In phase one of inflation, people postpone spending while they wait for prices to return to “normal.” This predicts that expansionary fiscal and monetary policy will disappoint and mislead policy makers that they have to do more than they first thought to achieve a boost in aggregate demand.

Second is the acceleration phase, when “sales” say something like: “Buy today because the price is going up 15% on Monday.” And it did (see the late 1970s). Accordingly, people accelerate their purchases because they come to believe prices will always be higher in the future.

Third, there is a “flight into goods” when people buy anything rather than hold money. Circulation velocity rises until the currency becomes worthless.

America is in phase one, as economists try to understand why people aren’t spending more. When we hit phase two, it will be clear, but it will be too late to fix. The way to stop the government from debauching the currency is to stop the government from debauching the currency.

Robert L. Formaini

Independent Institute

Oakland, Calif.