There’s a lot of talk about inflation and its causes. Is it corporate greed? Supply chain issues? One clear base cause of inflation less talked about is having an inflationary currency supply. Any other inflation caused by supply chain issues, corporate greed, lack of market competition, etc is just added on top of that. Fiat inflationary currency is a rather new invention in terms of the human timeline. In the US, Nixon is the start of it. Central banks aim for 2-3% inflation in “good years”. The money supply expands, the portion of that supply a single dollar represents, and therefore its value, decreases. This isn’t a conspiracy, it’s government policy, and both parties gleefully support it because it benefits their rich donors.
Think of it: in the last 50 years, everything has gotten cheaper to produce thanks to increasing mechanization, outsourcing to cheap labor/low regulation countries, and extremely efficient supply chains. Yet so many things “cost more” than they did 50 years ago. Even basics like bread. What used to be 5c in the US in the 50s now costs $5.00. How is that the case? Shouldn’t it cost less? Where is that “extra efficiency” going if not to lower prices? The answer: bread is the same value it’s always been, the money has gotten less valuable. This is how they keep working class people running on a treadmill, never able to achieve economic mobility.
Inflationary currency devalues the currency you worked hard to earn by increasing the supply. It hits the middle class the worst because they have more of their net wealth in cash, often in the form of emergency funds, savings, and putting together enough money for a down payment on a home. Rich people have their money in assets which aren’t harmed by currency inflation. Actually, even worse, it inflates the value of those assets! If the dollar loses value (all other things being equal), it takes more dollar to buy a share in Amazon, just like it takes more dollars to buy a loaf of bread. Poor people live hand to mouth, so their net wealth is not impacted much, but inflationary currency prevents them from saving and “moving up”. If you want to identify the causes of increasing wealth disparity, the inability of people to save money and theft of value from the middle class via money supply expansion is a major one.
Rich people are affected by inflation. If your return on investment is 4%, but inflation rose 8%, you lost money.
The detachment of productivity gains from average wages is a much stronger argument. They more or less matched up through the 70s, but then a stark difference settled in as the extra money made from things went to the investor class rather than the working class.
Really rich people are not affected as much by inflation as they take out loans to pay for their day-to-day life which is then paid back in the currency that is inflating, while it’s paid with the interest they earn with company shares. Those shares are not directly hit by inflation like the loan is.
This lifestyle/procedure makes it easier to maintain your wealth compared to a regular person.
See in your example you say company value rose by 4% and inflation by 8% so they loose money, but that also means the company performed worse than before. Think of it like gold, when I have 1 ounce of gold and the dollar value sinks due to inflation, the value of my gold did not change, it’s still one ounce of gold and if the gold price is not sinking for some reason, the cost/buying price of gold will most likely rise 8%, because the currency is worth 8% less but the value of gold staid the same.
Loans change their rates according to inflation. That doesn’t work that way.
No, you can take out huge loans over a year with putting stocks as collateral so its a low risk deal for the bank and have fixed interest rates if you pay back in the same year. If you are really rich you have access to “tools” which make participating in the financial market systematically easier.
A bank isn’t giving away loans for less than inflation. Especially not in a year’s time. They’re looking at the fed rate (itself set according to inflation), adding one or two percent, and taking that. Yes, even for low risk loans with full collateral. Higher risk loans set it at fed rate plus 5 and go up from there.
The loudest anti-inflation voices over the past 40 years haven’t come from the left. They’re right-libertarians railing about “Audit the Fed”. You should ask yourself why those temporarily embarrassed billionaires don’t like inflation. It’s definitely not because they have a sudden care about the working class on this issue.
If I take out a $10,000 loan, which for simplicity’s sake let’s say is worth 10,000 loaves of bread, and next year, when payment is due, $10,000 is “worth half as much” ie I can only buy 5,000 loaves of bread with it, I only have to pay back “half the loan”. I still pay the same $10k, but at the time I paid it back, I only had to trade half as much bread (my storage asset of choice) for it.
If inflation doubled in a single year like that, and the bank didn’t set their interest rate to at least double, then the bank lost money. Banks aren’t in the habit of losing money.
It’s not about making profit with your loan, it’s about not liquidating your hard assets which are not hit by inflation.
