Inflation Matters
Inflationary Wave Theory, Its Impact on Inflation Past and Present ... and the Deflation Yet to Come
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Summary
In the swirling tempest of global economies, "Inflation Matters" carves a clear path through the fog of financial jargon, transforming inflation from an enigmatic giant into a comprehensible force of nature. With a deft hand, this book unravels the intricate tapestry of inflation's history and its pervasive grip on our world, revealing the invisible patterns that dictate economic tides. At the heart of its narrative lies the groundbreaking Inflationary Wave Theory, a visionary model predicting a seismic shift toward near-zero inflation. As we stand on the brink of this new era, the book offers an indispensable guide for those seeking to navigate the treacherous waters of future wealth management. Here, the echoes of past economic upheavals meet the quiet anticipation of a deflationary dawn, crafting a narrative as compelling as it is enlightening.
Introduction
Picture yourself in 1264, walking through the streets of London with a silver coin worth enough to buy a loaf of bread. That same coin, if it somehow survived to today, would buy perhaps a hundredth of that loaf. This isn't merely the story of one currency or one nation—it's the tale of humanity's longest-running economic experiment, spanning seven centuries of price movements that reveal profound patterns in how societies create, destroy, and transfer wealth. This exploration takes us from medieval guilds struggling with the first great price surges to modern central bankers wielding unprecedented monetary power. Along the way, we encounter hyperinflation that destroyed entire middle classes, deflation that sparked revolutions, and the subtle mechanisms by which governments have learned to tax their citizens without their knowledge. These aren't abstract economic theories but lived experiences that shaped the rise and fall of empires, determined the fate of millions, and continue to influence every financial decision we make today. The patterns that emerge from this historical journey offer more than academic insight—they provide a roadmap for understanding where we stand today and where we might be heading. Whether you're a saver watching your purchasing power erode, an investor navigating uncertain markets, or simply someone curious about the invisible forces shaping our economic lives, these historical lessons offer both warning and wisdom for the challenges ahead.
Medieval to Modern: Seven Centuries of Inflationary Waves (1264-1900)
The story begins in 1264, when English record-keepers first began tracking the prices of everyday goods with sufficient detail to reveal long-term patterns. What emerged from their meticulous documentation was extraordinary: inflation doesn't move in straight lines but follows predictable wave patterns, each lasting roughly a century and a half. Like great tides in the ocean of commerce, these waves would rise slowly, crest dramatically, then recede into periods of relative calm. The first great wave stretched from 1180 to 1320, driven by a phenomenon that would become hauntingly familiar—population growth outstripping resources. Medieval Europe was experiencing unprecedented demographic expansion, but agricultural productivity couldn't keep pace. Prices rose steadily for 140 years until catastrophe struck. The Great Famine of 1315-1322 killed a tenth of Europe's population, followed by the Black Death, which wiped out another quarter. Population collapse finally broke the inflationary cycle, ushering in nearly two centuries of stable prices. This pattern repeated with remarkable consistency. The second wave, from 1510 to 1650, coincided with Spanish conquistadors flooding Europe with New World gold and silver. The third wave, spanning 1730 to 1815, climaxed during the Napoleonic Wars when governments discovered they could print money to fund their military campaigns. Each wave grew more intense than the last, as human societies became more sophisticated at exploiting inflationary opportunities. Between these dramatic peaks lay periods of consolidation where prices remained remarkably stable, sometimes for generations. During these intervals, technological progress and increased productivity actually drove prices downward, creating what we might today recognize as golden ages of purchasing power. The Victorian era, from 1815 to 1900, exemplified this phenomenon—a time when ordinary workers saw their real wages rise consistently as the prices of manufactured goods fell year after year.
The Great Inflation Era: Wars, Hyperinflation and Policy Response (1900-1980s)
The twentieth century ushered in humanity's most dramatic encounter with inflation, beginning what would become the fourth and most powerful wave in recorded history. World War I marked the decisive break with centuries of monetary restraint when governments abandoned the gold standard and embraced money printing on an unprecedented scale. What had once been an emergency measure during conflicts became a permanent feature of economic policy. The aftermath revealed inflation's capacity for both creation and destruction. In Weimar Germany, government officials consciously chose hyperinflation as a method of dealing with war debts and reparations. Prices doubled every few days at the peak, wiping out the savings of the middle class while enriching speculators and debtors. As one economist observed at the time, inflation had become "a tax on those who failed to anticipate it" and "no subtler, no surer means of overturning the existing basis of society than to debauch the currency." The 1930s brought deflation's dark mirror image, as the Great Depression demonstrated how rapidly falling prices could devastate economic systems built on debt and leverage. This experience profoundly influenced post-war economic thinking, creating a deep-seated fear of deflation among policymakers that would shape monetary policy for decades to come. Following World War II, governments adopted a more sophisticated approach to inflation. Rather than the violent hyperinflations of the 1920s, they implemented what economists came to call "financial repression"—keeping interest rates below inflation rates to gradually erode debt burdens. John Maynard Keynes had presciently warned that inflation represented the "euthanasia of the rentier class," and post-war policies systematically transferred wealth from savers to debtors over several decades. The culmination came in the 1970s when multiple factors converged: the collapse of the Bretton Woods currency system freed governments from gold standard constraints, oil shocks drove up commodity prices, and wage-price spirals became entrenched. Inflation reached levels not seen since wartime, forcing central bankers to take dramatic action. Paul Volcker's decision to raise interest rates above 20 percent in 1980 finally broke the cycle, but at the cost of the deepest recession since the 1930s.
