With apologies to our many friends and posters outside the United States... it's time for another one of these! Culture war thread rules apply, and you are permitted to openly advocate for or against an issue or candidate on the ballot (if you clearly identify which ballot, and can do so without knocking down any strawmen along the way). "Small-scale" questions and answers are also permitted if you refrain from shitposting or being otherwise insulting to others here. Please keep the spirit of the law--this is a discussion forum!--carefully in mind.
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Notes -
It’s not limited to America, but the sharp erosion of purchasing power is a direct consequence of inflationary fiscal policy (#1). Other factors mattered, but this was central.
Inflation is caused by a mismatch between aggregate supply and demand. If demand ($ in the hands of consumers/firms/governments they want to spend) outstrips supply of the goods and services available to buy, those goods and services get rationed and allocated by raising the price. At the start of the COVID reopening, demand outstripped supply for a small subset of products which was interpreted as “transitory inflation”. In other words, supply chains are a mess and consumer preferences are rapidly shifting causing relative prices to move. The only way all prices move up together is either total economic output is falling or demand is rising too fast.
Of course, during COVID supply was severely impaired but so was spending so inflation didn’t increase. People who kept their jobs began saving aggressively and COVID relief was paid for with debt instead of with tax increases. When the economy reopened all that money hit the economy all at once and inflation took off.
So maybe that was unavoidable given our pandemic policies, though I am less sure about whether lockdowns were worth it or whether we should have borrowed for relief. If society really “wanted” lockdowns we should have jacked up taxes to pay for them and forestall massive savings accumulation.
But then the initial burst of inflation didn’t end. It kept going for years and would have been worse if the Fed hadn’t raised interest rates hugely. Retirement of baby boomers and business failure meant some loss of supply, but demand was continuously boosted by big spending bills. In Canada half of the giant pandemic era spending bills weren’t even pandemic related and persist today.
The easiest way to see this is by looking at the trend change in Nominal GDP. That’s a measure of raw spending in the economy. All that extra money came from somewhere.
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