Tuesday, September 9, 2014

The Tipping Point in Perception of Inflation

‘Inflation often begins imperceptibly, and gains a foothold before it is recognised. This lag in comprehension, important to central banks, is called “money illusion”, a phrase that that refers to a perception that real wealth is being created, so that Keynesian “animal spirts” are aroused. Only later is it discovered that bankers and astute investors captured the wealth, and everyday citizens are left with devalued savings, pensions, and life insurance….

‘Inflation can gain substantial momentum before the general public notices it. It was not until 1974, nine years into an inflationary cycle, that inflation became a potent political issue and a prominent public policy concern. This lag in momentum and perception is the essence of “money illusion”.

‘Once inflation perceptions shift, they are extremely difficult to reset. In the Vietnam era, it took nine years for everyday Americans to focus on inflation, and an additional eleven years to re-anchor expectations. Rolling a rock downhill is much easier than pushing it back up to the top.’

- Jim Rickards, The Death of Money