From Great Moderation to Financial Crisis: The End of the Wave (1980s-2015)
The defeat of 1970s inflation ushered in what economists later termed the Great Moderation—a period of declining inflation and reduced economic volatility that seemed to validate central bankers' growing confidence in their ability to manage economic cycles. From peaks above 20 percent, inflation rates in developed countries fell steadily toward zero by the millennium's end, accompanied by unprecedented economic stability and growth. China's entry into the global economy proved decisive in this transformation. When Chinese authorities devalued their currency by a third in 1994 and pegged it to the dollar, they effectively exported deflation to the developed world. Western consumers found themselves flooded with increasingly cheap manufactured goods, while discount retailers proliferated and technology costs plummeted. The internet revolution amplified these effects, creating new efficiencies and competitive pressures that kept prices in check. Central banks embraced inflation targeting as their primary tool, with most developed nations settling on targets around 2 percent annually. This represented a fundamental shift from earlier eras when monetary authorities sought price stability. The new doctrine assumed that moderate, predictable inflation was beneficial for economic growth and provided central banks with room to maneuver during downturns. The early 2000s revealed the limitations of this approach. Following the dot-com crash, central banks led by the Federal Reserve adopted "accommodative" monetary policies, keeping interest rates low and allowing rapid expansion of credit markets. Much of this newly created money flowed into asset prices rather than consumer goods, creating bubbles in housing and financial markets while official inflation measures remained subdued. The 2008 financial crisis exposed the underlying contradictions. Decades of credit expansion had created unsustainable debt levels throughout the global economy. When these debts began defaulting, central banks faced a choice between allowing massive deflation or engaging in unprecedented money creation through quantitative easing. They chose the latter, creating trillions of dollars, euros, and yen to support failing financial systems. By 2015, this fourth great inflationary wave appeared to be reaching its natural conclusion. Population growth was slowing in developed countries, debt burdens remained unsustainable despite low interest rates, and deflationary forces were reasserting themselves globally. The question was no longer whether the wave would end, but how and when the transition to the next phase would occur.
Transition to Stability: Demographics, Debt Crisis and the Consolidation Phase
History suggests we stand at a pivotal moment similar to the great turning points of 1320, 1650, and 1815—when inflationary waves crested and new eras began. The signs are unmistakable: birth rates have fallen below replacement levels in most developed nations, debt burdens have reached historically unprecedented levels, and traditional monetary policies are losing their effectiveness as interest rates approach zero. Demographics provide the most compelling evidence for this transition. Just as population growth drove the great inflations of the past, population decline is beginning to exert powerful deflationary pressure. Japan offers a preview of this future—twenty-five years of stable to falling prices accompanied by an aging, shrinking population. What economists initially dismissed as policy failure appears, in historical context, to be the natural consequence of demographic transition. The path forward likely requires resolution of the debt crisis that has been building since the 1980s. Total global debt now exceeds $300 trillion, or roughly four times world GDP, levels that historically have proven unsustainable. Whether through gradual deleveraging, systematic defaults, or radical reforms like the Chicago Plan—which would eliminate banks' power to create money through lending—some form of debt restructuring seems inevitable. The transition period itself may prove turbulent, as historical precedent suggests. Previous wave endings were marked by sharp price declines, wealth destruction, and social upheaval. Yet they also cleared the ground for subsequent periods of prosperity and innovation. The consolidation phases that followed each great inflation typically lasted 80 to 100 years and were characterized by technological progress, rising real wages, and declining inequality. A new monetary system may emerge from this transition, possibly based on digital currencies and transparent, algorithmic money creation rather than the discretionary policies of central banks. Such a system would eliminate the boom-bust cycles that have characterized the debt-based monetary system of the past century, creating the foundation for genuine price stability.
Summary
The seven-century pattern of inflationary waves reveals that our current era of persistent price increases is not a permanent feature of economic life but rather one phase in a recurring historical cycle. Each wave has been driven by the same fundamental tension between growing populations demanding more resources and the human capacity to supply them, amplified by increasingly sophisticated methods of monetary manipulation. What makes this historical perspective so valuable is its revelation of inflation's true nature as a mechanism for transferring wealth between different groups in society. Whether through the medieval debasement of coins, the hyperinflations of the twentieth century, or today's financial repression, the pattern remains consistent: inflation enriches debtors and governments while impoverishing savers and fixed-income earners. Understanding this dynamic allows individuals to position themselves advantageously rather than becoming unwitting victims of monetary policy. The approaching transition to a new era of price stability offers both challenges and opportunities. The consolidation phase that likely awaits will favor different assets and strategies than those that succeeded during the inflationary era. Cash and fixed-income investments may regain their traditional role as stores of value, while the leverage-driven asset appreciation of recent decades may give way to returns based on genuine productivity and innovation. Most importantly, the end of inflation as a tool of wealth redistribution could herald a return to more equitable economic relationships and sustainable prosperity built on real value creation rather than monetary manipulation.
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By Pete Comley
