Doc's Daily Commentary
Mind Of Mav
Hyperinflation Vs. Deflation: Opposite Views Of The Future
Some days ago Twitter CEO Jack Dorsey shocked the world by stating that “hyperinflation is happening”. This caused outrage on Twitter and beyond. US investor Cathie Woods quickly disputed Dorsey’s claim and stated that deflation is around the corner instead. Eventually, time will tell which of those views will be right.
The question remains: Why is inflation still a thing today, despite technological progress that should make all goods cheaper over time?
What is Hyperinflation?
Before we jump into details, let’s define the term hyperinflation:
Inflation is usually equated with the rise of the consumer price index (CPI) and hyperinflation is normally defined as a rise of consumer prices of more than 50% per month. According to this definition, we see that we are obviously not in this range at the moment; although the price inflation rates among industrial countries are much higher than usual.
However, relying on the consumer-price-index for measuring inflation is problematic for different reasons:
First, this index is not reflecting your true spendings. In fact, the index is full of deflationary consumer goods, and conveniently lacks goods that are increasing in price.
Second, it doesn’t include assets like real estate or stocks.
Third, different countries use different commodity bundles to measure the change of prices.
Fourth, the measured commodities are changed regularly.
Therefore we see that the CPI is not an objective measure, like a kilogram, meter, or second. It is a measure that is prone to manipulation and does not allow an objective comparison across time or countries.
Moreover, prices would be easier to measure, if we lived in a static world with no technological advancement. For example, we spend almost the same money on a new TV set as 20 years ago but today it is delivered with a much larger screen, higher resolution and access to the internet.
We get a much better TV for the same money, but how can we objectively measure this development?
If we take all those points into account, it should be clear, that the CPI is simply not a good measure for inflation. Plus, it is also not the historical measure of inflation. In the past, inflation was simply seen as any increase in the money supply. Today, this definition is almost exclusively upheld by the Austrian School of Economics.
The Austrian school believes that any increase in the money supply not supported by an increase in the production of goods and services leads to an increase in prices. But the prices of all goods do not increase simultaneously. (Investopedia)
In modern times inflation should not exist…
Most people are not aware that we live in a deflationary world. Naturally, there should not be any inflation due to technological progress:
Due to technology, you need less work for the same results. As technology progresses, you need less energy to generate any output. And the less energy you need, the less work you need to do.
For example, until the late 19th century, you had to spend a lot of money to buy candles for having light during the night. Nowadays operating a 60 Watt lamp for one-hour costs you next to nothing.
There are also new products that replace entire old product categories:
If you go back to 2008–2009 the iPhone was just gaining traction. Instead of being forced to buy a camera, a telephone, text messaging plan, books etc. You just put it all on your phone. (Bowtiedbulls)
Let’s take another look at the development of TV prices. If we factor in technological progress, “prices for televisions were 97,10% lower in 2021 versus 2000” according to the US Bureau of Labor Statistics.
Technological deflation is happening across all product categories and it is only accelerating.
Moreover, money is saved energy from your work. Due to technological deflation, the energy from the work you have saved in the past should be worth more in the future.
…but why are prices still rising?
Mainly because of an increase in the money supply. You can see money as a kind of battery that saves energy from your work, but when the money supply is increased, the energy density of this battery is weakened, meaning the longer you wait to spend your money, the less energy you can squeeze out of that battery.
Let’s do what most economists would do and imagine a fictive Robinson-Crusoe-Economy.
Robinson is living with his buddy Friday on a remote island. They use glass beads to trade goods with each other. The total money supply on the island is 100 glass beads and let assume that Friday wants to buy a fishing net from Robinson for 10 beads.
Now while Friday is walking on the beach all of a sudden a box with additional 100 glass beads washes ashore on the island. Will the fishing net still cost 10 beads? Of course not: If both parties are aware of the increase in beads supply, the prices will quickly match the money supply and a fishing net is going to cost 20 beads.
In other words: The increase in the money supply would make Robinson poorer if he doesn’t get a fair share of the new glass beads.
In 2020 alone the US$ money supply rose almost 40%, but why don’t is this increase not reflected in commodity prices? Because we actually don’t live in a static Robinson-Crusoe-Economy: The good news is that our world is rather a highly dynamic and technological place.
This also means that without the constant increase of money, we would feel the deflationary effect of technology much stronger. The prices are inflated, but we don’t feel it, because the deflationary effects of technology are already stronger.
Without technology, we would have experienced hyperinflation a long time ago.
Money inflation makes us believe, that we have more money than we have. Therefore it increases the demand for goods, which decreases the supply of goods if production cannot match the increased demand.
Thanks to technology this isn’t problematic for most manufactured goods nowadays because factories can easily increase the supply of most goods as demand is rising.
