They called it the Great Moderation.
After Federal Reserve governor Paul Volcker broke the back of U.S. inflation in the 1980s, the U.S. and other western economies enjoyed a blissful, multi-decade period of benign consumer price trends, with modest, predictable increases averaging around 2% per year. It was a key contributor to a positive feedback loop: Trust in central banks’ independent monetary policy grew and became entrenched, and, as a result, economies and stock markets boomed.
There were some rough spots – the dot.com collapse in 2000 and the Great Financial Crisis of 2008, to name two biggies – while an ever-widening haves-versus-have-nots gap bred disillusion with the political model upon which Wall Street generated its riches. Nonetheless, the fact that inflation, with all the uncertainty and stress it brings to economic decision-making, had become a distant memory meant the ship of economic expansion was consistently put back on course.
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And now? What does the current experience with rising prices mean for the long-term global economic outlook? And what might that mean for Bitcoin? Its advocates present it as an inflation hedge, but in recent months it’s done little to earn that status as its price in dollars has swung in line with the ups and (mostly) downs of the stock market.
The way to think about these questions is to consider the impact that persistent price uncertainty has on economic and, just as important, political decision-making.
Uncertainty is back
With inflation pegged at 8.5% in March and the Fed instituting its steepest rate hikes in 22 years to try to bring it down, Americans across the economic spectrum – not only those in lower-earning segments of society – are grappling every day with economic dilemmas they haven’t faced for decades. Do I buy that new car now in case it’s more expensive in the future, or should I worry about my job security, given all the talk of an imminent recession? This kind of uncertainty, translated across society, has a profound impact on the economy at large.
This uncertainty is an unpleasant experience for anyone other than the savviest (and luckiest) people who figure out how to make money in an inflationary environment. And inevitably it has political consequences. Think of how Jimmy Carter’s single-term presidency was doomed by inflation in 1980. Or consider the constant turnover in governments in economies dogged with inflation, such as Argentina.
Already, many believe President Joe Biden is doomed to go the way of Jimmy Carter. His approval rating was a dismal 41.3% in the latest Gallup poll.
Adding to Biden’s concerns: the specter of stagflation, a double whammy of inflation plus unemployment that pandemic-related supply chain disruptions could bring upon us. The fear is that even if the Fed drives us into recession, softening aggregate demand will fail to break the inflationary cycle because it will be offset by the price appreciation effect of supply-driven costs.
Already, news out of Amazon and Apple has flagged the blow to corporate bottom lines from supply problems brought on by China’s latest COVID-related lockdown. It’s a potential recipe for stagflation. And that’s a politician’s nightmare.
Shifting political equation
Beyond the ballot box dangers to incumbent leaders, it’s possible the politics of inflation will be quite different from those in 1980. Back then, there was greater trust generally in how society is governed. Over time, coincident with the disruption caused by globalization and the internet, confidence in government, in corporations, in law enforcement, in the media and in other important institutions has since waned, as documented by Edelman in its annual Trust Barometer report.
This rising ennui brings another layer of unpredictability to the political and economic decisions people will make. If, for example, Donald Trump is again the Republican candidate for 2024, what will it mean for all those swing voters who, in 2020, voted against him in disgust? Maybe they’ll hold their noses and put him back into power, but they won’t be happy about it. And Democrats, well, they’ll be downright depressed. There’ll be a level of mistrust in the political outcome and in the system that delivered it that wasn’t the case with Ronald Reagan’s victory over Carter in 1980.
There’s a growing sense, in other words, that traditional politics won’t be the solution to our economic woes.
How will this political disillusionment affect how people think about money?
Well, it's worth recognizing that for millennia money has been a largely political project, with governments seeking to control its issuance and circulation. The fiat money era of the past 50 years has been the apex of that effort.
But throughout history, when trust in the political system has dropped to low levels, people have turned to alternatives, gold being the principal example.
Now, Bitcoin offers an alternative, one with valuable properties beyond just being a store of value. Most importantly, bitcoin is digital, which means it can be integrated into the predominant internet economy with programmable capability. And its functionality – both its enforced scarcity and its transaction and recording mechanisms – is set by what is essentially a communal process of consensus.
In other words, Bitcoin is actually an alternative governance system for our money. There’s no guarantee that people will choose it en masse, but this current era of economic and government uncertainty and the mistrust it will sow in institutions offers as good a case as any for them to do so.