A Different Inflation

Sennholz’s “A Different Inflation” is a short 1997 economic commentary on the U.S. financial boom of the mid-1990s. Its central claim is that inflation should not be identified only with rising consumer prices. A society may believe inflation is subdued while monetary and credit conditions are driving a speculative rise in stocks, real estate, and other capital assets.

To most people, inflation is a persistent and large increase in the prices of goods and services.

Sennholz accepts that this is the ordinary meaning of the word, but he argues that it is analytically misleading because it restricts attention to consumer goods and services. A second definition, favored by more causal economists, identifies inflation with excessive monetary expansion. Yet Sennholz thinks this too fails to capture the particular danger of the 1990s: inflationary pressure is appearing less as an obvious increase in the money stock than as a surge of liquidity and turnover in financial markets.

To economists who like to look straight at causes, it is an increase in the stock of currency beyond the needs of trade.

The essay’s first polemical target is therefore public discussion of inflation. Sennholz faults journalists and officials for treating stable consumer-price indexes as proof that the Federal Reserve has kept inflation under control. In his view, this ignores asset-price inflation, especially in equities and real estate. The warning is historical as well as theoretical: he compares the United States of the 1990s with the United States of the 1920s and Japan of the 1980s, both episodes in which consumer prices appeared relatively calm while speculative markets became dangerously overextended.

As long as consumers goods and service prices do not soar, the media seem to be blind to the dangers of inflation.

The argument then turns from symptoms to mechanism. Sennholz does not present the 1990s boom as a simple case of rapid monetary expansion. On the contrary, he emphasizes that conventional money aggregates do not show the sort of explosive growth that would satisfy a textbook quantity-theory explanation. This is why the essay calls the episode a “different” inflation: the inflationary fuel is not primarily a visible increase in money balances, but the intensified use of existing balances through credit channels.

The stock of money has been relatively stable.

Sennholz’s key explanatory variable is monetary velocity. Low interest rates, financial innovation, brokerage cash-management accounts, money-market funds, credit cards, finance companies, insurers, and global dollar holdings all help existing money circulate more rapidly. Nonbank institutions become especially important in his account because they can expand purchasing power and speculative leverage without creating bank money in the narrow sense. The result is a financial system “awash” in liquidity even when conventional monetary statistics look restrained.

The Fed has not significantly increased the stock of money but managed to accelerate its use.

The essay finally becomes a warning about the political economy of bubbles. Sennholz does not absolve the Federal Reserve simply because the money stock has not exploded; he holds monetary policy responsible for creating an environment in which credit expansion, velocity, and speculation flourish. Nor does he expect political actors to deflate the boom deliberately, because rising asset prices are popular while the losses from collapse can be postponed.

Sennholz’s significance lies in his separation of consumer-price stability from financial instability. Written before later debates over asset inflation, shadow banking, and global dollar liquidity, the essay argues that inflation may be present precisely where standard indicators fail to register it. Its final lesson is that a liquidity-driven boom can look like prosperity until the underlying credit structure breaks.