Inflation (Written 2021)

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” - Milton Friedman 

“Inflation is a vector not a scalar. We measure inflation using arithmetic, when we need to use vector calculations.” -Michael Saylor

Over the past year a very popular talking point in the media has become inflation. But very few people truly understand inflation. This is because most scholars and intellectuals track inflation by using the consumer price index. To give clarity on inflation everybody must understand that the CPI does not represent inflation correctly. I think it is best to measure the inflation rate based on the inflation of the supply of money. When there is a massive increase in the supply of money, this will find its way into different assets and services. And the majority of it will go into assets, which is not represented in the CPI. When I refer to services it’s because I don’t recognize anything as a “good”. People only buy “goods” for the service that it provides them. It’s a different way of thinking about the economy but I think it is most useful when looking at the inflation narrative. 

The reason inflation is so difficult to understand for most people is because it has changed a lot since the last time the U.S. has experienced high levels of inflation. Most people look back on the 70’s and see what is happening now, and due to recency bias they expect the same dynamics. This is the wrong way of thinking, as a better comparison to what is happening today is the 1940’s era. During the 1940’s the debt/GDP level was so high that they left interest rates incredibly low, experiencing bouts of high inflation throughout the decade. During the 1970’s, the federal government “fought” inflation by raising interest rates which brought positive yields to those in bonds and savings accounts. Right now, the way the U.S. debt is structured, we cannot raise interest rates or the U.S. will default on its loan obligations. Much like the decade after World War 2 where we had so much debt it could not be paid back without inflating the debt away. For the next decade my base case is we will see bouts of inflation, devaluing the currency to relieve our debt obligations. We cannot raise rates meaningfully above 2% without defaulting, bankrupting the American economy. Savers have been losers in the past decades. And for at least the next decade, savers are losers. 

It should be clear that inflation is not normal, it is theft. It destroys feedback loops and price signals in the economy that make life better for all who operate in the economy. A positive is that it can decrease volatility, as it’s easier emotionally to slowly lose over many years, than to see big swings in price in the short term. But it does not change the fact that the current monetary system is weaponized by those who can print money, against those who cannot. This is not hyperbole, and I’m not being extreme by using these terms. We have never had a truly capitalist economy, because since 1913 (the creation of the Federal Reserve), at the heart of the economy has been an anti-capitalist institution. The central bank has monopolized, corrupted, changed, and weaponized monetary policy at any time it sees fit. It has given an experience of uncertainty for all who rely on the money it prints to survive. 

Inflation artificially increases scarcity in the human mind. It also amplifies divisiveness, artificially increasing conflict like cancel-culture. It is my belief that since many people do not understand what is happening, they look for other sources to blame. We have seen many protests and causes of those who are frustrated with the sense of scarcity inflation has sparked. Historically, inflation has induced an urge to gamble in its victims as well, which has exploded in popularity during recent years. At the heart of these problems has been a monetary system weaponized against the people, but it’s very hard for the average person to grasp this concept. I understand, as it’s taken me thousands of hours to understand how the monetary system works. There is a central bank that is acting as God, printing and taking away money at any given time. This is wrong.

From 2010-2020, the inflation rate (measured by the increase in the supply of money) was at minimum 7% annually. So during the past decade this was the “break-even” rate when it comes to investing your capital. It is a necessity to always invest in a strategy that compounds faster than the money is being devalued. Globally, inflation is a problem and will be for the foreseeable future. It is a $25-50 Trillion a year problem. One thing unique about it is that it impacts both the rich and poor, so we all need to find a solution. I’ll lay out what that solution is in the next section, through the framework of Austrian economics, using Bitcoin to preserve your energy over space and time, and avoid the theft of your purchasing power.