Time for a lecture on basic economics, I’m afraid. WH Press Liar Psaki just defended inflation as a good thing. A reporter was grilling her on chief of staff Ron Klain blowing off inflation as a “high class problem.”
“The fact is the unemployment rate is about half what it was a year ago. So a year ago, people were in their homes. Ten percent of people were unemployed. Gas prices were low because nobody was driving. People weren’t buying goods because they didn’t have jobs. Now more people have jobs. More people are buying goods. That’s increasing the demand. That’s a good thing.”
Did you see what she did?
I suspect that a lot of people do think inflation is prices going up. But that’s just because prices are commonly used as a proxy to measure inflation. It’s a little more complicated than that, but not much. Let’s talk price.
Price represents the value that a seller sets on a good. If a buyer agrees, the sale is made.
Let’s say tin, with a relatively fixed, constant supply is is selling at $34,000 per metric ton. Tin has a lot of uses, so buyers and sellers agree on the price. The value
But suddenly someone invents a new and extremely popular use for tin. For fun, we’ll pretend that someone invented tin batteries with 10 times the capacity of lithium batteries, and without LiON’s tendency to burn and explode. And just as suddenly a lot more people want to buy tin.
The supply of tin is relatively constant, but the demand has changed. Now more people value tin more. They are willing to offer sellers more money to reflect that changed value. The price of tin goes up.
Wanting even greater profit, sellers mine more tin, so they can sell more at the higher price. Of course, that means the supply increases, which tends to decrease the price, but it will settle out; probably at something higher than the original price and lower than the peak. Everyone is happy.
Digression: Sometimes perception of an increase in value can drive prices up. Several years ago, palladium prices made an odd jump. More than one person suggested that it was related to some fairly obscure reports suggesting that a well-financed group had actually found a palladium-based catalytic, or cold, fusion variant that actually worked. Speculators may have been buying up palladium in anticipation of an actual increase in demand as everyone would want a palladium cold fusion reactor in their basement or factory generator shed. Beats me.
Or you may be old enough to recall the pet rock craze, when fools were paying five bucks for chunks of chert. Thank Ghu we didn’t get a property reappraisal on our driveway during that phase.
Now a new scenario. No new uses for tin, but evil, tyrannical SOBs introduce “pandemic” policies that destroy the supply chain. The supply at point of origin may still be the same — or may have dropped because “social distancing” shut down mining — and demand remains the same. But the supply of tin that can be delivered is down. Desperate buyers start offering more money for the limited amount tin.
Those are supply and demand issues, and have exactly zero to do with inflation. Because inflation is not “rising prices.”
“Inflation” is actually verbal shorthand. The complete term is “monetary supply inflation.”
Third scenario: Tin output is constant, and the demand for tin is constant. The price should remain constant. But suddenly the government increases the amount of currency, money, in circulation.
Increasing the monetary supply is tricky. To simplify this, imagine you are in a country with a gold standard. One ounce of gold is fixed at $20 (historians may recognize that). Or maybe it’s fixed at some other rate; $100/oz. Let’s use $1,000/oz. But at that fixed rate, tin is priced at $34,000/mt. Sellers expect 34 ounces of gold — be it metal, Federal Reserve dollars, bank notes, or warehouse certificates — for every metric ton.
But then your jackass king says, “Fuck that standard. I need to spend money on economic impact payments and a green new deal now, and can’t wait to mine more gold.” So he orders the printing presses to be cranked up. Instead of printing $1,000 for every ounce the government has on hand, he’s printing $2,000.
Now $1,000 only represents half an ounce of gold.
Tin sellers still expect the equivalent of 34 ounces of gold (value), so they raise the “price” (not the value) to $68,000/mt.
Buyers on the other hand… tricky, tricky.
If a buyer happened to be one of the lucky ones to get his hands on his share on the new, devalued dollars, he may be happy to pay the new inflated tin price. They don’t particularly care. Buyers still waiting to get their cut are out of luck.
End consumers are especially out of luck. Because everyone in the chain of production still wants the same value for their product, so raises the price of their part of building parts of what becomes and end product. Miners want more, price of labor goes up. Price of tin goes up. Price of injection molded tin parts goes up. Price of electric mixer with injection molded tin parts goes up. Wholesaler prices go up. And the end retail shelf price goes way up.
That is inflation.
Digression 2: Guess what else accumulates in the chain of production. Taxes. There are taxes at each stage, too income taxes, if nothing else. And no sane company wants those to eat up their earnings, so they just pass the cost on as an increase in price. From farmer’s field to retail shelf; what does that do to the price of a loaf of bread?
Fourth scenario: The king trashed the gold standard, and just cranks out and borrows all the cash he needs to finance green new deals and vote-buying year after year after year. The money supply constantly increases. And interest has to be paid on the borrowed money, so he prints enough new, constantly devaluing, dollars to cover the interest payments.
Every year, the dollar has a smaller value, so prices on goods and services go up in a vain attempt to keep getting the same value. Vain, because the newly minted dollars always seem to get to the king’s cronies before anyone else, so the peasants are stuck paying today’s increased prices with yesterday’s lower amount of dollars.
Stop me when this sounds familiar.
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