Dear Friends,
It seems to me, Milton Friedman was correct that inflation results from too much money chasing too few goods, but I think there is another side he didn’t address. That’s government economic repression, or supply side inflation. If government reduces the nation’s output, (aggregate supply) with the same amount of dollars, there will be inflation. This is because the same number of dollars are chasing less goods. It’s the same mechanism as Friedman’s but inverted. For example, when governments all but shut down their economies in 2020, this amounted to a huge reduction in aggregate supply. Then the US stimulated spending at the same time. How can that not produce inflation, since there were less products but more dollars. Our standard of living hangs in the inflationary balance.
Government can trigger inflation by printing more money than the economy grew. More dollars chasing the same goods allows those selling the goods to raise their prices. This isn’t out of greed as much as self-interest. Why do I say that, because if you or I were in the same position we would almost certainly also raise our prices. One can’t justly vilify another for an action we would do in their circumstances. Moreover, a mechanism operates as a mechanism, without morality or ethics. A gun cares not if it’s fired at the ground, a clay pigeon, or a human being. The mechanism of economics is the same. Print more dollars, Euros, or Pesos than the economy grows and there will be inflation. Economists know this and exploit the fact via central banks like the US Federal Reserve.
Government can shrink the economy to create inflation. In a situation where government doesn’t print a single dollar but passes regulation that lowers aggregate supply, there must be inflation. As I discussed above. This is a factor in inflation that I believe is underestimated. Most elites (leaders of nations, cities, and institutions) should want prosperous nations. Their avarice, wrath, envy, pride, sloth, lust, and gluttony get in the way, however. So many opt for extraction instead of a wealthy nation. The rest are stupid, as defined by Bonhoeffer. When this is the case, laws and regulations will be passed that crush aggregate supply and worst, entrepreneurship. The second destroys aggregate supply in the future. Destroying entrepreneurs amounts to damage that is unseen.
Inflation then can be a measure of the economic effectiveness of government. This is because the wealth of a nation is due to the quality of leadership, not location, natural resources, or any other confounding factor. History is pretty shrill about this. Japan is not a nation swimming in natural resources, indeed it has tsunamis and earthquakes on a regular basis. Yet, Japan has been an economic powerhouse. Meanwhile, Canada is a well developed nation with terrific natural resources, yet the GDP per person in Canada is lower than Mississippi residents. The reason is clear, economic repression in Canada has smothered the economy. Their profligate government fails at even the most basic tasks. Resorting to state assisted suicide. Even as that same government claims omnipotence.
What if government spending was limited to economic growth? In other words, it could only print and spend the amount of money it would take to reach zero inflation. If the government’s policies create economic growth, there would be a lot of additional currency to spend. Meanwhile, the government whose policies lower GDP would have to lay off most if not all of its staff and work for free. This would directly link government’s economic effectiveness with its own self-interest. Laws and regulations that lower aggregate supply would become an anathema. Economic repression would be a thing of the past. Moreover, entrepreneurs would be cherished for the future government income they promise. This would solve inflation and our standard of living would rise.
Sincerely,
John Pepin
