The Sources of Inflation

The Economics of Chaos. What We Know for Sure

by Rodger Malcolm Mitchell, www.nofica.com

Because a large economy, by definition, contains more money than does a smaller economy, an economy growing from smaller to larger requires an increase in the money supply.

But in the minds of people ignorant about economics, every solution to recession, every solution to the income gap, every solution to other economic misfortunes — indeed every government action that involves adding to the money supply — always must lead to inflation and unsustainable debt.

For them economics is simple: Money Supply (MS) = Inflation (I). Period.

(The exceptionally ignorant believe all solutions lead to hyperinflation, with the inevitable, wrongheaded comparisons to Zimbabwe, Weimar Republic and Argentina.)

But economics actually is among the most complex of all sciences, encompassing psychology, sociology, mathematics, engineering, physics, chaos theory and innumerable other disciplines.

Inflation includes that complexity, for Inflation most certainly does not = Money Supply.

Inflation is the change in value of Money vs. the value of Goods and Services.

The Value of Money = Demand / Supply.
The Demand for Money = Reward/Risk
The Reward or owning money is Interest.

Put them all together and you have:

Value of Money = (Interest / Risk) / Supply.

Then we come to the Value of Goods and Services (G&S), which is calculated.

Value = (Demand / Supply) X Cost

Consider any Good, such as steel. The value of steel = the Demand for steel divided by the Supply of steel, x the cost of producing steel. The price of steel rises when demand rises, the supply falls and/or the cost of production rises.

So Inflation depends on this:

[(Demand for G&S / Supply of G&S) x Cost of producing Goods and Services] / [(Interest / Risk) / Supply of Money]

That is a long, long way from from the debt hawks’ simplistic: Money Supply = Inflation.

But, it gets more complicated. Each Good and each Service weighs differently on inflation. The cost of tomatoes might rise and have a very small effect on inflation, while the cost of oil has a huge effect on inflation.

Further, the price of some goods is artificially controlled (oil is an example), and the Demand for oil reacts minimally to price changes. Inflation then is the weighted Values of every Good and Service / the Value of Money, and that weighting, in of itself, is complex.

But, it gets even more complicated, for psychology is a big part of economics, and humans as a group, react differently to different situations.

Finally, a small inflation can be self curing or self perpetuating, depending on the power of automatic stabilizers (factors that automatically work against changes in inflation).

Many sciences encounter such complexity. Consider these excerpts from the January 25, 2014 issue of Science News Magazine

Tomorrow’s catch, Chaos theory’s potential for fisheries management

BY Gabriel Popkin, JANUARY 10, 2014

Pacific sardines all but disappeared from coastal waters in the 1950s. Numbers remained low until the late 1980s, when enough fish finally reappeared to make commercial harvesting worthwhile again. By then, sardines in the highly productive California Current were carefully managed.

Scientists still debate what causes sardine numbers to rise and fall. Overfishing certainly played a part in the collapse. Research suggests that a cooling of the eastern Pacific Ocean also played a key role.

The thinking goes that a cool period starting in the mid-1940s, combined with decades of overfishing, sank the sardine.

So, for the scientists, Sardine population = 1 / (Fishing x Water Temperature)

Based on this understanding, the Pacific Fishery Management Council developed a temperature-dependent method to predict population changes and set harvest limits for sardines in the California Current.

In 2010, however, scientists analyzed data from the previous two decades and published a study questioning the correlation between sardine population growth and sea surface temperature. As a result, the council removed ocean temperature from the mathematical models they use to forecast sardine population growth.

The council’s decision frustrates George Sugihara, a theoretical biologist. In his view, the simulations that fishery scientists use to predict population changes and set quotas are fundamentally flawed.

The simulations can’t capture how a population’s growth rate might change in response to the other fish species living in the ocean, for example, or to the amount of zooplankton, or to wind speeds or, for that matter, to fishing itself. He says “it’s like trying to understand reality by just looking at one page” of a book.

I do it. You do it. We all do it. We look for simple correlations. To the layman, Money Supply = Inflation makes perfect intuitive sense. “Print” more money, and we’ll have inflation. Right?

But somehow, it doesn’t work that way. In fact, since 1972, when we stopped using gold as a backing for the dollar, there has been no relationship between federal “money printing” (deficit spending) and inflation.

How is this possible? Complexity.

And as for federal debt being “unsustainable” and “costing taxpayers money,” these myths have been demolished in many posts throughout this blog, for instance here and here.

Intuition betrays us in all sciences. Time depends on speed (We age slower as we go faster.) An atomic particle can be in different places at the same moment. Fish populations do not correlate directly with fishing. Debt is not a burden on the federal government. And inflation does not result from federal spending.

So where does that leave us? Economics is beyond complex; it is chaotic. It follows the butterfly effect (A butterfly flapping its wings can change world weather). So simple, linear causes and effects are rare.

We are left, then, with the few things we know for sure.

1. We know for sure that a growing economy requires a growing money supply, as discussed, above (although this is not to say there is a linear relationship between money supply and economic growth).
2. We know for sure that federal spending and exports add money to the economy while federal taxes and imports remove money from the economy.
3. We know for sure that the federal government (unlike state and local governments) cannot run short of dollars, so can pay any debt at any time (unless Congress rules against paying its debts).
4. We know for sure that money cures poverty, at least temporarily. Give a poor person money and/or services on which he must spend money, and at that moment he is less poor (recognizing that any given individual quickly may lose the money or waste the services provided to him).
5. We know for sure that a growing gap between the rich and the rest punishes the majority, while rewarding the minority.
6. We know for sure that rewarding the poor and middle classes more that we reward the rich, narrows the gap between the rich and the rest.
7. We know for sure that education in general helps people in general to grow economically.
8. We know for sure, that when crime is rewarded more than punished, crime will exist, and when the rewards grow vs punishments, crime will grow.

And this knowledge is what leads us to “The Nine Steps to Prosperity,” below.

••••••••••••••••••••••••••••••••••

Nine Steps to Prosperity:

1. Eliminate FICA (Click here)
2. Federally funded Medicare — parts A, B & D plus long term nursing care — for everyone (Click here)
3. Provide an Economic Bonus to every man, woman and child in America, and/or every state a per capita Economic Bonus. (Click here) Or institute a reverse income tax.
4. Free education (including post-grad) for everyone. Click here
5. Salary for attending school (Click here)
6. Eliminate corporate taxes (Click here)
7. Increase the standard income tax deduction annually
8. Increase federal spending on the myriad initiatives that benefit America’s 99% (Click here)
9. Federal ownership of all banks (Click here)

•••••••••••••••••

10 Steps to Economic Misery: (Click here🙂

1. Maintain or increase the FICA tax.
2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
3. Cut federal employment in the military, post office, other federal agencies.
4. Broaden the income tax base so more lower income people will pay.
5. Cut financial assistance to the states.
6. Spread the myth federal taxes pay for federal spending.
7. Allow banks to trade for their own accounts; save them when their investments go sour.
8. Never prosecute any banker for criminal activity.
9. Nominate arch conservatives to the Supreme Court.
10. Reduce the federal deficit and debt.

•••••••••••••••••

Mitchell’s laws:

1. The more federal budgets are cut and taxes increased, the weaker an economy becomes.
2. Austerity is the government’s method for widening the gap between rich and poor, which ultimately leads to civil disorder.
3. Until the 99% understand the need for federal deficits, the upper 1% will rule.
4. To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
5. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
6. The penalty for ignorance is slavery.
7. Everything in economics devolves to motive.