Understanding Inflation

Inflation is popularly thought of as what happens when too much money chases too few goods -and that's sort of true, but incomplete. More generally both price and currency inflation refer to change over time in the ratio of the value (V) of that subset of the goods, services, and expectations (e.g. rents) in the world economy normally priced in the currency of interest and the number of units (N) of that currency in use.

This is unquantifiable (the experts writing endlessly about public accounts and the Mn money supply are mostly just looking for their keys where the data is) because the definitions are all somewhat recursive, the needed numbers aren't known, and there are no complete and inarguable lists of components making up the two totals. Luckily, this doesn't matter much because all we really want to know is whether, when, and in which direction, the ratio of V to N changes - i.e. we get inflation when the value measured in dollars decreases relative to the number of dollars and/or the number of dollars increases relative to the value measured. So printing a trillion dollars dilutes the value per dollar and when pricing for a sizeable percentage of the world's energy resources moved from the American dollar to the Russian Ruble and Chinese Yuan, the dollar fell, the Ruble and Yuan rose, and Americans found themselves paying more for Japanese tires that were already in American warehouses.

The people who see inflation only as too many dollars chasing too few goods and services are naturally going to argue that raising the cost of money (and so causing a recession) will allow the central bank to slow or eliminate inflation by reducing the number of dollars in circulation - and while they have cause and effect reversed, their solution works because inflation results from change in the ratio between the value measured and the yardstick, not from change in the absolute value of either one.

Get the direction right, however, and it's obvious that inflation can be reduced to insignificance without causing a recession simply by increasing the value measured without commensurate increases in the number of dollars used to do the measuring.

Since this policy option is patently obvious, the question is why the recessionary approach is generally preferred - and therein hangs a tale of personal and political motivation driving support for policy justifications that are really just rationalizations: obvious, self-serving, and applicable only within the constraints of pre-determined policy options.

Generally speaking the lower ranks among those who wield political and economic power - bureaucrats, politicians, academics, think tank consultants - favor policies causing inflation because the effect of currency inflation on individuals mostly varies inversely with disposable income, theirs is relatively high, and so the process further elevates them relative to the working middle and lower classes. Thus $6.00 gas and 7% mortgage rates are catastrophic for someone making $15.00 an hour, horrific for the small business operator, tradesman, or young professional, and essentially meaningless to long term homeowners with guaranteed six figure or higher salaries - and these same people are well insulated from the recession they count on to stop inflation before it directly affects their own status.

Sometimes, of course, things get out of hand - mainly through organizational momentum and/or the foreign and monetary policies of other nations - and the rate of currency inflation escapes control. When that happens, (think Wiemar Republic, Zimbabwe, Venezuela) the effects move up the income scale as the rich seize overt political power to further elevate themselves over the middle classes, productivity (and thus value) collapses as the poor become fully dependent on government, the middle classes are reduced to the criminal classes, and the government itself becomes feudal (totalitarian).

Look at this in the current (mid 2022) American context and what you see is that the democrat approach to economic management is ultimately good for the rich, bad for the middle classes, utterly destructive to the working poor, and a significant threat to the American constitutional republic.

Meanwhile, on the other side of the political divide deplorables like me tend to try to adapt to inflation by unknowingly taking the opposite tack: often increasing national economic productivity (and so value) by holding two jobs, getting more done with less, buying fewer non dollar denominated goods and/or services (like foreign vacations or remittances), and supporting policies like these:

  1. stopping mass immigration and support payments to people who choose not to work while eliminating government subsidies and policy favoritism for economic absurdities like green energy would directly reduce government's role in the economy while creating new opportunities for Americans;
  2. identifying and removing the regulatory and executive actions doing the most damage to American productivity (energy industry permitting being the most obvious example) immediately removes key barriers to American creativity, world trade, and the creation of highly productive jobs for Americans; and,
  3. adopting sane foreign and monetary policies with deep and credible commitments to reversing the current administration's stupidities could join with massive increases in American productivity to restore American dollar dominance worldwide and so vastly expand the valuation base without printing more dollars or raising interest rates.

Bottom line? it is easy for America to beat inflation without a recession: simply re-adopt Trump administration foreign, economic, and immigration policy.



Apparently some people want to argue that world wide currency trading is based on real data. I disagree. In general currency traders, even more so than equities traders, live and work in a world of enormous uncertainty and make decisions largely on the intuitive recognition of patterns constructed between what they think they know of the real world and what they think other people in their business are thinking. 

Consider that there are fewer than 500 or so genuinely influential currency traders worldwide along with perhaps 3 to 5 thousand committed hangers on and many thousands of smaller players. Consider too that if you aggregate (plot) many seemingly random divergences from a norm you get a bell curve, so if each of the key influencers has a stopped clock moment on average about once every ten days or so, that's enough to shift the center of the bell curve far enough and fast enough that overall currency trading can look both purposeful and tied to data when, in reality, it is not.

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