All that is solid melts into inflation

The upshot is that central banks are not as independent as they purport to be. In both the UK and the US, governments and central banks have been responding to the political pressures created by apparently intractable societal divisions. Such extreme polarization raises questions about whether the political union can continue. Hence, the 1970s-era debate about the UK’s ungovernability is reappearing, with both Scotland and Northern Ireland eying paths out so that they can rejoin the European Union. Even more ominously, a slew of recent books prophesy a civil war in the US.

Of course, Europe, too, faces threats of disintegration. The European Central Bank has been even slower than the Fed or the BOE to raise interest rates. This is partly because the character of the inflation is different, and because Russia’s war in Ukraine has driven up energy costs. European labor markets also have somewhat more slack (though some European economies are suffering the same dramatic shortages of skilled labor seen in the US and the UK)…

History is replete with examples of high inflation driving systemic breakdowns. By trying to bind societies together with money, central banks have repeatedly sown the seeds of broader political and social dissolution. In federal states, such as Germany in the early 1920s or the Soviet Union and Yugoslavia in the late 1980s, inflation fueled a centrifugal dynamic and separatism. The public harbored a gnawing suspicion that the center (Berlin, Moscow, Belgrade) exercised unfair political control over the distributive levers. For the federated republics, secession and monetary autonomy became ever more attractive.

By breeding uncertainty, inflation can easily destroy large, complex political entities. We know that Russian President Vladimir Putin believes the breakup of the Soviet Union was the greatest political catastrophe of the twentieth century. He may also believe that energy- and food-price inflation – and government efforts to buffer the impact with even greater subsidization – will destroy the British, American, and European unions.