There’s a lot of talk about inflation and its causes. Is it corporate greed? Supply chain issues? One clear base cause of inflation less talked about is having an inflationary currency supply. Any other inflation caused by supply chain issues, corporate greed, lack of market competition, etc is just added on top of that. Fiat inflationary currency is a rather new invention in terms of the human timeline. In the US, Nixon is the start of it. Central banks aim for 2-3% inflation in “good years”. The money supply expands, the portion of that supply a single dollar represents, and therefore its value, decreases. This isn’t a conspiracy, it’s government policy, and both parties gleefully support it because it benefits their rich donors.
Think of it: in the last 50 years, everything has gotten cheaper to produce thanks to increasing mechanization, outsourcing to cheap labor/low regulation countries, and extremely efficient supply chains. Yet so many things “cost more” than they did 50 years ago. Even basics like bread. What used to be 5c in the US in the 50s now costs $5.00. How is that the case? Shouldn’t it cost less? Where is that “extra efficiency” going if not to lower prices? The answer: bread is the same value it’s always been, the money has gotten less valuable. This is how they keep working class people running on a treadmill, never able to achieve economic mobility.
Inflationary currency devalues the currency you worked hard to earn by increasing the supply. It hits the middle class the worst because they have more of their net wealth in cash, often in the form of emergency funds, savings, and putting together enough money for a down payment on a home. Rich people have their money in assets which aren’t harmed by currency inflation. Actually, even worse, it inflates the value of those assets! If the dollar loses value (all other things being equal), it takes more dollar to buy a share in Amazon, just like it takes more dollars to buy a loaf of bread. Poor people live hand to mouth, so their net wealth is not impacted much, but inflationary currency prevents them from saving and “moving up”. If you want to identify the causes of increasing wealth disparity, the inability of people to save money and theft of value from the middle class via money supply expansion is a major one.
This kind of naive and simplistic view of inflation is long debuked. Maybe read up on current thoughts: https://strangematters.coop/supply-chain-theory-of-inflation/
Increasing the money supply, all other things equal, decreases the value of the currency. It’s that simple. The price, or value of the currency is the net of supply and demand for that currency. Same demand, higher supply, lower value per unit.
This link argues inflation is more complicated than that, which I agree with in my opening sentence, inflation has many causes. Of course it’s more complicated than that. But that doesn’t change the underlying basic reality that inflating the supply on its own reduces the value of the money. Supply and demand is simple, unpacking which % of the 10% inflation experienced in an economy is caused by money printing or push-pull or supply chain disruptions is a more complex and possibly impossible to fully answer question. The complexity of answering that question is a good argument for why we shouldn’t give central banks the ability to change the money supply or interest rates, as they cannot have the information required to know whether raising interest rates will fix inflation because they can’t even know for sure what is even causing it. I mean, inflating the currency supply is certainly a part of it, but picking apart the other pieces is when it enters that grey area of unknowability.
I am not an economist but isn’t inflation stimulated in capitalist countries, and it is used as a leverage against people over saving. The idea is that your savings will lose its purchasing power over time and people are stimulated to spend them instead of simply saving it in the bank. Here we are talking of annual inflation around 2-3%.
But yes, I agree, employees are usually suffering from the inflation, as it slowly eats their purchasing power and savings.
But now the divide between poor and rich is so big, that I think our societies will reach a point where there would be public outcry and people will publicly revolt against it.
this kind of leads into OPs point I think. keep people from amassing any kind of wealth or savings by devaluing those savings. therefore keeping us on the treadmill in perpetuity
Rich people are affected by inflation. If your return on investment is 4%, but inflation rose 8%, you lost money.
The detachment of productivity gains from average wages is a much stronger argument. They more or less matched up through the 70s, but then a stark difference settled in as the extra money made from things went to the investor class rather than the working class.
