If we are heading for a period of uncontrolled inflation, we should expect a long recession.
Inflation occurs when there is more money in circulation than what is reflected in GDP. This happens because the Federal Reserve is in control of the amount of money in the U.S. also known as fiat currency.
For most of the 19th century and as late as 1934, the U.S. based its currency on the gold standard. There are benefits to having dollars tied to a commodity, such as reducing inflation. Because there is only a finite amount of gold in the world, and only so much held by the U.S. at any one time, it limits the amount of dollars that can be printed to what gold is worth on the market and how much the U.S. holds. The problem with the gold standard is that in times of crisis, when there is a recession or depression people often need an immediate influx of cash; this is not possible with a commodity based currency. That is where fiat currency becomes beneficial. The Federal Reserve has the ability to print off dollars to help people in need. However, there was another reason to print off money.
In 1958, William Philip published a paper The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957. His conclusion was that increasing money supply would decrease unemployment, also known as the “Philip’s Curve”. It became the lens through which Presidents Kennedy, Johnson, Nixon, and Carter sought to reach full employment (at that time it was considered 4.0% unemployment).
At first it seemed to produce what William Philips predicted. For example, from February 1961 to December 1969 unemployment was 3.4%, down from 4.8% in April 1960. As predicted, inflation also rose over that time period from 1.7% in 1960 to 6.2% in 1969. Though often credit for unemployment is given to the wrong source. From 1961 to 1969, real GDP grew 51.2%, industrial production grew 74.9%, and nonfarm job growth grew 33%.
One problem with an artificial influx of money circulating is that markets respond. As more of any product is available, the less the product is of value. So as the prices of products rose, the Johnson administration infused price controls. Artificial printing of currency causes a product's price to rise, the government response is to enforce price controls on that product, thus artificially deflating the value of that product. Sometimes this can work in cases like price gouging (though there is an argument as to price gouging’s effectiveness). But price controls do not really work in a capitalist country long term (nor do they really work in any country for that matter). For example, in 2020 when there was a rush to buy toilet paper, the government put price controls into effect to prevent employers from raising prices to meet demand. They do this so that people with insufficient means can still afford toilet paper. Though, this often backfires in the cases of hoarding (so fewer people still get the product) and slowing supply chains rather than speeding them up if prices were to reach their natural cost based on supply and demand. Additionally, an artificial increase in dollars weakens the dollar globally, so paying for any foreign product that may be required for a business’s product to be created will not only cost more, but how much more is uncertain. Price controls on US products often fail to consider global markets.
Between November 1970 and July 1981 inflation reached as high as 14.8%. From 1973 to 1981, “the high cost of living” was cited as the number one problem facing the country according to Gallup.
So what happened to lower inflation? Jimmy Carter had two prominent roles to play. First he deregulated a number of industries. Before this, flying was really limited to the upper class businessmen you’d see on Mad Men, but because of the Airline Deregulation Act, airlines like Southwest were able to break into the industry and compete for less affluent flyers. Up until this time, most people believed prices could only rise. By allowing Southwest to have access to the market, the other airlines were forced to compete with Southwest's low rates. The second thing Carter did was to assign Paul Volcker to head of the Federal Reserve. Paul Volcker raised interest rates for a short time (this was thought to be the way to lower inflation). However, raising interest rates is not popular for Presidents, so Carter attempted a different program that lowered interest rates. The economy went into a short recession (January 1980 to July 1980) and inflation remained high (9.7%).
Paul Volcker remained the head of the Federal Reserve under Ronald Reagan. Both men were aligned on one goal - disinflation. Ronald Reagan’s best attribute to the cause was doing nothing. Paul Volcker did as he did under the Carter administration and raised interest rates. Raising interest rates led to a 16 month recession from July 1981 to November 1982. Unemployment reached 10.8%. But by the end inflation had dropped to 2.5%. The economy then went on its third longest expansionary period from 1982 to 1990. Then had an 8 month recession, followed by its longest expansionary period of 120 months from 1991 to 2001. The lesson learned is that controlling inflation is a key component to economic expansion.
I do not know if we are heading for a period of uncontrolled inflation. There are some warning signs; anecdotally I can’t imagine all the government spending when the economy was shut down to be a good thing for an accurate depiction of currency reflecting real GDP. At this point almost every bill passed is a bill financed by debt spending, and we are already nearly $30 trillion in the hole. Cutting or rationing programs seems like a way to balance budgets but no political figure will run on a message of meaningfully cutting entitlements - especially for seniors because they are such a large voting block (and thus the most expensive). Currently the federal interest rate is less than 1%. It seems like we will most likely continue to print money until the money machine breaks. And once the money machine breaks we head for a recession that younger generations will pay for with fewer entitlements on the back end most likely. But once the money machine is fixed, how is it fixed? Do we again have fiat based currency, do we move to crypto (I don’t know enough about crypto to say that in any sort of certainty), or maybe we hit the wondrous world of perfect A.I. and our supercomputer gods can just do it for us.
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