As long as natural resources are not rising in price, price inflation will probably not be able to raise the price of manufactured goods like in a fictive Robinson-Crusoe-Economy, because in the long term it will only become cheaper and cheaper to produce them.
Is technological deflation saving us from inflation?
Unfortunately, technology cannot save us from all price increases, because not all goods can be scaled when demand increases. A good example of this is real estate or other assets like stocks.
Attractive neighborhoods are scarce. It is hard to create more attractive neighborhoods and it takes time to build new houses. Therefore, it is not surprising that while the US $ money supply doubled in the last 10 years, house prices almost doubled as well in the US and most of Western Europe.
So, if your income hasn’t doubled in that time period as well, owning a house will be more and more out of reach for you. But this development is not displayed in the consumer price index: Funnily, due to the deflationary composition of this index, you now have politicians complaining about not beeing able to produce inflation while in fact, the prices of all scarce assets infare inflating into the sky.
There is also what is known as the Cantillion Effect: If you are in the position to acquire the newly issued money, your purchasing power still reflects the old prices. This allows you to buy real estate, other assets, or products before the rise of the money supply is factored into the price.
Imagine that Friday is finding the box with 100 additional glass beats on the beach and isn’t telling Robinson about his discovery: In the beginning, he will be able to buy all kinds of goods for the old price from Robinson. Only after a while, poor Robinson might realize that there is much more money in the market and he will start to adjust his prices accordingly. In the meantime, Friday would already have made a huge profit just because he had exclusive access to the glass beats that washed ashore the beach.
In today’s economy, you will get fresh money first, when you are close to banks and the government. You will get it last, when you are poor, retired, or depending on welfare.
We underestimate deflationary forces
Many people underestimate the deflationary force of technology that could actually save us from classical price hyperinflation. Still, the prices of assets and everything else that is scarce will inevitably rise due to the increase in the money supply.
Asset owners — the rich — will get richer, while buying assets is becoming more and more impossible for the have nots that rely on income from their wages.
In today’s world, Inflation might not be visible in the CPI, but it is still affecting everybody. In the end, it is mainly a mechanism of reallocating wealth from the poor to the rich. Inflation is the force that keeps us all running just to stay in the same place at best. It is a hidden tax, that destroys your savings every second of the day. It is a force that destroys the energy density of money and sucks life energy out of your existence.
Moreover, there is no reason to talk about climate change measures, without addressing the problems of an inflationary money system that causes overproduction, malinvestments, and over-consumptions of goods.
This leads us to the final question:
Why are governments causing inflation?
Inflation is beneficial for indebted persons and institutions while deflation is highly dangerous for them. Mainstream economists will tell you in horrific detail about the negative consequences of deflation, but they withhold the fact that those consequences would be mainly faced by indebted governments and big companies.
The theory goes like this:
“Economists fear deflation because falling prices lead to lower consumer spending, which is a major component of economic growth. Companies respond to falling prices by slowing down their production, which leads to layoffs and salary reduction.”
Instead, they think that prices should rise, to incentivize people to consume and invest more, instead of saving money under their pillows.
Interestingly, this view is actually not supported by data:
The 19th century had been the century of deflation because it was the first time in history when technological progress became visible for humans within their lifetime. Living standards were poor compared to today, but it was a century of economic growth, rising wages, and falling prices.
Recently, “for a period of approximately five years, prices of consumer goods went down in Switzerland without any widespread negative impact on the country’s economy.”
Furthermore, prices for electronic goods like TVs, smartphones, or computers were constantly falling over the last years. Still, people queue for hours to get the newest iPhone.
According to mainstream economists, this would all be an impossibility.
The problem with mainstream economists is that they cite primarily a single data point of the past — the time of the great depression — when they are making their frightening claims about deflation. But this period seems to be an outlier in the history of deflation. In reality, it is much more believable that deflation was just one of the symptoms and not the cause of the long depression.
Economy is the science of government. This makes it the discipline with the most real-world consequences, but also the most corrupted discipline.
Conclusion: There is hope on the horizon
An economy addicted to inflation is like a worker who takes crystal meth instead of taking a break, eating, or going to sleep. In the short run, he might outperform workers, who are taking breaks, eating lunch, and getting 8 hours of sleep per night. In the long run, it is inevitable that he will crash and needs to go through a painful recovery period.
Moreover, saving is not a contradiction to consuming. It is actually deferred consumption of higher-order goods. Saving makes consumption possible without having to sell personal freedom with debt.
Deflation is also a natural symptom of technological progress. Fighting deflation is like fighting windmills. Economists try to avoid deflation, in order to secure technological progress, but this very progress is causing deflation in the first place. Maybe it is sometimes just better when we let natural forces take their course.
In fact, it seems that those forces cannot be restricted anyway: In the near future, Bitcoin might be a disruptive technology that will make it impossible for governments to increase the money supply, simply by creating a decentralized money network that cannot be controlled by central banks.
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