Inflation: The Opium of the People
Inflationary
The 2022 economy can be described many ways, however the word that most defines this period that we find ourselves in is “Inflationary.” We know what inflation is simply by how it is felt, it’s felt by us feeling like we aren’t living are lives any differently and yet there is less money in our banks at the end of the day leaving us thinking, “Where’d it go?” We just passed a $700,000,000,000 “Inflation Reduction Act” so I wanted to examine the effects of this bill on inflation as well as a general examination of inflation itself.
Starboy
First to lay the groundwork, we need to look at a few definitions and concepts that will allow us to examine inflation specifically. The first rule in economics is supply and demand, these two concepts are in constant cohesion with one another, the supply of a product determines its demand and the demand of something dictates its cost. Let’s look at an example of a commodity to better paint this picture. If there is a particular year where Apples were able to be produced in excess and there is a large supply then in relation, the demand for apples will be lower because everyone has access to them, because of this, the price for them will be lower. However, in a year where there is a crop shortage due to poor weather then there will be a shortage of apples. When there is a good in which the same number of people want the item with a lot less of it to go around then the demand for apples is high which in-turn drives the price up since after all in order for the apple industry to stay afloat and match the cost of production then Apple Co. must hit its numbers and the only way to do so is by raising the prices. Another example, let’s say that The Weeknd is performing at a small venue, one that holds 15,000 people and The Weeknd’s fee to play is $1 Million dollars. Also let’s say that The Weeknd is performing at a stadium, a venue that holds 65,000, again this same charged fee to come perform of $1 Million dollars. Since there are far fewer tickets that can be sold for the 15,000 show, the smaller venue is going to have to charge over 4x the cost of the stadium who can charge less since they are able to seat over 4x the amount of people therefor sell over 4x the amount of tickets. Since there is less seating (Less Supply) there is going to be a higher demand at the Pine Knob show which will drive the price up.
Real Capital
Second, we’re going to look at the difference between money and purchasing power or “Real Wealth.” Psychologically we think in terms of money, “If I receive a $1,000 raise, I am now worth more” which is the natural way to think however, is completely false. The way we must think of wealth is in terms of purchasing power, how far one dollar will go. Money can be printed infinitely and bags of it can be dropped off on our doorsteps, this however does not make us wealthier. Wealth and Income are not summarized by the amount of money one has, rather, by the purchasing power that it wields, $60,000 in 2019 is worth more than $65,000 in 2022. “Money” is no different than the law of supply and demand that we just discussed, money, when more has been printed, has a larger supply making it worth less however when there is less money in circulation, the paper we know as money is now suddenly worth more and the purchasing power is higher. We reside in an exchange economy where in order to acquire commodity “A” there must be an exchange of “B.” So, if “B” is money and the supply is up, everyone with their more money competing for commodity “A,” drives the demand up and therefor the price to acquire it. Inflation can most simply be described as, “Too much money chasing too few of goods.” This is exemplified by the statistic given by the Bureau of Labor Statistics that, “U.S. wages grew at the fastest pace in decades in 2021.” According to Peterson Institute for International Economics, “Since December 2020, nominal wages & salaries were up 4.5%, the fastest increase since 1983.” To continue, “Prices, however, have also risen rapidly and so inflation adjusted wages fell by 4.3%. While nominal wages have still grown faster in some sectors relative to its pre-pandemic trend, all sectors have seen below-trend real wage growth.” This shows us that an increase in wages via governmental money printing during the pandemic and the increase in the costs of commodities are not unrelated, in fact, they are directly tied to one another, again, “Too much money chasing too few good.” Goods, after all, are something that has to be produced, if we increase the money supply it does not mean that we will in proportion double the creation of goods therefor higher artificial wages means a higher supply of money demanding the same amount of goods which then drives up the prices. When you consider that over 80% of all money currently in circulation was printed between 2020-2021, you can see the direct effect this has had. A popular retort to this is “Why can’t the greedy corporations just take the hit and keep prices what they were at instead of price gouging?” What people who make this statement do not consider is the increase in the cost of production. When you’re a business producing a good, this generally requires raw materials and commodities that you have to purchase in order to supply the good, these raw materials are not exempt from the increase in cost to acquire them, therefor, in order to produce the good, the company must pay that price increase. A company cannot survive if it is losing money for the good or service that it provides, that is how companies become insolvent and people lose jobs so therefor, that increase in the cost of production is then passed onto the consumer. This cost of production also includes the added cost of artificially increased wages which is then too passed on to the consumer. If a bakery in pre-inflationary times charges $10 for a cake, it may cost the bakery $6 to acquire the flower, fruit, cream, butter, etc. to create the cake and then $2 of the $10 will go toward paying the wage of the worker leaving $2 in profit. In an inflationary cycle, this same $6 it cost to buy the ingredients needed to make the cake now costs $8 and because the bakery down the street is paying their workers $3 per cake for wages, this bakery must now do the same to keep their worker making the cost to produce the cake now $11, well in order to keep the bakery in business and for the owner to afford to feed their family that cost must be passed on to the consumer by charging $13 for the cake instead of $10. This is no more simple or complicated than what corporations and businesses are dealing with on a global scale. To quote economist Henry Hazlitt, “Any substantial increase in the quantity of money will reduce the purchasing power of each individual monetary unit,” more artificial money = Increase in commodity prices= Increase in cost of production = higher prices for consumers.
