On the Brink of Fatal Policy Error

The ECB were justified in panicking about the threat of deflation. An environment that is simultaneously debt laden and has falling prices will quick devolve into a crisis, as revenues and wages will struggle to cover interest payments on previously accumulated debt. Interest payments definitely do not fall in sympathy with prices therefore deflati

Another much ignored trend at the time was the incredible labour force growth as a result of the women’s movement. The participation by married and single women in the workforce started growing in the mid ‘60s, which propelled the participation rate from a steady 59% to 64% by 1980. Since wages continued to grow despite the extra supply of labour,

Game theory can explain these outcomes. While the best outcome for everyone would be to cool the spiral, for any individual actor in the game the personal best outcome is to demand a price rise as the environment allows them to make this demand, and this leaves everyone worse off in the end.

Deflation is far worse than inflation

An inflationary environment has the opposite effect when considering previously accumulated debt. In outright Dollar terms, rising wages and revenues can more easily cover interest payments. This is referred to as ‘inflating away debt’. Obviously living costs also increase, but after a few years of more brisk

In the 1960s, years of cajoling by Martin’s Fed to persuade President Lyndon Johnson’s administration to restrain the budget deficit failed to pay off. Despite constant soul-searching at Fed meetings on the danger of price rises taking hold in the buoyant American economy, the Fed underestimated the persistence of inflationary pressures.

With the be

It is inconvenient to the narrative then that the effect of a depreciating currency, in addition to the import tariffs and oil price spikes, all happened after 1971. In reality, however, inflation was already biting by the end of the ‘60s, making the cited reasons for the Great Inflation merely events that exacerbated a problem that was already wel

The primary cause of this was Lyndon Johnson’s administration embarking upon serious fiscal stimulus from 1965. Persistently large budget deficits that funded ambitious social programs including the ‘Great Society’ initiative which was to reduce poverty to zero, and equalise home ownership across races. This period also brought the Food Stamp progr

LBJ's increased government spending added $42 billion, or 13%, to the national debt. It was almost double the amount added by JFK, but less than a third of the debt added by President Nixon. Since Johnson, every president has increased the debt by at least 30%.