54-travande_hast_svartvit.jpg)
Source: [Wikimedia Commons](https://commons.wikimedia.org/wiki/File:American_roadsters_and_trotting_horses_-_being_a_sketch_of_the_trotting_stallions_of_the_United_States,_and_a_treatise_on_the_breeding_of_the_same_(1878)_(18160419855).jpg)

What makes [Feldman's book](https://www.amazon.com/Great-Disorder-Economics-Inflation-1914-1924-dp-019503791X/dp/019503791X?me=) even more interesting is that he - writing about the beginning of the 1920s - describes an environment which in many ways is ominously reminiscent of today.

#### Conditions when Germany transitioned to galloping inflation vs the US in 2021


|Germany 1920 | United States 2021 |
|:--|:--|
|The central bank had accumulated a large share of government papers which had led to more money in circulation. | The size of the Fed's balance sheet AND the amount of money in circulation is record-high. |
|The weakening of the currency enabled a "permanent bull market" in equities. | "Permanent bull market" is unlikely to be technically correct - nothing is permanent, but the phrase has been prevalent in recent years. |
|It was a time of "never before seen speculation", where even rich capitalists accumulated "real values".  | Measured as S&P500's market cap as share of GDP or margin debt as share of GDP, we may have experienced unprecedented speculation. Individuals such as Bill Gates have been accumulating real values such as [farm land](https://www.theguardian.com/commentisfree/2021/apr/05/bill-gates-climate-crisis-farmland) and Fink's BlackRock have been [buying houses](https://slate.com/business/2021/06/blackrock-invitation-houses-investment-firms-real-estate.html). |
|Companies were importing more commodities in anticipation of them becoming even more dear. |  Companies across the globe has been importing plenty of resources. In some countries and sectors even hoarding commodities. World Bank recently [warned](https://money.yahoo.com/world-banks-malpass-warns-against-183209918.html) (or recommended) against hoarding of food and gasoline - never a good sign.  |
|The Chancellor worried that citizens had started to "flee" the reichsmark in order to protect themselves against currency weakness.  |  Individuals have been fleeing fiat currency into equities, gold and crypto for years. A friend of mine said more than two years ago that he "was afraid to hold cash". |
|Increased use of foreign currencies was seen as threatening the country's "monetary sovereignty".  | Central banks ARE worrying about reduced "monetary sovereignty" due to the rise of crypto currencies such as Bitcoin. Facebook's Libra/Diem currency scared e.g. the ECB and caused an acceleration into CBDC development. |
|The working class was losing confidence in the government. | The larger trend of falling confidence in Congress and media remains in place, and Biden's approval rates have been falling since inauguration 2021. |
|The Chancellor at the time was distressed by "reports that women appeared to be in a particularly belligerent mood". | Just have a look at social media :-) (nota bene: I'm not implying Biden is as "distressed" by this phenomenon as was Germany's Chancellor, but perhaps it can help explain why the Biden admin is seeking help from teenage [TikTok stars](https://www.dailymail.co.uk/news/article-10613795/Joe-Biden-deploys-teenage-TikTok-stars-blame-soaring-gas-prices-inflation-Russia.html)). But I digress. |

What finally caused Germany's inflation to start galloping in the early 1920s was a change in wage formation. According to Feldman:

> The tide against wage restraint was turned in the summer of 1921. 

After a bread price hike of 50% on August 15 2021, workers in the coal industry demanded higher wages, which the industry accepted - and subsequently hiked prices in order to preserve their profits. Government employees didn't want to lose out on the fun, and successfully sought to compensation for the high cost of living as well. "The private sector was no less troubled."

Simply put, the workers had finally gotten tired of falling real wages and now sought to anticipate the inflation rather than react to it... ´. And it was at this point that inflation started to gallop.

A couple of months later, the city of Berlin prohibited public meetings in order to prevent plundering and "panic buying" of clothes and shoes. 

US wage inflation has reached its highest pace [in 40 years](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.4.01..11.19.52-us_wage_growth.png), and gauging by quit rates and other measures of labour market strength wage earners are in a stellar position currently... 

##### Piles of new banknotes awaiting distribution
![Piles of new banknotes awaiting distribution](https://urs.fra1.digitaloceanspaces.com/millyt-dorsen/2022.4.01..12.06.09-Bundesarchiv_Bild_183-R1215-506%2C_Berlin%2C_Reichsbank%2C_Geldauflieferungsstelle.jpeg)
Source: [Wikimedia Commons](https://commons.wikimedia.org/wiki/File:Bundesarchiv_Bild_183-R1215-506,_Berlin,_Reichsbank,_Geldauflieferungsstelle.jpg)

#### Good intentions and theoretical abilities not always enough

Fed Chair Powell was recently [asked](https://www.bloomberg.com/news/videos/2022-03-03/fed-s-powell-clashes-with-senator-shelby-on-inflation-video) whether the Fed is prepared to do what it takes to get inflation under control, he obviously responded in the positive. As Fed Chair he is not allowed to say anything else. The intention to combat inflation is likely present within the Fed.

Theoretically, the authorities are also likely to be able to dampen inflation. The "easy" way to combat inflation is simply tighten monetary policy *enough*, possibly triggering a new recession. Fiscal austerity *could* help out: just stop spending and/or hike taxes, Austerity does not seem likely, as evidenced by the discussions regarding (inflationary) tax cuts on fuel, not to mention Green New Deals, Build Back Better Programs and prospects for more wars... 

#### Two weeks to flatten the price?

There are also unorthodox tools that can be put to use. The German city of Berlin prohibited public meetings to prevent "panic buying" in 1921. Perhaps it was on to something? If current authorities were to prohibit public gatherings this would offer another way to combat inflation - perhaps delay it, simply via implementing more lockdowns (though perhaps this could turn the population restless after the past two years).

In related news, the International Energy Agency (IEA) has suggested taking away other freedoms, such as implementing "[car free Sundays](https://www.theguardian.com/business/2022/mar/18/car-free-sundays-iea-sets-out-10-point-plan-to-reduce-global-oil-demand)", and also to prohibit people from driving their private cars: "cars whose number plate ends with an odd number can drive on Monday". What's not to like, if you're not a climate denier?

Feldman's book shows that good intentions are sometimes not enough, not even when coupled with theoretical abilities. At times the political ability is simply not present.  Those in power cannot always control everything, and what they think they are controlling might even revolt against them.  

Prohibitions of public meetings and consumption bans were **not** enough to change Germany's trajectory towards galloping inflation in the 1920s. 

Galloping inflation rates were followed by still-higher ones - hyperinflation.


Stations

unfiltered macro <--

Monetary Poverty Policy

Well, of course a recession is looming

Well, of course a recession is looming.

On Gutenberg, Satoshi Nakamoto and political polarisation

Is the US about to experience a new "Great Disorder"?

Links

Stack Podcast