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If I bought one unit of Apple stock, if the USD loses value, it doesn’t effect the value of my apple stock. It now takes more dollars to buy an Apple share, but my Apple share is still 1/100 of Apple. Currency devaluing makes it look like I’m making money because the share price rose, but I’m not. To be fair, I’m making money but the total value has not changed. I can trade that Apple share for more dollars now, but I probably can’t trade it for more bread or other “assets”.
If the currency loses 8% of its value, one would expect the share of Apple stock to cost 8% more currency. So if my “return on investment” is 4% but the currency is worth 8% less, that means Apple’s value has changed in addition to inflation happening. My stock lost value there. Not due to inflation, but due to Apple being valued less by the market for some unknown reason.
The impact is still disproportionate. While I lost 4% in your example, a pleb holding cash lost 8%. And plebs have a greater share of their net wealth in cash.
If the currency loses 8% of its value, one would expect the share of Apple stock to cost 8% more currency. So if my “return on investment” is 4% but the currency is worth 8% less, that means Apple’s value has changed in addition to inflation happening.
If APPL goes up 8% and inflation increased 8%, then your real rate of return is zero.
a pleb holding cash lost 8%.
This is not how it works. The working class does not “hold cash”. They spend their cash, and their wage (hopefully) tracks inflation over time. It mostly does over the long run; we’re in a period of high inflation, which is why it’s on everyone’s mind, but we’re also coming off a period of remarkably low inflation since the 2008 financial crash.
Or like I said above, it hopefully tracks with productivity gains rather than inflation, which would far outpace inflation over the last 50 years.
I’ll also copy a bit from another comment I made in the thread:
The loudest anti-inflation voices over the past 40 years haven’t come from the left. They’re right-libertarians railing about “Audit the Fed”. You should ask yourself why those temporarily embarrassed billionaires don’t like inflation. It’s definitely not because they have a sudden care about the working class on this issue.
That’s wrong. If your ROI is 4% with 8% inflation, it would have been -4% if there had been no inflation. Also on average, it’s pretty much always above (don’t forget dividends)
I’m not sure how you’re putting the numbers together. You’d be right if ROI already accounted for inflation, but it generally doesn’t.
This kind of naive and simplistic view of inflation is long debuked. Maybe read up on current thoughts: https://strangematters.coop/supply-chain-theory-of-inflation/
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Increasing the money supply, all other things equal, decreases the value of the currency. It’s that simple. The price, or value of the currency is the net of supply and demand for that currency. Same demand, higher supply, lower value per unit.
This link argues inflation is more complicated than that, which I agree with in my opening sentence, inflation has many causes. Of course it’s more complicated than that. But that doesn’t change the underlying basic reality that inflating the supply on its own reduces the value of the money. Supply and demand is simple, unpacking which % of the 10% inflation experienced in an economy is caused by money printing or push-pull or supply chain disruptions is a more complex and possibly impossible to fully answer question. The complexity of answering that question is a good argument for why we shouldn’t give central banks the ability to change the money supply or interest rates, as they cannot have the information required to know whether raising interest rates will fix inflation because they can’t even know for sure what is even causing it. I mean, inflating the currency supply is certainly a part of it, but picking apart the other pieces is when it enters that grey area of unknowability.
Sure, but you argue with this extremely oversimplified view on inflation as if that is that is causing the plight of the middle class and that a deflationary currency would solve that. This is complete economic nonsense and strait out of the propaganda book of crypto-currency and goldbug shills.
Increasing the money supply, all other things equal, decreases the value of the currency. It’s that simple.
how can we test this theory? and would you ever concede it has failed, or will all exceptions be thrown under “all other things weren’t equal”?
this theory has no genuine predictive value. it’s a tautology
This will not be popular but oh well.
The cause of inflation is: getting something for nothing. One can see how this notion would be unpopular, because, well, literally anyone would like to get something without working for it/for free. And some people are better than others at doing that, with varying definitions for “better”, “people”, “something”, and “nothing”.
The classic example of inflation is the one everyone knows: a store that raises prices because of theft. A skateboard maker builds skateboards, a skateboard gets stolen, the price goes up to cover the loss of the things that went into the skateboard (materials, labor, etc) so the builder can still eat. The price of skateboards has inflated because of theft; the thief got something for nothing. Fact of life.
