There is a lot of conversation about inflation.
In the title of the article, I use the term "monetary inflation". This is done intentionally since the concepts have been warped.
If we go back to Milton Friedman, probably the most influential advocate of monetarism. He is best known for this statement:
Notice how he talks about the quantity of money. Nowhere does it refer to price increases. While this can result from inflation, there are many factors for price increases. More on this in a bit.
The contemporary view of things now terms any price increase inflation. We have the CPI and PPI, neither of which measures the quantity of money. There is no factoring in whether the money supply (not the monetary base) expanded or contracted.
Instead, the focus is upon price.
This leads to the belief in monetary debasement. Here is where we are dealing with outdated ideas.
Inflation, under the contemporary view is stated at "too much money chasing too few goods or services". This is something that most of us heard.
Thus, the conclusion is that, as this situation occurs, currency is debased because it loses its purchasing power.
If we take this from a mathematical perspective, it would look like this:
Number of units of goods and services/Number of units of currency
Let us give an example:
If the units of goods is 4 and the currency units 2, the purchasing power is 2.
Keeping the units the same, but doubling the currency units to 4, gives us a result of 1.
This affirms the view whereby the purchasing power was cut in half. One unit of currency, in the first example, got to units of goods whereas it only acquired 1 after the doubling of the money supply.
If this was the 1920s, it might be a valid theory. However, it is easily debunked.
What happens when the equation looks like this:
Infinite number of goods divided by currency units of 2. What is the purchasing power? Infinite.
If we double the currency units, to 4, what is the answer? The same: infinite.
What we have is the digital reality. There is no limits to the number of units since there is no number. Instead, we are limited by bandwidth. People can download an unlimited number of songs from ITunes. There is no numerical limit. Of course, there is a cap but that is based upon bandwidth. How quickly do the Apple services enable the download? What is the speed of the payment processing? How fast is one's connection?
Here we are not dealing with monetary variables but technological. One thing that should stand out is these systems are only increasing in speed. That means the numerator in our equation keeps going up.
Many will take exception to this, pointing to fancy graphics online that show the US dollar's purchasing power declining 99% in the last hundred years. This is pure foolishness.
Look at all that one can purchase that wasn't even around 100 years ago. On top of that, what is not in the numbers. People like to isolate specific markets to "prove" their point. Raoul Pal likes to use real estate. Yet, if you think about his analysis, he doesn't take into account factors such as population growth, regulations or urbanization. Instead, he simply correlates the price increase as evidence of currency debasement.
If we are going to operate in select markets, tell me the currency debasement rate in processors. How about in photographs? Songs?
Even more importantly, with the advent of LLMs, what is the debasement of the currency in cognitive units? Anyone who is following AI is seeing the cost of this drop like a rock. This means we are getting more cognition, per unit, for the same (or less) money as before.
Of course, we do not think in these terms. It is taken for granted when a chatbot spits out a 750 word article in a few seconds. This is overlooked when research, something that took significant time in the analog days, can be waned down to an hour or two.
In the next article, we will cover the mythology of inflation bad, deflation good.
