More On: inflation
The existing monetary and fiscal policies are self-destructive.
The good news is that inflation will eventually come to an end. The bad news is that, given who is in charge of economic policy, it is more likely to go south than up. The best method to stop inflation is to cut government expenditure so that it grows at a slower rate than the economy. As a result, the debt-to-GDP ratio will decrease, making debt financing easier (less money printing).
CPI inflation fell from 13.5 percent in 1980 (the year Reagan was elected) to 3.6 percent in 1987 under the Reagan administration (his last full year in office). This was accomplished by lowering the rate of spending growth while dramatically raising the rate of economic growth – by lowering tax barriers to labor and capital and removing numerous superfluous and counterproductive regulations from the economy.
Unfortunately, the Biden administration has done and continues to do the exact opposite, raising taxes, government spending, and regulations. (There's something about an old dog being incapable of learning new tricks.) As a result, inflation will rise or remain stable, and economic growth will slow. Many of those responsible for the bad economic strategy will be the first to argue that inflation has made many old white males richer while many women and children have become impoverished — which is correct.
Younger people have less assets (which can be used as inflation hedges) than older persons (who are more dependent on current income). I predict some Democrats to label inflation racist if the Republicans were in charge.
Having lived in numerous countries with high inflation rates throughout the years, I was always astounded by the inventiveness with which people coped. I spent a summer in Brazil during graduate school working on an ill-fated (aren't they all?) US foreign aid initiative. Mortgages were nearly impossible to obtain at the time due to the high pace of inflation. Those intending to construct a high-rise apartment complex would do so floor by floor, renting out the lower floors to raise funds to construct the next. (Every week or month, rents were adjusted for inflation.)
It was troublesome for both construction employees and renters, but when it was finished, the owner enjoyed a debt-free building. The Brazilians also did not replace old tattering, worn-out currency, thus the old bills just decomposed over time, diminishing the money supply.
During the early 1990s, Bulgaria experienced a couple of bouts of hyperinflation, but individuals could readily exchange the Bulgarian currency for US dollars or West German D-marks (predating the euro), which became the transaction and investment currencies. Bulgaria established a currency board linked to the euro in 1997, which has provided price stability in the years afterwards.
In the early 1990s, Ukraine saw many bouts of hyperinflation, and I remember recall how restaurant pricing fluctuated throughout the day (this is not a hoax) — yet people managed by using the US dollar as a reference point.
In 1992, and again in 1998, Russia experienced hyperinflation. In the mid-1990s, Russia introduced a new ruble with the stipulation that all pricing be in rubles rather than dollars (the US dollar having been the de-facto currency, which many Russians despised). When the next round of inflation hit, merchants were required to price things in "units" rather than dollars, and by chance, one unit was equal to one dollar.
It will be impossible for Americans and Europeans to acquire enough Swiss francs and the few other well-managed currencies as inflation hedges once the coming great inflation hits the dollar and the euro Because there simply aren't enough of them. Many people are flocking to bitcoin and its alternatives, but the lack of a genuine anchor (simply an algorithm) will likely lead to continuous volatility, rendering bitcoin ineffective as a store of value. To date, the so-called "stable coins" have been backed by government and other securities, but rising inflation rates will deplete such backings.
Various sorts of digital and/or private currencies are currently being tested in a variety of ways. Because the creators will have developed ways to make those digital/private monies serve most of the duties of sound money, some of them are likely to be embraced by millions of users. (Full disclosure: I am the chair of LuminiumCoin, a firm that issues tokens totally backed by metal.) We, like others working on similar goods, believe we've solved the issues. But keep in mind that I have a vested interest while you read this. In the end, the market will decide which groupings are correct.)
Gold, silver, diamonds, and other real assets have historically served as hedges against inflation and unscrupulous government officials. Inflation and asset preservation are two popular uses for real estate and equities.
Perhaps, before it's too late, the world will get lucky and leaders in the United States and Europe will recognize that their current monetary and fiscal policies are suicidal, and those in power will lose one way or another – with no tears shed.