How to Bring a Nation to Its Knees: High Inflation

President Trump seems to be waking up to the extreme peril that high inflation poses to the economic, social, political, and moral order of a nation.

During the dark days of the spring 2020 lockdowns, I had a conversation with my father—who was a supporter of the policy—about the inflationary wave that would likely head our way from impairing labor and supply chains and the CARES ACT generation and dispersal of $2.2 trillion out of thin air.

As I told him:

If major inflation hits this country, the disaster for the working and middle classes—not to mention retired people with modest savings on a fixed income—will make COVID-19 look like a pleasant walk in the park.

High price inflation is probably the most destructive economic thing that can afflict a society, and can literally bring a once proud nation to its knees.

Though commonly understood as a general rise in prices, its deeper perniciousness lies in its progressive impairment of money’s essential functions: as a medium of exchange, a store of value, and a reliable unit of account.

When the purchasing power of money declines rapidly and unpredictably, the consequences extend far beyond higher grocery bills and increased housing costs. High inflation erodes savings, distorts economic decision-making, destroys confidence in public institutions, aggravates social conflicts, and threatens political stability.

If you want to know why the people in Germany during the Weimar Republic years became psychologically and spiritually destabilized, understanding the era’s inflation is a good place to start. If you review the biography of virtually any ranking Nazi during the Third Reich, you will observe that most experienced profound economic and social setbacks during the hyperinflation years of the early twenties. Hyperinflation spawned monsters.

The first consequence of inflation is the erosion of purchasing power. When prices rise faster than wages, salaries, pensions, and other income, households experience a decline in their real standard of living. Those with fixed incomes, particularly retirees and pensioners, are especially vulnerable.

A person who has spent decades accumulating savings discovers to his shock—even to his despair— that the purchasing power of his savings has been substantially diminished through no fault of his own.

At an annual inflation rate of 20 percent, money held without interest loses approximately 60 percent of its purchasing power over five years.

Inflation also produces an insidious redistribution of wealth. Individuals holding cash, fixed-rate bonds, or other nominal financial claims suffer losses in real terms, while some debtors benefit by repaying their obligations with money worth less than when they borrowed it.

Governments with substantial fixed-rate debt may similarly benefit from unexpected inflation, effectively reducing the real burden of their obligations. This redistribution is neither transparent nor equitable. It occurs without legislative authorization and often rewards those best positioned to anticipate inflation and protect their assets.

An especially troubling consequence is the erosion of the middle class. Wealthy individuals have greater opportunities to protect themselves by investing in real estate, equities, businesses, commodities, and other assets whose nominal values may rise with inflation.

Lower-income households often have little wealth to protect, but suffer acutely from increases in the prices of necessities. Middle-class households are especially exposed when much of their accumulated wealth consists of bank deposits, pensions, and fixed-income investments. Inflation therefore undermine the financial independence that characterizes a stable middle class.

High inflation also corrupts the data function of prices. In a functioning market economy, relative prices communicate information about scarcity, consumer preferences, production costs, and investment opportunities.

When prices change rapidly, businesses find it difficult to distinguish genuine changes in demand from monetary disturbances. Long-term contracts become hazardous, accounting becomes unreliable, and investment decisions become more speculative. Entrepreneurs devote increasing resources to predicting inflation rather than improving products, developing technologies, or increasing productivity.

This uncertainty discourages long-term economic planning. Businesses hesitate to invest in factories, equipment, and research when future costs, revenues, and financing conditions become unpredictable.

Lenders demand higher interest rates to compensate for anticipated inflation, increasing borrowing costs. If monetary authorities subsequently raise interest rates sharply to suppress inflation, the resulting contraction will likely produce bankruptcies, unemployment, and recession. Thus, high inflation can inflict economic damage both while it persists and during the painful process of bringing it under control.

Inflation also weakens the moral and psychological foundations of economic life. Saving, thrift, delayed gratification, and prudent financial planning depend upon a reasonable expectation that money accumulated today will retain meaningful value tomorrow. For a middle class man trying to provide economic security for his family, this can cause constant, gnawing worry.

In 1925, Thomas Mann published a poignant short story titled “Disorder and Early Sorrow” about a worried professor who is briefly distracted from his concerns when his children throw a house party.

The climax occurs when his favorite young daughter, Lorchen (Elisabeth) develops an intense, overwhelming crush on one of the older male guests who danced with her as a polite gesture. The little girl’s heartbreak—as deeply felt as it is—starkly contrasts with the chaotic, collapsing external world of economic inflation of which the professor is keenly aware.

When the expectation of price stability collapses, individuals are encouraged to spend quickly, borrow opportunistically, and speculate in assets rather than accumulate productive savings. The patient saver is punished while the highly leveraged speculator prospers.

Such circumstances can foster a widespread perception that economic success no longer depends on diligence, competence, and productive contribution, but upon financial maneuvering and privileged access to information.

The political consequences of this—as we saw during the Weimar Republic—can be disastrous. As living standards deteriorate, citizens look for someone to blame and demand retribution. Workers demand higher wages, businesses raise prices to protect margins, and governments face mounting pressure to subsidize necessities and increase social expenditures.

These responses may seem urgently needed, but if they are financed through additional monetary expansion, they will likely worsen the inflation. Society can become trapped in a cycle of escalating demands, mutual recrimination, and declining confidence.

Recent inflationary disasters in Zimbabwe and Venezuela demonstrate how extreme monetary instability, combined with institutional and productive failures, contributed to shortages, capital flight, impoverishment, and mass emigration.

Citizens who believe that political authorities have permitted or engineered the destruction of their savings will likely question the legitimacy of the institutions responsible for managing the currency. Populist movements will likely harness anger by promising decisive action against bankers, political elites, foreign interests, or alleged internal enemies. Economic desperation will likely make authoritarian solutions appear attractive to populations that might otherwise reject them.

In short, the US government’s endless train of fraudulent schemes, foreign wars, lunacy and total lack of discipline have created fertile ground for inflation, and it now appears that the genie may have escaped from the lantern. This probably explains why President Trump now seems keen to put an end to the moronic US proxy war against Russia in Ukraine.

Americans who quickly became obsessed with the territorial integrity of the Donbas will—if hit hard by inflation— quickly discover that they have other priorities much closer to home.