Bad Old Deal
A fallacy that we are taught and that undoubtedly persists in the minds of most is that FDR’s “New Deal” stabilized the economy and brought us out of The Great Depression. This is one of the more pervasive economic fallacies that we are taught and believe that runs counter to the reality of the situation. Two economists Harold Cole and Lee Ohanion, the vice chair at UCLA Department of Economics broke down FDR’s government run amok economic policy and determined that his policies not only did not end the depression but in fact added 7 years onto the economic period. To quote Ohanian, “FDR believed excessive competition was responsible for the repression by reducing wages and prices and by extension, reducing employment and demand for goods and services.” Roosevelt went on to implement his New Deal including “The National Recovery Act.” After three years of his policies the effects were that wages rose 25% above their market value which sounds good for workers in theory however the effects were much different. Unemployment rose in direct correlation in 11 key industries to “25% higher than it would have been given the gains in productivity.” The effect was also felt on consumer prices where they found “Prices across 19 industries averaged 23% above where they should have been given the state of the economy.” And since goods and services were that much more unattainable for consumers, demand stalled and the Gross National Product, “Floundered at 27% below where it otherwise should have been.” Ohanian once more, “High wages and high prices in an economics slump run contrary to everything we know about market forces in economic downturns. As we’ve seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, The New Deal policies short-circuited the market’s self-correcting forces.” Roosevelt instituted price-fixing which kills the incentive to produce a good or service since there is no profit to be made which then removes the good or service from the marketplace since after all, who would offer a good or a service that would bankrupt your company? Minimum wage laws and the artificial raising of wages beyond their actual value did nothing but increase unemployment and increase consumer costs for that particular good or service. Cole singles out one product, steel, that due to the effects of New Deal policies rose to being 50% higher than the cost of foreign steel which then reduces industry’s ability to create and build and naturally create jobs through demand. Job creation programs such as the WPA operated under the false illusion that by artificially lowering unemployment, it was somehow helping the general health of the economy instead of what it was, killing a private job for a public job which is not paid for by a businesses through the exchange of profit for consumer’s acquisition of a good or service but instead through taxation and money printing which further devalues the currency even further causing a rise in the cost of living for everyone. Ohanian and Cole were able to determine that the “National Industrial Recovery Act and its aftermath account for 60% of the weak recovery.” Without the institution of these policies, they were able to calculate that the depression would have ended in 1939, not 1943. “The fact that the depression dragged on for years convinced generations of economists and policy makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes. Ironically, our work shows that the recovery would have been very rapid had the government not intervened.” It was not The New Deal that got us out of the depression the way that we are told, it was instead the production as a result of World War II combined with the fact that our foreign competitors in Europe and abroad were leveled and their economies left in shambles following the war.
Antiesthetic
Economist Henry Hazlitt describes inflation as, “The opium of the people, it acts as antiesthetic that has dulled the pain of the operation.” During 2020 and 2021 the American people on average had in their bank accounts the most money they’ve ever had and wages have never been higher, this of course was an illusion that is just now starting to catch up with us. Inflation acts as a form of taxation except its one that is worse for the working and lower classes. If a 5% increase in taxation is instituted, someone making $40,000 is going to pay less in amount than someone earning $100,000 however with inflation, a 10% inflationary cycle on the cost of goods means the effects are felt much worse by the person making less money for both people of the different incomes pay the same price in dollar amount, it acts as a flat tax on goods and services. We just passed the $700,000,000,000 “Inflation Reduction Act” which not only will result in more money printing (Devaluation of the currency) but also impose an increase in taxation on the middle class. I cannot think of a dumber method for solving the cost-of-living crisis than to transfer more wealth and purchasing power away from people and handing it over to the government through more taxation and money printing. Taxation acts as an anchor on production because it reduces the self-interested motive of profit. If you remove the motive of profit then you remove the incentive to produce which in-turn means less good and services, which raises demand and therefor costs for the consumer while simultaneously raising unemployment since companies do not have the money to retain and hire labor. Since we operate in an exchange economy, fall off in production in one sector spreads rapidly until it is felt in all sectors and eventually felt through unemployment and a rise in consumer prices. To quote Senator Bernie Sanders, “I want to take a moment to say a few words about the so-called inflation reduction that we are debating this evening. And I say “So-called,” by the way, because according to the CBO, and other economic organizations that study this bill, it will, in fact, have a minimal impact on inflation.” Bernie Sanders, the senator most in favor of a planned government economy even notices and points out the fact that this bill we just passed will have little-to-no effect on reducing inflation and when you factor in the added taxation, I will argue will have a detrimental impact on the economy. The fact of the matter is that once run-away inflation has set in, there is no way to wrangle it back in with the “Soft landing” that is being claimed we’re in the process of. There has been no, if any, signs that inflation has been brought under the control and certainly excessive government spending will not assist in this process to do so. One thing that the government and their economists are failing to tell us as they boast about the unemployment rate is that soon enough the unemployment trend will invert and we will begin seeing an increase in unemployment, this is a necessary and inevitable pain that must take place in order to reduce inflation. When unemployment is high, both salaries and more importantly, prices fall due to a decrease in demand which is what is needed to see an actual reduction in inflation. Nothing other than a reduction in the money supply will effectively combat inflation. With costs as high as they are, the data indicates that savings are way down, credit card balances are up, defaults on credit debts are increasing, all of this indicates that people have less money. When people have less money, we conserve and spend less, this means less money being spent on goods and services which will directly effect the businesses that provide these goods and services and through that, the ability to maintain employment and bring in new hires. Do not be fooled by the politicians and their media lackey’s, discussing these policies as if it is divine help handed down from on high, as if everything the government provides and offers is not paid for directly from you and I. It is not through government intervention and spending, but rather the self-correcting forces of the free-market that will get us through this inflationary cycle even if there are more economic hardships still on the horizon. Understand that with every government intervention and every dollar we pass through legislation, it will only exacerbate this problem and its effects are not felt by those pushing the legislation or the wealthy but instead it is felt by us, in everything and in every way.