Many years ago, in September-October 1987, we had a global stock market crash. In one day, the S&P 500 index lost 27%. And all the doomsayers were in the press telling us that the final crisis of capitalism had just begun and that we had not seen anything yet.

At the end of October 1987, if I remember correctly, Milton Friedman published a laugh-out-loud article in the Wall-Street Journal with the following theme: in his long career, up to September 1987, he had heard, or read, a considerable amount of nonsense when the newspapers or the media talked about the economy, but that it was nothing compared to what he had just read or heard since the crash, which was not going to have any long-term economic or financial impact, which the future confirmed, of course.

Why am I telling this story? Simply because, when a new important event of an economic nature occurs, the quality of the comments that follow is generally very low and inverse relation to the quantity of comments published. As I always tell my readers, reading the economic or financial comments in the mainstream press is extremely dangerous for the future evolution of your savings. If the journalist or economist was competent, he would be working in the financial markets and getting paid a maximum and would not be working for his bank or newspaper for a long time.

Now, one of these important events is taking place: inflation is back and of course, idle comments are coming out everywhere. So, in this article, I will first explain what inflation is not, then we will move on to what it really is and finally, I will explain the economic and financial consequences.


First assumption: Inflation has nothing to do with rising prices. Let's imagine that food prices explode because we have had abominable harvests in the United States, Russia and France. Let's also imagine that the Strait of Hormuz is mined and closed by the Iranians and that the price of oil doubles while Chinese exports come to a screeching halt because of an epidemic, with closed ports. I can assure the reader that prices around the world would rise sharply. There would be a temporary drop in the standard of living since the real income of the basic citizen would fall, but this would not be inflation, since the following year, the harvests would become normal again, the Strait of Hormuz would be reopened by the American or Belgian navies (that's a joke) while Chinese exports would have resumed.

And so we would have a temporary price increase that would normalize some time later. This is what we experienced in the late 1940s and early 1950s when the "free" world rearmed after the Prague coup and the Korean War. For a while, which can last several quarters, we have gigantic changes in relative prices, but as soon as production picks up, everything returns to normal and prices normalize. In a way, we have had such increases since the beginning of Covid and one can hope that prices that have gone up a lot for some commodities (like lumber or semiconductors, for example) will return to normal before long. Let's call this phenomenon "temporary" price increases.


Let's go back to what Milton Friedman said: "Inflation is always and everywhere a monetary phenomenon", which is a much more complex sentence than it seems. What Milton is saying is that in this case, prices go up, and they go up all together because something happens to the money.

Something happens to the money because the government that issues that money, for whatever reason, can no longer service or repay the debt it issued in the past. So, this government or its central bank, which amounts to the same thing, will decide that its money will no longer be a store of value (one of the three essential functions of money, after standard of value and medium of exchange). And the best way to achieve this result is, of course, to repay the government debt in monkey money and to stop paying savers by maintaining negative real rates on government bonds.

Let's check:



The green shaded periods correspond to the times when the Fed has the goal of robbing savers and follows an inflationary monetary policy.

This is the third episode of inflationary monetary policy by the Fed in the last eighty years:

  • From 1941 to 1955, World War II, beginning of the Cold War, the annuitant loses 52% of the value of his capital in purchasing power. So much less for the government to pay back.
  • From 1966 to 1980, Vietnam War, Johnson's "Great Society", arrival of the baby-boomers on the labour market: the annuitant sees his standard of living drop by 20% over the period.
  • Since 2003, the annuitant's standard of living has also dropped by 20%, but it is far from over.

Let's go back to the chart: whenever real rates are negative, we have about two years after the start of the inflationary policy, a general acceleration of price increases (first on the twelve-month price increase, then on the four-year price increase). All prices start to rise at the same time.

Contrary to what many people say, the experience of the last few years is quite similar to previous periods: since 2003, structural inflationary increases are interrupted by cyclical declines due to recessions such as in 2009, 2012 (in Europe) or in 2020. (See the second chart)

But this general acceleration of prices is more intense for the sectors that are most important for low-income households. When I was a student in the USA, I spent 1/3 of my income on food, 1/3 on rent and 1/3 on energy expenses. This seems to be the norm for the lowest income households, which I call the "yellow vests." Now, for understandable reasons, the food, real estate (rent) and energy sectors are the most sensitive to inflation and rise the most in each inflationary period.

This means that, during inflationary spikes, the poorest households see their living standards fall the most. Following an inflationary policy is a direct attack on the poorest in society, which I personally find completely unacceptable. As John Rawls, the American philosopher who died a few years ago, said, a system is just if it allows those who are at the bottom and remain there to see their standard of living rise in absolute terms over time. A society in which the standard of living of the poorest people falls permanently is a society that is preparing for a painful future. This is, however, where we are in the United States and in France.



The price increase for American yellow vests is almost 13% over the last twelve months, which is considerable.

Which brings me to my final point...


An inflationary policy is always disastrous in the end. And the question that immediately arises is: what are the reasons why a central bank would resort to it, when everyone knows that the end of an inflationary period is always extraordinarily difficult?

So why follow a policy that is doomed to failure? The reasons are numerous and not mutually exclusive.

Here they are.

  • Incompetence: Acceptable for Zimbabwe, but not for the United States or France.
  • Ideology: Many left-wing politicians have a millenarian project of extinguishing capitalism. Inflation is the surest way to transfer productive resources from the private sector to the state. A true socialist will therefore automatically aim at screwing up the money, the fastest and surest way to kill the private sector.
  • Cowardice: “Sewer money collects unearned rights”, said Rueff. The only way to continue to distribute unearned rights is, of course, not to pay back those who have lent money in the past. This is the so-called Ponzi or Madoff method. I am thinking of French life insurance.
  • Corruption: Those who control the central bank issue money that they know will soon be worthless in order to take over real assets that will always be worth something. This method was used by Henry VIII in Great Britain and by the Revolution in France (assignats) to seize the property of the Church, by the French socialists in 1981 and by the large American investment banks since 2003.
  • The desire to keep alive an institution that should die: Here, I am thinking of the euro, which is being kept alive even though it should have disappeared in 2012, by practicing negative nominal rates, which is without example in history.

In France, since we have a public service that is the envy of the whole world, and since this public service is in power, we have been practicing the five ways to ruin ourselves, since 1981 at least, without leaving any of them unexplored. We are heading for disaster. Because, since negative interest rates are a tax on savings, taxing the creation of savings means reducing the amount of savings. There is therefore less capital to invest at the end of the day (savings=investment), which means that investment collapses. And as investment collapses, productivity follows along with the standard of living of everyone in the country, but also the ability to repay past debt disappears.

That's how Argentina went from the second highest standard of living in the world in 1946 to one of the lowest today.

This is how France, in Europe, went from the second highest standard of living in 1973 to the eleventh highest in 2020.

The road to servitude is largely clear. Full speed ahead! All the indicators are green.

Original source: Institut Des Libertés | Think Tank