The proponents of Keynesianism believe there is a tradeoff between inflation and unemployment.  If the economy is hot and prices are rising faster than they like, then they might have to sacrifice a little employment to cool things off.  On the other hand, if prices are depressed and unemployment is high, then they advocate for a policy of more government spending and more monetary inflation.

The 1970s basically proved Keynesianism as wrong, but that doesn’t stop them from still advocating it.  During the 1970s, there were periods of high unemployment, high interest rates, high consumer price inflation, and even recession at the same time.

Of course, the reason that Keynesians advocate Keynesianism isn’t because they have read John Maynard Keynes from generations ago.  It isn’t because they have any principles guiding them in economics or otherwise.  Keynesian economics is used as an excuse to justify the policies they want of more government spending, central bank inflation, and economic centralization.

I have said for a long time that if Keynes had never existed, then the statists would have found somebody else to latch on to in order to justify their reckless policies.  The statists can always find some shill for the government that can pose as an expert.

Aside from price inflation and unemployment, most Keynesians will also say there is a tradeoff between recession and price inflation.  After all, recessionary conditions are typically linked with higher unemployment.

To a certain extent, there can be a tradeoff between recession and inflationary policies in the short run.  Inflationary policies can cover up weak economic growth for a while.  The problem is that it is the inflationary policies that ultimately cause the recession.

Easy money and artificially low interest rates lead to a misallocation of resources.  There is typically bubble activity in certain sectors.  When the misallocations are ultimately revealed, there is a bust.  This is the recession.  Then the Fed (or any other central bank) tries to cover it up with more monetary inflation, and the whole cycle starts over again.

In the United States, the early 1980s was probably the last time that malinvestments were allowed to clear.  The Fed let rates rise and stopped inflating, despite a recession (or some would say recessions).  While the Fed did eventually start inflating again, much of the growth of the 1980s was actually real prosperity and not just artificial prosperity created by money creation.

While there can be a tradeoff between recession and inflation in the short run, the tradeoff eventually runs out of room. This is what happened in the 1970s.  Despite a weak economy, the Fed still had to slam on the monetary brakes in order to save the dollar.  If the Fed had just kept on increasing its pace of monetary inflation, there would have eventually been runaway inflation or hyperinflation.

In other words, the Fed can’t maintain its current policies forever without something major happening.  Either we will eventually get higher consumer price inflation or we will get a recession.  Of course, it is also possible to get both eventually.

If the Fed had kept a stable money policy after the fall of 2008, then we would not face such a choice.  But with the Fed approximately quintupling its monetary base from 2008 to 2014, there have to be malinvestments.

We have not seen significant consumer price inflation.  It has stayed around 2% per year, or even a little less at times.  But we can’t say the same for asset price inflation.  Housing is booming in many areas, and U.S. stock markets are hitting all-time nominal highs.  This is actually similar to the late 1920s, just prior to the start of the Great Depression.  Economists largely missed the mark on that one because consumer prices were tame.  But asset prices were in a bubble.

If I had to pick between higher price inflation or recession at this point, I am definitely more on the recession side.  The Fed has had a tight monetary policy since QE3 ended in October 2014.  Unless banks start lending out a lot more money, which isn’t likely given that the Fed is paying higher interest rates on reserves, then we are more likely to see price inflation slow down if anything.  The previous misallocations will be exposed.

If we are going to get significantly higher price inflation, I think it will come after the next major recession.  The Fed will start digitally printing money again, and then we may see prices (aside from just asset prices) take off.  There is no guarantee, but I see this scenario as being the most likely.

Stocks may be able to run higher still, but it isn’t going to go on forever.  In all likelihood, there is going to be some kind of a recession before the next presidential election in 3 years.  It could come quite a bit sooner than that.

The Fed has been enjoying the last several years, as it doesn’t get much blame.  The economy is humming along, even if slowly.  Meanwhile, consumer price inflation, at least as reported by the government, is relatively tame.

The Fed has to do a balancing act between inflation and recession.  The problem is, it is running out of tightrope.  The rope eventually runs out and we inevitably get one or the other.  Or in the case of the 1970s, we can even get both at the same time.