Inflation: Why We’re All Fucked

In the last post I talked about inflation and how it represents a generalized rise in prices and a permanent decrease in purchasing power. I know I mostly focused back then on inflation caused by the growth of the money supply, but inflation actually has a lot of possible mechanisms. In this post I’m trying to go through all of them and explain them.

As a basic rule, inflation caused by printing money is not the main cause of inflation. Naturally, inflation appears when there’s an imbalance between demand and supply: either demand suddenly gets too high and exceeds the production or service capacity, or supply suddenly drops while demand stays the same or increases. In both cases you get a supply shock that pushes prices up. A supply shock is currently happening with oil at a global level. In many cases you don’t even need a real supply shock, just a perceived one. For example, if out of some unclear fear the whole population rushes to buy one specific product, its price will go up despite there being enough supply on the market. It doesn’t mean the good became more valuable overnight, it just means someone is willing to pay more for it.

Inflation driven by supply and demand is usually cyclical and self-limiting. If, for example, massive demand for gold pushes its price up, mining capacity will increase to cover that demand. As gold production rises, it will cover the new demand until the balance flips and supply exceeds demand, at which point the price will crash. The accelerated production will stall because part of the miners won’t see profit at the new market price.

Market demand for a product, good, or service can come from different sources. But most often it involves an acceleration of financial transactions. People buy more. Now, why exactly they buy more can have different reasons. We can have a significant rise in income in certain sectors, and people suddenly have more money available. Governments can step in, cut taxes, or offer financial aid to the population. Both methods generate free capital. A significant drop in interest rates that makes credit cheaper leads to circulating capital in the form of loans. Even a rise in assets, in investments people hold, even if they’re not liquidated and don’t generate available capital, often brings a “feel rich” sentiment and produces an increase in spending.

Even governments can alter demand and supply if they seriously commit to investing in a certain sector. The conflicts of recent years, with governments investing in rearmament, have induced inflation across the defense industry, visible in the stock performance of most companies in that field. Even mass migration can raise demand for certain goods. For example, it’s not necessary for the majority of a population to want to buy or rent a home for prices to rise. All it takes is a mass migration that overnight raises demand.

The best example of mass migration inducing inflation in recent history is the story of Switzerland. Look at how fast Switzerland went from 4 million inhabitants in 1940 to 9 million today. Now, not everyone wants to buy a villa in Lausanne or Bern, but everyone needs housing, everyone needs transport. So the entire urban infrastructure gets put under demand stress.

As an immigrant myself, I understand perfectly the idea of building a better life for yourself and your children, but try to also understand the Swiss, who are unhappy that their rent has doubled and tripled over the last 20 years while salaries have stayed the same.

On the flip side, the balance can also tip by reducing available supply even if demand doesn’t change. This kind of inflation usually shows up in the food and energy sectors. In years when agriculture underdelivers, you get food inflation. Disasters, pandemics, wars, and trade sanctions all reduce the ability to guarantee supply.

Even an aging population and a shrinking workforce can reduce available supply.

So we see that any imbalance between supply and demand will raise prices. The migration outlook, foreign policy tied to wars or conflicts, trade tariffs, these are usually problems that the political class can address. Whether decisions are actually made correctly most of the time is a different matter.

We’ve already established, though, that a company shouldn’t raise salaries without raising productivity. Otherwise it risks contributing to inflation.

Government monetary policy is the main driver of long-term inflation. And here the situation is fairly simple. The state is responsible for printing money, though nowadays the effort is usually digital, adding nonexistent zeros to accounts that are just as nonexistent, in other words growing the money supply. Why does the money supply need to grow? Because the state needs money to pay for its own expenses. Most governments currently spend more than they earn. Imagine a giant that collects 1 billion a day in taxes but wants to spend 2 billion a day. The difference, since it doesn’t have it, gets printed out of thin air or borrowed. And if it borrows, that debt has to be paid back at some point. The problem is that the more the money supply grows, the weaker the currency gets, and the higher the interest the state has to pay. Certain countries that are heavily dependent on imports will even produce significant inflation on goods priced in their own currency. Over time, these kinds of policies lead to a loss of investor confidence and accelerate the currency’s downfall. Pretty much what’s happening right now with the US.

What I don’t understand is why governments keep spending more than they have. They’re responsible for some of the biggest damage in global economic systems. Actually, do I know why they do it? Any government that comes in and cuts spending, how do you think they cut it? By lowering public employees’ salaries or laying them off, cutting pensions, and raising taxes. All unpopular measures. And even if they had the courage to push people into poverty, a poverty necessary to build a stable foundation, the next government four years later would come in with loose populist policies and it would lead right back to growing the money supply. So we’re stuck in a vicious circle where everyone wants low inflation but nobody wants to suffer for it. Following the principle that everyone wants to get to heaven but nobody wants to die to get there.

International trade and globalization are other elements of inflation.

First of all, inflation can be imported. Nowadays most small and medium components are imported multinationally. Think about how many microchips are imported from Asia to produce equipment in Europe or the US. A rise in the cost of that equipment in any country will lead to imported inflation. Similarly, growth in the USD money supply will produce inflation for every country holding that currency. These days, inflation is the easiest thing in the world to import. It’s instant.

These political games tied to global trade are impossible to calculate. Inflation comes from absolutely everything, economic monopolies and collusion between different cartels. And I’m not talking about drug cartels here, we can just as easily talk about chicken meat cartels. If everyone agrees not to sell chicken below a certain price, we are fucked. Look at OPEC and how they coordinate, not just the price, but actively cutting and raising oil production to control the market. That, to me, is an organized cartel.

So we see that when it comes to inflation, we are totally fucked! Global trade and intergovernmental policies are things we can’t control. We can act at the government level to push for coherent agricultural and migration policies, but even there we only have an indirect role, since it’s ultimately our politicians who decide.

But what we could stop, in one form or another, are budget deficits! Which the political class isn’t willing to reduce.

The conclusion is clear: we are all so fucked! I hope you’ve all already ordered your lubricant! If we all order it at the same time from Amazon, we’ll drive up demand and cause inflation! At least let’s not have inflation on lubricant, since we’ve got it everywhere else!