The Dangers Riding Along With Mild (Secular) Inflation
The US Dollar is the world reserve currency in a globalized hyperconnected economy. The world depends on its stability, and the fact that most goods and services exchanged internationally are priced in USD helps maintain that stability in a sort of feedback loop. Other currencies are much more sensitive to changes in the money supply.
But even if we never get to hyperinflation, and we see only mild (secular) inflation of the USD, we could get into trouble. I think a lot of people worry about hyperinflation and miss this more subtle systemic risk.
Global commerce and the competitiveness of international markets that brings us the benefits of globalization - namely low prices - really hinges on producers and suppliers having high confidence in their price inputs over time. As soon as you get to a point where that confidence starts to fray, every node on the supply chain has to adjust their pricing to reflect the increased risk.
It's common for goods and services providers to increase prices 2-3% each year to 'keep up with inflation', and most businesses currently see this as a predictable change that they can form long-term plans around. The change is slow enough that many businesses will just absorb the loss in revenue in purchasing power terms, as often operational efficiency gains from technology or other optimizations will offset the loss.
Once we get bigger changes in the prices of key inputs to supply chains, like commodities and labor, businesses no longer have the confidence in their costs to offer competitive pricing. In a hypothetical simple local economy, when the cost of a raw material rises, say copper, the prices of goods like copper wire and pipe rise accordingly. In a hyperconnected global economy, volatility in raw material costs can cascade through the system as everyone is seeing their costs fluctuate and needs to account for the risk of a sudden rise. If I agree to sell you a building made of steel, and the price of steel goes up and down 20% over 2 months, I need to charge you an extra 20% even if the price just came down in order to account for the risk of it going up again.
It's this uncertainty around pricing that could cause inflation to sort of spiral out of control. So, a stable USD is really important and not something we should play risky games with. Although, an unstable USD would really accelerate the de-globalization of the world theorized by Zeihan.
It's no surprise that the covid-induced chaos of 2020 has jolted markets around the world, and short-term inflation is completely predictable as suppliers need time to address changes in demand and restore their production capacity. High prices are a signal to producers that there is profit to be made, and the market naturally responds by overbuilding supply, which eventually causes prices to drop. This should happen with lumber and other commodities where we are seeing the impact of covid-related supply shocks.
Government spending itself will not directly cause inflation. UBI-like direct payments to citizens are inflationary, as you're creating more consumer demand with no change to supply while dis-incentivizing low-wage work. But things like infrastructure spending should be more neutral over the long term, provided the spending results in economically useful results.
The bigger risk of high spending is that it means more debt, which means raising interest rates (normally used to control inflation) becomes less of an option.
If inflation does start to happen in a big way, it will probably be triggered by an oil supply crunch. The delusional fantasies of a post-oil global economy as a "solution to climate change" are starting to have real impacts on capital allocation and gesturing governments toward economic central planning. Oil and gas are still the lifeblood of modern economies -- if it stops flowing, most movement of goods stops (food won't get into cities), most iron and copper stops getting produced, and things will generally break down. But even a small disruption in supply (or, say, a carbon tax at a level to meaningfully impact oil demand) will impact these essential activities and cause the cost of everything to rise. Combine this risk with a government that is ready to send cash directly to citizens whenever a "crisis" arises, and we will have demand greatly exceeding supply across the board.