What’s Inflation About?

“Inflation in economics, A general increase in prices and fall in the purchasing value of money.” Oxford Languages

That definition misses essential factors.

The questions

  1. Would it be inflation if goods or services improved and their price increased? That assumes the money has a constant value.
  2. Would the depreciating value of money be hidden if goods and services improve and yet their price does not increase?
  3. Does the value of money you may own arise for some service you previously provided? Essentially, money is earned.
  4. Does the appearance of money without a pre-existing contribution of value reduce the value of all money?

The Oxford definition is about price. Price defines the intersection of value given for money received. Prices can rise for either of two reasons.

  1. The product or service provided has become more valuable or scarce, or
  2. The money that gets it has become less valuable.

Where that leads

Suppose inflation is a problem, and since it does not apply equally to everyone, it is always a problem. In that circumstance, there will be efforts to minimize it.

The Federal Reserve is tasked with reducing the problem. How would you approach that if you were offered the chance to solve it?

First, notice that in 20202 and 2021, much money came into being without goods or services being provided to earn it. That means all money is devalued. It should not be a vast problem to know how much that effect would be if the money supply were the only factor in inflation. Once we notice that money supply is just one factor, how do we decide that higher interest rates are the best cure method?

Second what other things should we consider? How about scarcity of some goods? Things we know:

The labour participation rate is a better factor regarding inflation than the unemployment rate. The supply of labour affects its price. The participation rate is the number of people working as a percentage of the population between the age of 15 and 64. It is now slightly more than 62%. In 1960 it was about 60%, but the female share was much lower. We know that from 1950 the number of employed females rose from 18 million to 66 million. The population was a little more than double in the same period. Peak participation reached nearly 68% by 2000 and fell after. If more people were looking for, and finding work, today, the price of labour would fall or at least not rise. Would the price of some good fall too?

Things that reduce supply exacerbate scarcity and raise prices.

What policy would increase the supply of labour?

In the same way, what policy would make it easier to supply more goods? Cheaper energy should not be very hard over the course of a year or maybe 18 months.

What taxing policies require businesses to behave differently? International supply and sales factors, for example. What about policies that prevent inefficient producers from failing? What about subsidies to start-ups that are to provide something not needed or not needed yet?

What rhetoric demonizes producers and praises others?

What policies reduce the ease of clearing goods through the ports?

Higher interest rates reduce the supply of goods because not all people can afford them if they must both pay for the goods and the price of financing their acquisition.

The single tool of interest rate hikes leads to a harder landing while doing nothing to increase supply.

To think about.

The economy needs money and there is a suitable amount. Who knows what that amount is?

Inflation is a number arising from more than one factor. It is a summary of events, not a fact all by itself.

Do we want to reduce inflation or reduce the effect of the things that cause it?

Is it possible to shrink the money supply?

What would happen then?

If needed at all, how much shrink is necessary to reduce inflation?

Could the same effect be had by making it easier to provide goods and services?

The things to take away?

All economic results rely on incentives and tradeoffs.

Limited approaches to complex problems, like ones in society and the economy, don’t work. Sometimes they cause more harm.

Inflation happens when unearned money tries to purchase the same or fewer goods.

You can reduce the resulting price level by producing more or removing the extra money. Reducing the price level by making it harder to buy things, does not resolve the problem of an inflated money supply. It just hides it in the numbers.

Elect people who do not believe in the magic of ideological regulation and increasing the money supply. Wise people have noticed that inflation is like a heroin addiction. In the beginning, a little will give you the result you want. As time passes, more is needed to get the same result. Eventually, the margin between what works and what will kill you becomes very small. Then what do you do? That’s where we are now, and governments are looking to get a bigger dose. There should be a rehab facility for inflation-inducing politicians.

I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.

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