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Inflation: It’s the 2020 Lockdowns stupid

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The Inflation Disaster Is Collateral Damage from Lockdowns​

Jeffrey A. Tucker
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By Jeffrey A. Tucker March 24, 2022 Economics, History 10 minute read

The outrageous prices at the grocery store and gas stations – the highest ever recorded and increasing at rates too fast to calculate with precision – are yet more collateral damage from the initial lockdowns two years ago. The story unfolds over two years but the line of causality is direct.

Apparently it’s going to get much worse. I wonder if at some point, no one will remember how this all began. Maybe everyone has already forgotten.

I asked a friend: do you think people understand the relationship between the March 2020 lockdowns and the wild price increases two years later? The answer came: no way.

That surprises me but I also understand. There has been so much flimflam coming from the media and government spokespeople for so long, so many many attempts to demonize and scapegoat.

In addition, for many people, the past 24 months have seemed like one big blur when everything they thought about the world has been blasted to pieces. It’s extremely disorienting. After a while, one can get used to the chaos and just accept it without attempting to account for it. The lines of causality too become blurry.

The latest mess – and this doesn’t even account for the shocking talk of nuclear war that is now in the air – profoundly affects all states in the US, not just the blue ones that stayed closed much longer than red ones. Red states have felt normal but now they too must deal with incredible price increases in everything plus strange and random goods shortages on the shelves.

No one is spared when we all use the same currency and inhabit the same global economic environment.

Cash and Mattresses​

The cash you hold is losing value. Financial markets are volatile, but even when rising, portfolios can’t keep up. Even the best-managed funds are scrambling for returns. Savings seem ever less like savings. Even with cost-of-living increases in salaries and wages, the purchasing power is shrinking day-by-day.

The promises of “transitory” inflation turned out to be as credible as the promises to control the virus.

Persistently high inflation becomes a tragedy for the poor and working classes, who are daily astonished at the new terrain of high prices for everything that makes life good.
But it is especially awful for the savers. They are all being punished for frugality and exercising good personal stewardship over their resources.

It was not a surprise to any economist that personal savings soared during lockdowns. This is not only due to few opportunities to spend money. That was the least of it. When a crisis hits, risk aversion dominates confidence. The pace at which money changes hands collapses. The cash stays in the mattress. This is due to fear, and it is entirely reasonable.

This boost in savings during a crisis normally prepares the way for recovery. Once it ends, deferred consumption in the form of savings becomes the basis of investment in capital that then becomes the basis of the rebuilding. It’s a natural economic phenomenon. You can call it the silver lining of any crisis. There is recovery and it is built on the real economic behaviors inspired by the crisis itself.

You can see this happening in the data from 2020 in personal savings. It ballooned from 7% of income to 33% practically overnight. In fact, we’ve never seen anything like this before. It’s a measure of just how awful things became so quickly.
 
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