Inflation, jargon that’s meant to sound meaningful, and how fighting inflation affects Money.

Jargon drives the communications of many professions. It is used to make those professions appear important, or to make simple concepts sound more complex, thereby ensuring that a profession is promoting itself as of higher value. Worse still, jargon is used to make some important concepts mean whatever anyone using them wants them to mean. Damn those statistics, and what did they mean again?

Economics jargon is the worst of the worst. It’s meant to make economists appear clever, make economics appear as a highly skilled profession, and be so flagrant with the meaning and effect that the jargon can literally mean whatever the user or listener wants it to mean. Economics and economic concepts are very important to all citizens but using complex jargon is unnecessary and self-serving . Let’s follow the Money to understand inflation.

Inflation as understood by most citizens is the increase over time and expressed as a percentage, in the Money paid for the goods and services purchased by a citizen. However, that is not what inflation is to economists or Central Bankers. Inflation is a set of statistics on certain goods and services weighted in ways that are unfathomable to citizens but are meant to represent the increase in the Money paid by the average citizen for those goods and services. It does not reflect what the average citizen is faced with in making their Money go round.

Inflation is touted by Central Banks as the evil of all evils, but that’s only for ‘too much inflation or ‘zero’ inflation. ‘Some’ inflation is good and necessary. Confused? Let’s try and break this down.

Inflation as a ‘thing’ does not create Money, and we’ve covered those things that do create Money in a previous article. Those things can inspire inflation. Inflation is a means of redistributing Money across the economy but does not create Money.  Money creation can increase inflation by creating Money from private debt or government borrowing that does not result in productivity increases, leading to an increased pool of Money being used to pay for the same goods and services and leading to the cost of goods and services increasing without added value.

For an average citizen, when Money earnings increase at the same percentage rate as the increase in Money expended on living (inflation), he or she is probably better off no matter what the rate of inflation. That’s because earnings allocated to discretionary spending also rise at the same rate. The extra spending could be used, for example, to pay down debt therefore increasing a citizen’s wealth.

 As there is no such thing as a free lunch, the only way that wealth (spare Money) could increase for the average citizen is by Money being transferred from business owners, big and not so big, to those citizens. Again, we’ll refer to the business owners that have excessive control of the supply of goods and services as the 1%ers. Now it becomes apparent why the 1%ers fight the payment of more Money as increased earnings to citizens, even when the increase matches cost of living increases. Because in those circumstances a wealth transfer occurs from the 1%ers to other citizens by increasing the Money available for discretionary spending. We’ll call this a ‘wage-price’ spiral, where wages lead prices in inflation.

Assume for the purposes of analysis that the economic system was equitable at a certain point in time. If there is a period of having to pay more Money for the same goods and services that is not matched by a citizen’s Money earnings being increased by the same amount, then there is a wealth transfer from citizens to the 1%ers. If Citizens need to pay more Money for goods and services with the same Money earnings, that is a negative. This is, a ‘price-wage’ spiral, where a wealth and Money transfer to the 1%ers can continue until many citizens do not have any discretionary Money and become wage slaves;  barely earning enough to survive and yet having full-time employment.

So why is our Central Bank so fearful of the wage-price inflationary spiral rather than a ‘price-wage’ inflationary spiral, when the government owned Central Bank is supposed to represent the interests of Australian citizens and not just the 1%ers?

Let us be balanced and take the side of the Central Bank for a clear case of a wage-price spiral inflation case that is detrimental. If the 1%ers are generating significant productive gains across the board and have incurred debt (created Money), a wage-price spiral may produce very negative results. If citizen’s Money earnings are increasing before and faster than prices, then there is a transfer of Money from productive business enterprises to citizens. Simply, productivity gains go to citizens and not to those that created the gains and Money through innovation and taking risk.

The Money transferred to citizens would be needed to repay the debt incurred to create the Money. Obviously, this type of Money transfer is best avoided as it could result in productive businesses going broke and certainly disincentivising further productive gains, causing all citizens to be  worse off. This is why Central Banks and economists get so heated up about inflation and the wage-price spiral.

Productivity gains and the Money and value it creates should be shared equitably and not be inequitably distributed between owners (1%ers) and labour (the rest of the citizens). There is no formula as to how this equitable distribution of Money should occur. It’s a constant battle in every circumstance as to what value has been contributed by whom.

It is the government’s role to create an unbiased infrastructure to at least allow an equitable negotiation on distributing the benefits of Productivity gains. It is not professional or even intelligent for the Central Bank to treat all inflation the same by increasing interest rates until inflation abates. The effects on citizen’s Money and wealth could be very detrimental depending on the causes of inflation.

Leaving aside Money created through productivity gains, what’s the situation when prices have risen through Rent seeking, and Money created from non-productive activities? Rent seekers want and encourage a price-wage spiral because they can only win in that situation, capturing an increasing share of new Money creation. In the reciprocal, Rent seekers are losers in a wage-price spiral, certainly not a bad thing. If Rent seekers have been pillaging a greater share of existing Money and new Money creation, and for whatever reason that Rent seeking reverses, there is a Money transfer to citizens through earnings increases more than cost increases. Citizens are better off.

In parallel, the Rent seeker business model suffers because their Money wealth decreases with no ability to make productivity gains to retrieve the lost wealth. There is then a transfer of money back to citizens that was misappropriated by Rent seekers and encourages more innovation for productivity gains.

Again we must ask the question, why does the Central Bank, in addressing the inflation (both price-wage and wage-price) issue have a one-solution-fits-all solution, being increased interest rates, when clearly there are very different circumstances with very different effects in how Money is distributed to citizens? For the Central Bank to increase interest rates to address inflation caused by a price-wage spiral mainly generated by Rent seekers, causing a loss of Money to many citizens who had nothing to do with creating the inflation appears nonsensical. It’s an act of economic destruction by discouraging productivity and decreasing the value of Money that hurts citizens to the benefit of only the 1%ers. That is just stupidity.

Why is ‘zero’ inflation bad but ‘some’ inflation good?

The theory in simple terms, is that ‘some’ inflation is warranted to encourage citizens to spend Money today on goods and services rather than wait say a year because the price would be greater in the future. Buying today rather than in a year is apparently a good thing. The Central Bank sets what the ‘some’ inflation rate is through its targeted inflation rate but does not explain why that ‘some’ is acceptable, or the effect of any inflation on the value of a citizens Money. The theory of why ‘some’ inflation is necessary is very flaky. Yet again, this theory takes no account of how inflation distributes Money between citizens and 1%ers that is driven by the particular type and causes of inflation.

Rule 21: Inflation does not create or destroy Money. It redistributes Money between sections of the economy. There is not just one form of inflation, there are a number. The distinction is critical to the effects of inflation. Price-wage spirals of inflation are never good for citizens. Wage-price spirals are good for citizens when inflation redistributes Money to citizens for productivity gains or where Money was misappropriated by Rent seekers

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