December 9, 2004


The End Of the Age Of Inflation (Robert J. Samuelson, December 2, 2004, Washington Post)

The Age of Inflation is finished. Over the past four decades, the rise and fall of double-digit inflation has been the most significant force affecting the U.S. economy. Inflation rose from a little less than 2 percent in 1960 to 13 percent in 1979 and then gradually descended to a little less than 2 percent in 2003. Going up, inflation generally harmed the economy -- causing harsh recessions, a stagnant stock market and lackluster gains in living standards. Coming down, inflation generally helped the economy -- leading to longer expansions, a stock market boom and stronger gains in living standards.

That's the Age of Inflation in a nutshell, but it's barely understood.

One reason is simply the passage of time. Americans who were 20 in 1980, when double-digit inflation was at its most destructive, were barely old enough to appreciate what was happening. Yet, those people (now 44) are older than two-thirds of the population. They have no memory of rising inflation. As for declining inflation, its benefits have occurred in a gradual and almost invisible manner. We haven't paid much attention. Our economic debates blame or credit high-profile presidential policies (Reagan's tax cuts, Clinton's budget surpluses or Bush's deficits) or focus on more dramatic upheavals: the Internet or globalization.

Inflation mattered more than any of these. [...]

Low interest rates also signal the significance of declining inflation. Rates on 10-year Treasury bonds hover around 4 percent. By way of contrast, they were 12.4 percent in 1984, 8.6 percent in 1990 and 6 percent in 2000. Interest rates on home mortgages and corporate bonds have also declined sharply. This slow-motion drop in borrowing costs has silently propelled the economy forward in the past two decades. And interest rates dropped mainly because inflation dropped.

Which is why "historically low" are in fact too high.

Posted by Orrin Judd at December 9, 2004 6:13 AM

Famous last words.

Posted by: Robert Duquette at December 9, 2004 11:59 AM

Evidently, no Girl Scouts have come by either the Judds' or the Samuelsons' place selling cookies.

Posted by: Harry Eagar at December 10, 2004 4:01 PM