The Great Inflation and Its Aftermath: The Past and Future of American Affluence

Samuelson has written a very straightforward historical account of how destructive inflation is to an economy, the tremendous boost an economy gets from low inflation, how America got itself into a nasty inflation mess in the 60's and 70's and how we ultimately got out of it.This book is very timely because currently the government is sowing the seeds of rampant inflation through massive amounts of fiscal and monetary stimulus. The amount of money that is being flooded into the system is unprecedented in our history.There is immense political pressure on the President of the United States to prevent recessions, and keep unemployment low. As Clinton advisor James Carville said in 1992: "It's the economy stupid." Once the United States went off the gold standard, it became very easy to cheat by artificially keeping unemployment low by lowering interest rates and increasing the money supply. The result was lower unemployment with the side effect of persistent, high inflation.The only way to combat inflation is to take harsh steps, causing deep economic pain to the country. Not until Ronald Reagan came along with Paul Volcker as Fed Chairman was anyone able to confront the inflation problem directly. The short term result was 12% unemployment and interest rates as high as 18%.It took an incredible amount of political courage to take the drastic steps they took. The result over the next 25 years was an unprecedented economic boom primarily caused by stable prices.The question I have for President Obama is whether he will have the guts to put the country through the same short term pain to rein in the inevitable inflation that will result from the current policy of massive money injections into the economy? It is one thing to propose a one trillion dollar stimulus using borrowed money, but quite another to propose throwing people out of work in order to recover from the effects of that stimulus.Here are few quotes from the book that illustrate these points:- Nixon said early in his presidency: "We can't allow a recession. We'll never get in office again." Presidents knew their political fortunes rested on the economy and were willing to run inflationary risks to preserve low unemployment. Low employment was the be-all and the end-all of economic policy; inflation was an inconvenient nuisance.- In 1968, economist Milton Friedman explained that, if government tried to hold unemployment below some "natural rate", the result would simply be accelerating inflation. Americans came to believe that inflation, as much as they hated it, was a semi permanent way of life. Government wouldn't suppress it, because doing so would involve large, politically unacceptable social costs - higher unemployment, lower incomes and profits.- Volcker took a sledgehammer to inflationary expectations. Volcker raised interest rates, tightened credit and triggered the most punishing economic slump since the 1930s. Volcker's approach was not subtle. The Federal Reserve bludgeoned the economy until inflation subsided. It is doubtful that aside from Reagan, any other potential president would have let the Fed proceed unchallenged. Reagan's indestructible optimism, especially for the country's future, was liberating. He believed that correct decisions would turn out well. He was also convinced that reducing inflation required some high unemployment.- The Volcker-Reagan campaign discredited many of the ideas that had misgoverned national economic policy for nearly two decades. The notion that the Federal Reserve couldn't control inflation was discredited.- The achievement of Reagan and Volcker was profound - and it was as much about politics as economics. One of the dilemmas of a democratic society is how to take actions that though immediately painful and unpopular, seem essential to the society's long-term well-being. Coping with double-digit inflation posed precisely this problem. Any realistic program was bound to hurt millions of Americans, almost all innocent victims.- "Central Bankers over the past several decades have absorbed an important principle," wrote Alan Greenspan. "Price stability is the path to maximum sustainable economic growth."This book is a fascinating look into a part of US history that does not get much attention. It is highly recommended.

This is a good book end complementing The Forgotten Man in a sense that they both give a feel for politics in general (non-partisan, although some readers may put a partisan spin on them) and those influences on economics. Politics and economics go together and are not set apart in their own vacuums.The Great Inflation explains, in layman terms, a perspective as to what happened with inflation since the 50's and those impacts on our economy. The main theme is that we should be careful assuming anyone knows what is actually happening in the present and that only looking back at history can we begin to parse out what happened and begin to theorize as to cause and effect. Actions we take have unintended consequences and the economic and political world we know today is much different than what it was. There is good, and bad, in this.America was fortunate in the past in that global demand for our economic output enabled us to pay off the past massive public spending (e.g., Depression and World War II). We were a creditor nation then. Assuming that the future global markets will do the same appears to be a stretched theory when we are now a debtor nation illustrated by our frequent visits to China asking that they continue to purchase our nation's debt ... debt which we will increasingly need to rely upon if the U.S. is not able to fix the huge entitlement program growth.The economy needs to continue to grow to bring in the revenue to sustain the increasing need for entitlement expenditures. One wrong move and we stunt the economic growth, thus hurting the revenue side of the equation, which is disconnected from the growing entitlement expenditure side of the equation - what he describes as "Affluent Deprivation." A brief review of history as described in Samuelson's work helps keep this in mind.Other great "big picture" works: The Forgotten Man: A New History of the Great Depression  by Amity Shlaes  Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics  by Eric D. Beinhocker The Ascent of Money: A Financial History of the World  by Niall FergusonFor a read about perhaps why crisis may be okay after all ... Pop! Why Bubbles Are Great For The Economy  by Daniel Gross Wealth Odyssey: The Essential Road Map For Your Financial Journey Where Is It You Are Really Trying To Go With Money?

This is a highly informative book about the so-called Great inflation of the 1970s. It is well written, relatively succinct, and non-technical. I wish the publishers could have made a Kindle edition available.The author makes clear that one of the prime causes of the Great Inflation was bad economic theory and bad policy-making. This turns out to have been true - by common consent - of the Great Depression as well, but, curiously, not really of the more recent Great Recession, at least as yet.And you've got to love the timing of this book - published just before the 2007 Global Financial Crisis became the 2008 Great Recession.