This in turn has often been the result of wars and the same is true in British history specifically. Having stuck to it uninterruptedly during the preceding decades Britain came off the gold standard during the Napoleonic wars and again at the onset of the First World War. Matching large rises in government spending and debt the general level of prices also went up (these things were all far more extreme in WWI). That inflation didn’t get wholly out of control may have reflected confidence in a return to gold after those wars had ended. That confidence would also have tempered the rise in bond yields. Conversely, the rapid inflation of the 1970s and early 1980s occurred when public-sector debt was much lower than during those two episodes but when there was no stable anchor for monetary policy. That inflation was followed by a material rise in the real cost of newly issued debt, at least on an ex post basis. This suggests that the presence of, and credibility in, a fixed nominal target for monetary policy are more important than the government’s fiscal position alone, not only for the behaviour of inflation but for longer-term bond yields as well. The pandemic differs from these episodes in important ways. Unlike the wars there has been no material rise in government spending on goods and services. Aggregate demand has fallen and spare capacity is rising. All else equal this will depress inflation.
Not only does this raise serious concerns on the risk to systemic stability, it also undermines the integrity and efficiency of the markets. By virtue of their sheer size and aggressive trading strategies, the highly leveraged institutions, through their agencies, who usually also provide them with the credit, and possibly also ride along with them, often use their market power to influence the prices in smaller markets. Almost always an attack on a currency in Asia starts late on a Friday afternoon when the domestic markets in Asia are thin and when the international currency markets in London and New York open for business. Almost always a succession of big sell orders is placed for execution in a short period of time. And almost always the banks, when asked, say that they are executing those orders on behalf of their customers, whose identity and purpose cannot be disclosed because client secrecy is sacrosanct. And all this is supported with an immaculately timed commentary of gloom and doom. Some are more objective than others, but regrettably the impression one gets, particularly as a regulator, is that they are aimed at generating undue pessimism and panic, and consequent sharp and widespread movements across the currency and other related financial markets in favour of those behind the attacks. Most of the activities of the highly leveraged institutions are carried out through the OTC markets, which are very opaque.