Inflation VI

 

Lucky

I’d rather be lucky than good,
Tough than pretty,
Rockin' in the country than rolling in the city.
Spend my life rolling them dice,
Instead living like everybody says I should.
I’d rather be lucky, rather be lucky than good.

But what about governments?

Inflation is suggested to have two components: 1) currency inflation and 2) buyer-seller inflation. Currency inflation seems to be long term and is controlled by the central bank which manages the currency of c county ( in the case of the US, its Federal Reserve Bank). Buyer-seller inflation includes a range of factors, such as: changes in preferences; changes in the cost of production; changes in buyers disposable income; natural or man-made disasters, etc. Only some of these factors are controllable by the government. Some costs of production by sellers may be governed by the interest rate charged by the central bank. Some costs of purchasing/borrowing by buyers may be governed by the interest rate charged by the central bank. However other factors are beyond the control of any government and include changes in the cost of production related to changes in the costs of raw materials, changes in the cost of production due to natural or man-made disasters,  changes in consumer preference, or technological changes affecting either the producer/seller or the consumer/ buyer.

It is reasonable  to expect the government to control currency inflation. It is reasonable  to expect the government to control the cost of borrowing by sellers or buyers. It is NOT reasonable to expect the government to control the weather, any natural or man-made disaster, or  changes in preference or  technology.

The impact of currency inflation can be dramatic. Weimar Germany in the 1930s, Hungary in the 1940s, or Venezuela in the 2020s are vivid examples of what happens when the government produces currency without regard to the actual usage of that currency. In the United States, since the early 1900s, the long-term currency impacts appear to be stable except during economic crashes, when the US currency was on the gold standard, e.g. was a commodity currency; the 1930s when the US currency was no longer on the gold standard, e.g. was a fiat currency; 1944 when the US currency convertible into gold was made the international trading currency; and 1971 when the US currency was no longer convertible into gold in international trading.

When the currency effects are removed, it appears to show only buyer‑seller inflation which seems to be short-term in its effects. As noted, the government has limited ability to impact buyer‑seller inflation.  To expect otherwise is to expect a government to be not only correct but lucky. Anticipating truly random events such as international wars, supply chain disruptions, pandemics, hurricanes, droughts, etc.,  is a hope that those events are predictable when typically they are not. “I‘d rather be lucky than good” may work for sporting events, but it is not an acceptable national policy. Our national government should be good, not lucky.