They called it the Great Moderation.
After Federal Reserve governor Paul Volcker broke the back of U.S. inflation in the 1980s, the U.S. and other western economies enjoyed a blissful, multi-decade period of benign consumer price trends, with modest, predictable increases averaging around 2% per year. It was a key contributor to a positive feedback loop: Trust in central banks’ independent monetary policy grew and became entrenched, and, as a result, economies and stock markets boomed.
There were some rough spots – the dot.com collapse in 2000 and the Great Financial Crisis of 2008, to name two biggies – while an ever-widening haves-versus-have-nots gap bred disillusion with the political model upon which Wall Street generated its riches. Nonetheless, the fact that inflation, with all the uncertainty and stress it brings to economic decision-making, had become a distant memory meant the ship of economic expansion was consistently put back on course.
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And now? What does the current experience with rising prices mean for the long-term global economic outlook? And what might that mean for Bitcoin? Its advocates present it as an inflation hedge, but in recent months it’s done little to earn that status as its price in dollars has swung in line with the ups and (mostly) downs of the stock market.
The way to think about these questions is to consider the impact that persistent price uncertainty has on economic and, just as important, political decision-making.