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If I bought one unit of Apple stock, if the USD loses value, it doesn’t effect the value of my apple stock. It now takes more dollars to buy an Apple share, but my Apple share is still 1/100 of Apple. Currency devaluing makes it look like I’m making money because the share price rose, but I’m not. To be fair, I’m making money but the total value has not changed. I can trade that Apple share for more dollars now, but I probably can’t trade it for more bread or other “assets”.
If the currency loses 8% of its value, one would expect the share of Apple stock to cost 8% more currency. So if my “return on investment” is 4% but the currency is worth 8% less, that means Apple’s value has changed in addition to inflation happening. My stock lost value there. Not due to inflation, but due to Apple being valued less by the market for some unknown reason.
The impact is still disproportionate. While I lost 4% in your example, a pleb holding cash lost 8%. And plebs have a greater share of their net wealth in cash.
If the currency loses 8% of its value, one would expect the share of Apple stock to cost 8% more currency. So if my “return on investment” is 4% but the currency is worth 8% less, that means Apple’s value has changed in addition to inflation happening.
If APPL goes up 8% and inflation increased 8%, then your real rate of return is zero.
a pleb holding cash lost 8%.
This is not how it works. The working class does not “hold cash”. They spend their cash, and their wage (hopefully) tracks inflation over time. It mostly does over the long run; we’re in a period of high inflation, which is why it’s on everyone’s mind, but we’re also coming off a period of remarkably low inflation since the 2008 financial crash.
Or like I said above, it hopefully tracks with productivity gains rather than inflation, which would far outpace inflation over the last 50 years.
I’ll also copy a bit from another comment I made in the thread:
The loudest anti-inflation voices over the past 40 years haven’t come from the left. They’re right-libertarians railing about “Audit the Fed”. You should ask yourself why those temporarily embarrassed billionaires don’t like inflation. It’s definitely not because they have a sudden care about the working class on this issue.
Really rich people are not affected as much by inflation as they take out loans to pay for their day-to-day life which is then paid back in the currency that is inflating, while it’s paid with the interest they earn with company shares. Those shares are not directly hit by inflation like the loan is.
This lifestyle/procedure makes it easier to maintain your wealth compared to a regular person.
See in your example you say company value rose by 4% and inflation by 8% so they loose money, but that also means the company performed worse than before. Think of it like gold, when I have 1 ounce of gold and the dollar value sinks due to inflation, the value of my gold did not change, it’s still one ounce of gold and if the gold price is not sinking for some reason, the cost/buying price of gold will most likely rise 8%, because the currency is worth 8% less but the value of gold staid the same.
Loans change their rates according to inflation. That doesn’t work that way.
If I take out a $10,000 loan, which for simplicity’s sake let’s say is worth 10,000 loaves of bread, and next year, when payment is due, $10,000 is “worth half as much” ie I can only buy 5,000 loaves of bread with it, I only have to pay back “half the loan”. I still pay the same $10k, but at the time I paid it back, I only had to trade half as much bread (my storage asset of choice) for it.
If inflation doubled in a single year like that, and the bank didn’t set their interest rate to at least double, then the bank lost money. Banks aren’t in the habit of losing money.
No, you can take out huge loans over a year with putting stocks as collateral so its a low risk deal for the bank and have fixed interest rates if you pay back in the same year. If you are really rich you have access to “tools” which make participating in the financial market systematically easier.
A bank isn’t giving away loans for less than inflation. Especially not in a year’s time. They’re looking at the fed rate (itself set according to inflation), adding one or two percent, and taking that. Yes, even for low risk loans with full collateral. Higher risk loans set it at fed rate plus 5 and go up from there.
The loudest anti-inflation voices over the past 40 years haven’t come from the left. They’re right-libertarians railing about “Audit the Fed”. You should ask yourself why those temporarily embarrassed billionaires don’t like inflation. It’s definitely not because they have a sudden care about the working class on this issue.
Not to mention that the price of necessities doesn’t scale with your income.
A person making 100,000 a year and a person making 10,000 a year pay the same rate for things like bread and water and electricity.
