Inflation vs. Recession: Eight Readers Choose

1. Recessions fix supply/demand imbalances that create inflation.

2. Recessions let the air out of unsustainable asset bubbles, allowing investors the chance to purchase assets at fair values or even exceptional bargains in some cases.

3. Inflation is functionally a tax on everyone, including those on fixed incomes or those who get smaller raises than what is necessary to keep up with rising prices.

4.  Recessions (though their association with Fed rate hikes) give savers the rare opportunity to invest in safer securities like Treasuries at far more attractive interest rates, which might even keep up with inflation once the recession at least takes the edge off rising process.

5.  Recessions increase unemployment temporarily, but even if unemployment doubles, that’s perhaps an additional 5 million Americans out of work collecting benefits for a while, whereas inflation raises prices for every American family until it’s subdued.

6. Remember that the inflation of the 1970s destroyed more spending power than the Great Depression despite a more modest drop in equity values. The reason is the incredible loss in value of the U.S. dollar, which masked the devastation to investors during that period.

7. Recessions tend to be relatively short/sharp downturns in growth, whereas if inflation expectations are allowed to become well entrenched, they can lead to inflation spirals. Once the inflation genie is released from the bottle, it’s not easy to get it back in. In fact, the typical cure for inflation is a recession (soft landings are mostly fairy tales the Fed tells to worried investors to prevent panic or to avoid leveling with the public for political reasons).  

8. Fiscal policy can help mitigate the pain of a recession (fiscal help being economically stimulative), but fiscal policy intended to alleviate inflation’s impacts on consumers only makes inflation even worse.  

The Fed’s QE infinity and ZIRP [zero interest-rate] eternity policies plus congressional pandemic largesse contributed substantially to the rampant inflation, not just the exogenous supply shocks.  

The coming recession is merely the hangover consequence of the fixing of the policy error of failing to raise rates and reducing the Fed balance sheet at least 18 months ago. Therefore the question of which is “better” is like asking if it’s better to drink way, way too much, to the point of blacking out, or better to wake up with the worst hangover one has ever had. You chose to get blackout drunk, and the hangover is a natural consequence. Even if more drinking the next day might put off the hangover for a few more hours, a “hair of the dog” strategy is still a terrible idea and only serves to compound the original error in judgment. Accept the recession while trying to mitigate its impacts, and endeavor to stop blowing asset bubbles with artificially stimulative monetary policy.