The basic principles of economics are not complex, but human intuition is not effective understanding very large, slowly changing systems. I tried to simplify the concept of purchasing power, or inflation, 10 years ago, here (EggVille).
Judging by the dangerous nonsense I continue to read everywhere, some of it written Nobel Prize winner in economies and paid progressive stooge Paul Krugman, it appears to have not worked.
Let me further simplify:
Imagine an economy where the only product in existence is the predecessor to ChatGPT, the Hasbro Furby.
Demand is equal among everyone for exactly one Furby. No new Furbi are, or can be created, but they last forever in working order.
There are 10 Furbi in existence, 10 people in the entire economy, and $10 in circulation.
What does a Furby cost?
Another $10 is added to that same economy in the form of free $1 Covid19 checks for everyone, in exchange for doing nothing.
What does a Furby cost? Why?
Adding money to an economy makes the purchasing power of a dollar drop and raises prices.
The first of two of largest mechanisms to add (or, hypothetically, remove) money from a Western capitalist economy are “Quantitative Easing” (QE). QE achieves exactly what I describe above with the additional $10. Money is created from thin air, added to the government’s checkbook and given away, in exchange for nothing. It is never retired, or “paid back”.
The second is government debt. If debt is used to make an investment with a return, like the Interstate Highway system, or Hoover Dam, then it can increase economic output, wages, and wealth. There is an argument for leaving this debt to future generations as they will benefit from it.
We have not behaved like this since the Clinton presidency. We have amassed so much debt (as I warned) that it can only be paid back if spread across the next 6 generations. This is called “pull forward revenue”, which means stealing from the future and partying now. And it works. Sort of.
What’s happening to prices now? Why?
“Inflation Reduction Act”, anyone? The level of ignorance assumed by The Brandon Group appears to be correct.
Ignoring the moral questions here, there are several real issues this theft causes:
1. Interest payments paid on the debt are paid out of taxes, and budgets shrink by that amount, or taxes go up.
2. It is highly inflationary.
3. There is a declining return on investment, rather like heroin. The early effects are large, but the effect of additional “stimulus” over time declines.
4. Historically, this practice has led to collapse and war.
One of the arguments made by those who are invested in continuing to do this, under the name “Modern Monetary Theory”, which means dangerous historical and economic illiteracy, is that it worked for twenty years, so obviously, it will work forever.
It “worked”, because globalization (offshoring your job), and financialization (bankers own everything) depressed wages in the middle class, keeping measured inflation low. Low, because with bills, debt and no job they have no ability to ask for higher wages.
Globalization had the effect of making America the world’s banker, which spread the size of the linked economy from one country to most of world, and delayed the impact. Globalization is not all bad, indeed it increased total global wealth, reduced prices and quality of goods, lifted many people out of poverty.
One could imagine a globalized world where most governments are honest and wise, and don’t use endless debt to create the illusion of wealth so as to keep themselves in private jets at Davos. Such a world would produce great amounts of new wealth, and link people economically making war less likely.
It seems wee don’t get to see that experiment run.
It might just all work out OK.
Mike.
Mike Zintel, Discourse Antinormative 