Misunderstanding Inflation

It's not what you think, er, rather,it's exactly what you think

Milton Friedman once said that all inflation is a “monetary phenomenon.” Well, although that’s true, it’s like saying all death is a lack=of-heartbeat-phenomenon. It describes the ultimate outcome, but hardly explains the root of the problem.

With inflation, the traditional explanation is that it is “too many dollars chasing too few goods.” Everyone focuses on the dollars, most everyone ignores the goods.

Inflation is NOT a “monetary phenomenon’ unless it is tied to a “goods phenomenon.”
That is, to get out of an inflationary cycle, you can reduce the printing of money (or stop entirely) or you can increase the number of goods. From 1990 if not earlier we had a situation were goods (as defined not just in number of goods but in number plus quality/performance/usefulness of goods) exceeded the number of dollars out there. This was especially true in the tech sector, where each new app substantially increased the productivity of the unit (a phone, a car, a computer) without raising prices correspondingly. Indeed, by the mid-1990s, the quality/productivity aspects of tech was vastly outpacing its dollar value. Prices fell in ridiculous increments.

This was great for consumers, but concealed the true value and productivity of the products being created. As I have mentioned before, www.entropyeconomics.com has argued that the real value of an iPhone 10 should be around $41,000 of the bandwidth, applications’ value, and other aspects of the phone are valued for what it would cost to develop and buy them separately.

Note also that modern tech corporations have, to a large degree been able to foist off onto consumers much of their research and development cost. There is no longer any need to “figure out” what customers want next—-just ask they in a simple survey what apps they’d like.

So if the number+quality/productivity side was substantially under-priced for almost 30 years, what does that mean? For one thing it meant that QE 1, 2, through 20 were largely irrelevant. It was like trying to fill up Cowboys Stadium with sand, one cup at a time. Are we there yet? Maybe. If so, that would mean the current inflation is real (as I think it is).

However, you can never lose site of the number+quality/performance of goods side of the equation. Traditionally inflation = the quantity times the velocity of money. Money still is not at high velocity levels. How do I know? Because coming out of the China Virus (and yes, despite what dicknipples like Dr. Fallacy and the Rutabaga in the White House say, we’re almost out), statistics showed that people who received gubment cheese saved a lot of it.

Why would they save? As all economists know, the driving factor in all economic decisions is either fear or greed. Did they save because they thought the Demented Pervert and his lawless band of spoogenuggets would be good for the economy and that they’d jump back into the stock market?

Er, no.

Indeed, we may already be seeing the long-predicted “Big Crash” that many of the contrarian economists have warned about. One newsletter cits “a truly shocking breakdown among a long list of equities, particularly of the high P/E small- and mid-cap growth variety.” Almost 40% of the stocks in the Nasdaq are down 50% or more from their 52-week peaks., while  65% are down at least 20%. 

Just wait til that 65% of Nasdaq is down 50%! They will be jumping from the glass ceiling.

No, those savers were saving out of fear, not greed. Even with good savings, there was no way people could save fast enough to outpace the skyrocketing price of housing and shelter. Here in my Phoenix suburb, we bought in 2016 for $365,000 and our valuation today is $641,000 . . . closing in on a 100% increase in five years. Ours is quite typical of the market here.

Now, I know Phoenix is one of the hottest real estate markets in the country, but nationally rents are (pardon the pun) going through the roof. Food and fuel are likewise rising sharply—-only the CPI doesn’t include housing or food. You know, we don’t have to eat or get out of the freezing winter.

If it is fear that is causing people to hold onto their money, well, think of that . . .It means that our current inflation is substantially lower than it would be if people were spending freely! While this makes the Fed’s job somewhat easier in starting its “tapering,” it fails to address the problem of fear itself. You know, “all we have to fear . . .?”

Worse, it means that the solution—-contra Uncle Miltie—-is not “just” monetary in nature, but is overwhelmingly psychological. Currently on the RealClearPolitics average (which is always biased toward DemoKKKrats/leftist positions), oer 61% (!!) of the country think we’re on the wrong track. Just wait til the Demented Pervert tries to lock us down again for Christmas, or gets his vax mandates past the courts. That number could go to 75%.

Forget the impact on the Rutabaga for a moment. Such a number means that we will not get out of a recession quickly once it hits. And without a recession, no end to inflation.

I’m not a fan of John Maynard Keynes, but he was right about this: economic behavior is driven by “animal spirits” (the old fear/greed thing). As long as Biteme has the country’s energy supplies bottled up; has the cargo/container ships stretching all the way to Tatooine; and has people constantly worried that he is going to tax every aspect of their lives—-all the while telling them that they are in for a “dark winter” with “misery and death,” well, that’ not exactly a Jordan Belfort pep talk.

Like Carter’s “malaise” speech (I know, I know, he didn’t use the word. Back off), Biteme has the effect of blaming people who drive the economy for the pain he has caused. It won’t get better til he, and his evil sphinctermissile compatriots, are removed and, preferably, their evil party banned from public life.

Larry Schweikart

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