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Whatever it Takes

December 6, 2021

In economics, one thing usually holds, and that is that when there is more of something, the price of that thing typically declines. People are willing to pay less for something when there is more of it. This is true even when that thing is money. When there is an increased supply of money, people are less willing to exchange goods for that money if the supply of goods stays constant. The price, in terms of money, of those goods increase.

For the past few years, central banks have seemingly been defying economic gravity, increasing the supply of money but seeing no signs of this expected inflation showing up in their metrics. Who knows, maybe their metrics were wrong all along.

It's hard to know exactly when certain effects will kick in. This is clear when comparing central banks' economic forecasts (for instance in Sweden) with actual data. Sometimes they get it right, but they often get the timing wrong; they don't know how long it will take before the economy starts moving in a certain direction. This is hard to know because for the actual economy to change, people's perception of the economy needs to change. Who knows how long that is going to take. Central banks didn't see inflation kicking in, so they kept printing money. Perhaps people weren't buying the things that were included in the inflation measurements, but rather buying houses or shares, so they missed that the prices were increasing. Microeconomics is now catching up with macroeconomists, and inflation is increasing substantially, also in the inflation gauges.

Having a 6% inflation rate is not a good thing. It's unfortunate that society has put itself in this situation, but not a surprise. The people who pay for this are the middle class because as a fraction of their wealth, they hold more cash. The rich have invested their capital to a greater fraction of their wealth. The low-income bracket needs to spend their money when they get it and if they don't get incomes adjusted accordingly,they too lose out.

I think it's a shame, but inevitable, that we ended up in this situation.