Inflation is not what you think it is. In this essay, I will make my case that people’s concerns about inflation are not really about inflation. Rather, they are about other issues. These are income inequality and, more importantly, unearned wealth.
In discussions about the economy and it’s ills, much has been said about inflation and printing money. The claim has been made that the government causes inflation by injecting currency into the economy and causing the value of the dollar to drop as a result. I would like to present a simple thought experiment to show the truth that this type of thinking is hiding.
All Inflation is Not Created Equal
Consider this: you wish to buy a book that costs $10. You have exactly $10 to spend. Now suppose the price of the book rises to $20. In addition, your $10 in cash increases to $20. Who cares? This is inflation, nonetheless. Inflation simply means that things start to cost more. This means that prices go up all around, so why wouldn’t your wages go up? That being the case, why should you or I or anyone else care?
Clearly, the above scenario represents a problem for accountants and . . . no one else. It should be apparent that inflation, in itself, is not a very big deal. What if, however, the scenario played out differently?
Consider that the book’s price increased to $20 but the amount of money in your pocket only increases to $15. Now we have a problem. This, as you might imagine, is the type of inflation we have been programmed to worry about. When we hear about inflation we implicitly assume that our wages will not increase in proportion to prices.
Imagine, on the other side, that the price only rises to $15, but your cash increases to $20. This is clearly a benefit to you, but perhaps a problem for the bookseller who may be required to pay higher wages to his workers. Your wages went up, after all, so why wouldn’t theirs assuming they are benefiting from the same phenomenon that you are?
So, what could cause this scenario in one direction or another?
You must understand that the value of currency is determined by two factors. Firstly, the supply of that currency. Secondly, the supply of goods and services that the currency can purchase. To cause inflation, one of two things must happen. Either you increase the supply of the currency or you decrease the supply of goods and services that the currency can purchase. $10 million isn’t worth the paper it is printed on if no one is selling.
A few scenarios that could cause inflation in one direction or another.
A. A shortage of raw materials occurs. Oil becomes scarce. Transportation becomes expensive. The cost to deliver books increases. The bookseller is forced, as a result, to raise his prices. The effects, however, on your paycheck are less profound. They depend entirely on how desperate you become to ask for a raise. Everyone loses here.
B. The government begins spending big in a particular industry. Those who work in that industry benefit by a large increase in pay. Some of those people start visiting the quaint bookstores in your town and start bidding top dollar for the items available. Prices go up to benefit from the new clientele. Sad day for you.
C. A “stimulus” program is put into effect. Every man, woman and child gets a check in the mail. Businesses charge more because everyone is richer. People don’t mind because they can afford it. Initially, it is the lower-end clientele that benefit because the stimulus is highest relative to their net-worth. Later, the prices catch up and it all ends more or less the same.
Relative Power in Inflation
In scenarios B and C, above, it is apparent that inflation treats everyone differently. Those who turn out best are those who get to the money first. Those who are hurt are those who are left out. If the injection of currency is temporary, then they end up the same in the end. If, however, currency is injected in an ongoing basis then inflation is constantly happening and those who are distant from the injection are at a continuous disadvantage.
With the exception of scenario A, inflation in each case is relative. If the supply decreases, everyone is hurt. If, however, demand increases, your relative position means all the difference. There is no way around it. This is a question of relative power.
So, now we understand why people worry about inflation. At the end of the day, more money doesn’t mean anything, good or bad, if it is evenly distributed. The process of inflation, however, involves a shift in power. The people closest to the injection of currency have a competitive advantage over those who are distant from it.
To give the poor money would be to give the poor an advantage. To give the rich money would be to give the rich an advantage. Currency is nothing other than a measure of relative power. Currency is not a resource. Currency is a position relative to everyone who has more or less currency than you.
When the Government Causes Inflation, This is What it Really Means
Inflation in itself is meaningless. What matters is the process that causes inflation. The process has meaning because it entails giving one party a competitive advantage over other parties for a period of time.
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Government programs that artificially inject money into the economy ought to be judged with this in mind. “Quantitative Easing” and “Economic Stimulus” are very different programs. Some years ago, I received about $400 in the mail, courtesy of Uncle Sam. This was done in the name of “economic stimulus”. What was really happening was that individual citizens were given a competitive advantage over institutions. “Quantitative Easing” accomplishes the opposite. It gives particular institutions greater relative power to other institutions and people.
When the banks were bailed out, what we were really doing was giving power to the powerful. Why? Because the powerful kept the books on everyone’s positions. Having “money in the banks” was the measure of your position. If the banks went under, we would have to sort out everyone’s position all over again. That would have meant nothing less than a regime change. Production would have fallen because no one would have been in charge, i.e. no one would have the power (currency) to tell another person to get on with producing.
The Problem with Inflation
So, no one is really worried about inflation, per se. What they are really worried about is a shift in power. As such, things ought to be judged in this light.
Right now, inflation is driven primarily by the ability of banks and governments to spend and lend more money than they actually have. Fractional reserves and quantitative easing are examples of this. As a result, those with the greatest power at the moment are those closest to the injection point. These people are those who work in finance, the government and those who service these industries. As long as the injection continues, these people will hold the power.
Inflation is Income Inequality
The consistent theme in the majority of these scenarios are income inequality. That is the real problem with inflation. The amount of currency you hold only derives its meaning in terms of the amounts held by others. The people closest to the injection point of currency are driving down your wealth relative to theirs. When you are worried about inflation, this is what you are really worried about.
Considering this is what people are really worried about, why not direct your ire towards income inequality as a whole? Those who benefit from inflationary policies are not substantially different from those who make their living in other ways. In both cases, the beneficiaries are making everyone else poor by benefiting themselves.
But, that isn’t the full story.
Inflation is Unearned Wealth
It must be understood, of course, that an increase in production also means that your currency becomes worth more. So, that is the counter-balance to this whole thing. If an inflationary policy increases production to a justifiable degree, there should be no problem. If, however, it fails to do this we have a problem. Similarly, if a private individual increases production to a degree that justifies their wealth, we have little problem. If they fail to do this, they are, in effect, making other people poorer and harming society as a result.
So, the real problem is people who make money without adding genuine value. The problem is unearned wealth.
The problem is not inflation. The problem is not even income inequality. The problem is unearned wealth. The problem is easy money.
So, who are the enemies? Here is a short list:
-Advertisers: Much of the economy revolves around advertising. This is understandable to the extant that advertising is necessary to let the public know about the product. However, most advertising goes well beyond this and serves primarily to increase the perceived value of a product relative to its real value.
-Welfare Recipients: All sympathy is due to those who require assistance to get by. I would tend to give these people the benefit of a doubt. If, however, you receive assistance, without reasonable restraints, have jobs (even at burger joints) available, and you don’t at least have an application pending, you should be ashamed of yourself. Period. Community goes both ways.
-Government Contractors: Many governments have complex rules that determine how government agencies can purchase services. These rules mean that those applying to perform these services are judged more according to their ability to check boxes than according to the quality of service they apply. As an example, there are regulations in place that require the purchase of products made from prison labour. This means that, in some cases, the only time a prison industry would not get the job would be if the industry did not provide the service.
-Finance: This one has been beaten to death. These people benefit by making the rules, not by providing value.
-Inheritance: Here is the crown jewel. Symbolic of all unearned wealth is inheritance.
This list can easily be expanded. Central to everything is unearned wealth. Take care of this, and other economic problems evaporate. It’s that simple. Get everyone producing and everyone receiving in accordance with how much they produce, and little things like inflation will become wholly irrelevant.
Jason Calhoughney writing for the Apollo Institute of Reason AIR Review©