Funny comic that is less funny in the midst of our high inflation
Inflation is defined as the rate of increase in prices over a given period of time.
To understand inflation we need to understand how money supply is controlled. The best way to understand fiat* currency and the necessary independant role of the Federal Reserve bank and their actions to influence overall money supply is to picture a small town with X amount of money circulating in the town.
The people in the town work hard to create goods and services that did not exist before their work. This new work is how money or value- temporary (services) or permanent (goods)- can literally be "created" without any tangible (silver, gold, etc.) backing. The town can create its own paper to represent the incremental value they create each year.
When an economy's overall value expands (like postive GDP growth rate for nations), the money supply needs to be increased to reflect the increased value available for purchase or lease.
This "town money" is backed by the stuff produced by the townspeople each year, which, aside from a rare bad (crops, etc.) year every few decades, only ever increases. The townspeople have large, growing families** so the annual productivity gains and corresponding increases in the town's money supply can be counted on for generations*** and become part of the town's normal economy.
If all of the sudden, the town had to completely stop producing goods and services, the town's money (which is tied directly to the productivity of the town) will lose its purchasing power as each of the precious few remaining (already-produced) goods and services in the town become more and more scarce and expensive.
Recent inflation readings have been "not good" to put it mildly
The role of the Fed is to print money when positive GDP growth warrants it, to set base interest rates which banks use as the rate to lend money to each other, and to perform what are called "open market operations" where the Fed buys or sells bonds to influence the U.S. economy.
In normal times the Fed can cool an overheating economy by selling bonds and raising the base lending rates (which makes it more expensive to get money and slows spending), and can stimulate a flagging economy by buying bonds with cash which injects money into circulation (as was the case in the 2008 Recession and COVID stimulus grants, checks and other stimulus programs of the past 14 or so years).
In the national and world economies during a so-called "credit event" (ie. overvalued, "funny money" being found out, underlying assets being devalued, causing debts to default), the government can quite literally 'create' money by printing physical dollars and updating corresponding central digital banking ledgers in order to make up for the loss of liquidity in markets- this is the scenario when the Fed needs to add money to the money supply to stimulate the depressed labor market and demand that follows a credit event.
The problem lies in the lack of added value when the Fed prints money or buys debt securities far in excess of the actual value available in the economy. If there is nothing backing the new money, the new money represents a devaluing of currency because the overall money supply has changed, but the value available in the marketplace has not changed. This is why large loans typically need to be "secured" via a physical asset backing the loan- like a dwelling place, valuable land or an expensive vehicle.
A government's central bank can provide unbacked stimulus temporarily, but only temporarily. Eventually, any mismatch between value available and capital available will rebalance.
The problem right now is that we have to remove money from circulation to get inflation under control. And nobody ever wants the pain that is necessary for valuations and corresponding debts to "slow down" and reflect more realistic, tangible, clearly derived and described values. Fed actions to remove money from the money supply and hike basis interest rates means that money will become much more expensive to obtain and prices will remain bid up by the wealthiest spenders, until the world economy has been drained of all this excess money in circulation.
Americans would need an average annual pay raise of around 7-8% at this point simply to keep up with current inflation
Banks and large companies have been overdosing on easy (near-0 percent interest rate) money since 2008. Long-term high inflation is often the result of this kind of "cheap/easy money" monetary policy. When money can be had for the absurdly low rates as it was until very recently, an economy like that of the aforementioned ficticious small town, becomes awash in "too much money, chasing after too few goods and services".
In other words, people on average have a lot of money right now- but they cannot find enough things to spend it on. And because money has been raining on our economy for so long without an equal increase in the corresponding value backing the money, there simply aren't enough goods and services to go around for everyone (ie. meet the demand).
So what happens when once-affordable products and services become scarce like this? Naturally, people who possess the most money in the economy bid prices up as high as they are willing to afford, much like like an auction or eBay, and this raises prices for everyone.
Inflation was responsible for the rout of Reagan vs. Carter; no incumbent will win with 10% inflation (*cough*)
This excess supply of money- the principal cause of our current inflation and coming Recession- is accompanied by the inflationary pressures of China COVID lockdowns and Russia's invasion of Ukraine maligning global supply chains.
So not only are there less things and services available to purchase, but higher energy prices (sanctions on Russian oil) and slower delivery of supplies and goods to/from China are raising the prices of goods and services even higher than would happen in a "normal/historical" high inflationary period.
There are many takes on our current elevated inflation, but they all boil down to the same conculsion: when a normal balance of money in circulation and the goods and services available for purchase returns, inflation will return to the normal/expected ~2% year over year.
Naked captialism can be ugly and often reduces virtually all human value to metrics. We can do better, be more prudent about assesing risk, while also being more sensible (and equitable) in the distribution of new capital, and must.
This system is all we've got. And nobody wants to keep going on this terrifying plane ride every 8-10 years.
*dollars backed not by tangible precious metals like gold, silver or another scarce commodity resource but rather, backed by the "full faith and credit of the U.S. government". This "full faith and credit", is defined as "trust and reputation". But in regards to dollars and dollar-derived assets, the full faith and credit of the U.S. government includes its ability to collect massive amounts of revenue through taxes, as well as law enforcement and the military who protect assets from theft or seizure. Though this malleable "faith" backing is ambigous (it is a bit like "Goodwill" in business accounting), it's not for nothing.
**this is why a mid-to-high-growth U.S. economy is dependant on increases in nominal birthrates (workforce increases) and immigration (workforce increases). Otherwise there won't be enough people to provide for the demand of the older, retiring workforce and increasing wealth. That currently we've produced a series of American generations who are not as well off as their parents were is clear evidence of this already happening. There is simply demand outstripping supply at every turn.
***if this all seems like a gigantic institutionalized Ponzi scheme, that's because in a way, it is. 😐
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[uh-oh-we-can't-pay-the-ppl-above-us]
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