If you were born in, say, 1930, what was your best way to get rich before you turned 50?
Answer: borrow as much money as you possibly could, then borrow some more, and use the money to buy hard assets with maximum leverage. It almost didn’t matter what the asset was — real estate, pork bellies, Old Masters, oil and gas contracts, antique postage stamps.
This was the road to wealth if you started in 1969. It worked almost as well if you started in 1972. Or 1975. Or 1978.
And yet despite abundant examples of the success to be gained by following this advice, the record shows: most people did not seize the opportunity. They did not seize it because they did not believe it. They had endured the Great Depression as children. The urgency of saving, the dread of debt, had been seared into their very souls. Even when the world capsized every childhood lesson, they could not adjust. They continued to act upon the wisdom of the past long after the wisdom had been rendered obsolete.
Something like this dead hand of inherited wisdom lies upon those of us who were young in the 1970s. We grew up haunted by inflation. I wrote a whole book about it. I still remember the five cent bag of potato chips dwindling away, to be replaced by the 10 cent bag, the 15 cent bag until … until there is no longer even a cent symbol on my computer keyboard!
When we see the Federal Reserve creating massive quantities of new money, we have to believe that the money creation portends a price surge just as surely as it did in 1977. M . V = P. Q was our QED. We may see the “Velocity” in that equation drop away in a massive deleveraging. But we cannot believe it is happening even when we see it.
And yet it is happening. The Fed keeps creating money, and yet no inflation appears. The lessons we need to learn are those our grandparents knew. Money does not create inflation if every new dollar is used to extinguish debt rather than buy goods and services.
Those straining their eyes as they scan the horizon for signs of non-existent inflation should consider the economic applications of the wisdom of C.S. Lewis:
We direct the fashionable outcry of each generation against those vices of which it is least in danger and fix its approval on the virtue nearest to that vice which we are trying to make endemic. The game is to have them running about with fire extinguishers whenever there is a flood, and all crowding to that side of the boat which is already nearly gunwale under