Inflation in currency is caused by fractional reserve banking; the ability to lend more currency on paper than actually exists physically. You actually have to print more money in order to keep the system from grinding to a halt. The inflation would eventually resolve, but when interest is applied to the lent money it does not. Why manipulating the interest rate is related to combatting inflation lays in here. Find a decently long YouTube video about how fractional reserve banking works to find out more. I’d provide a link but I can’t find the good one right now. Suffice to say, inflation went up, because the banking system got money for having money. Fact of life.
Prices way over the cost of the good due to corporate greed is another one, pretty similar to the classic theft example, just modified. The price of something goes up, not to cover a loss, but “just because” someone wants more money, when it comes down to it. You can quarrel all day about the fine details on that. Suffice to say inflation went up because they got more money for something by essentially doing nothing more. Fact of life.
The interesting thing about that last one is that the problem is compounded by (what could be considered the “excess”) money going back into the fractional reserve banking system, especially without there having been any real work done to justify the added cost. You can kind of get a glimpse of how the interest rate is tied to inflation, and why raising it also doesn’t fix everything; cheaper money means people don’t care about the needlessly higher price of things as much, so if you raise the cost of money people have to be concerned again. But by raising the rate, the banking system is getting more money for no “real” reason, so…
So I suppose, knowing what we know now, it might be better to say, rather than “something for nothing”: receiving something for less than it is genuinely worth, or the flip side, selling something for more than it is genuinely worth, or maybe just simply, getting value without working for it.
If this all sounds insane to you, and you are thinking of replying, before you do, you really should learn about how fractional reserve banking works. It is the thing that underpins everything in modern life, and is the literal foundation of our world economy. Not knowing how it works is like not knowing why you get sick from drinking still water on the ground. You can still get along without knowing it, but if you know, it sure helps you to navigate the world better. Do watch the most detailed video or something you can find.
THANK YOU!!! Absolutely nobody seems to get this.
I am not an economist but isn’t inflation stimulated in capitalist countries, and it is used as a leverage against people over saving. The idea is that your savings will lose its purchasing power over time and people are stimulated to spend them instead of simply saving it in the bank. Here we are talking of annual inflation around 2-3%.
But yes, I agree, employees are usually suffering from the inflation, as it slowly eats their purchasing power and savings.
But now the divide between poor and rich is so big, that I think our societies will reach a point where there would be public outcry and people will publicly revolt against it.
Not everyone’s savings. Only the poor’s. Rich people don’t hold currency ; they have their entire wealth in stocks, gold and real estate
this kind of leads into OPs point I think. keep people from amassing any kind of wealth or savings by devaluing those savings. therefore keeping us on the treadmill in perpetuity
Very well said. Thanks for posting.
If the government isn’t able to issue more currency, isn’t the alternative that they must pay everything from tax revenue and therefore be raising taxes more often? Wouldn’t that also hit laborers harder in the current scenario, since the loans and unrealized gains in stocks are untaxed?
You’re getting taxes either way, either via inflationary supply or paying a portion of your paycheck. Those gains get taxes when they assets are sold so in theory that’s fine, but buy-borrow-die is a loophole to get around that which should be fixed.
isn’t the alternative that they must pay everything from tax revenue and therefore be raising taxes more often?
Yes, and that would be a good thing in that those in the seats of power would be forced to convince people that expenditures are necessary and in there own interests.
One prominent example would be the US government being able to start and fund an unlimited number of wars. A direct tax to fund killing brown people halfway around the world is kind of a hard sell, so the source of funding is instead abstracted away via a hidden tax and debt.
I’ve been saying it for years: the only acceptable rate of inflation is zero. The king must protect the value of his coin.
Yes, but how do you keep inflation at zero?
Some inflation is inevitable and better than the inverse. Of course we could just not use money…
I have been living on 90% Bitcoin for a few years now and I couldn’t be more happy. The incentive to save is incredible, you should try it man. I’m a poor student, but it suits me very well
Well yeah. How can I appreciate being rich if there aren’t poor people to compare myself with / lord over
…is something I’m not rich enough to say. Sigh.
"Everybody admits that the issuing of paper money constitutes the worst form of compulsory loan, that it most of all affects the conditions of the workers, of the poorest section of the population, and that it is the chief evil engendered by financial disorder. " - Lenin
https://www.marxists.org/archive/lenin/works/1917/ichtci/10.htm
