You can increase the supply of money, but you can’t increase the supply of value without technology. If technology is defined as doing more with less, inflation is entropy – it’s doing less (goods and services) with more (money). Because the supply of money is increasing through government policy choices more quickly than technology is progressing, the Western world is experiencing inflation. Unless we can find a way for technological progress to outrun the spending, the ratio between money and value will continue to progress in the wrong direction.
The only party that benefits from inflation are entities with large debts denominated in the form of money being inflated. In this case, that’s the government. The government is choosing to harm money holders and users in favour of continuing to meet its obligations. The problem is that until technology progresses faster than the money supply increases, the ratio just keeps getting worse. As the ratio gets worse, people lose confidence in governments, which results ultimately in more populism. Populism is what recursively leads to more spending focused policy, which leads to more inflation. For case studies, see many South American countries. While it temporarily benefits the populist government, it permanently erodes trust, and ultimately leads to failed states. The question is whether we can outrun that failed state scenario.
The party that is most harmed by inflation are people with no financial assets. Because businesses supply costs increase (simple math as the ratio of money to value goes up), businesses pass those costs on. Eventually, everything is impacted by consumer spending. As prices rise, consumers’ ability to spend goes down, the ratio of their money to value in the form of goods and services goes down. If you own a ton of financial assets, and those financial assets increase in monetary value (not the same as actual value), you’re at least hedged and you come out net neutral. If you don’t have those assets, everything costs more, with no upside. This is ultimately what makes inflation lead to a vicious cycle of populism. You can’t increase taxes (less money to spend), you can’t decrease spending (populism). If you raise interest rates, financial assets crash. If you don’t raise interest rates, inflation becomes hyperinflation.
We will all be a part of this experiment until one of a few things happen. The first is that the value supply catches up with or surpasses the money supply. It’s a rate of change problem, but it could be done, if the rate of technological progress and productivity growth increased faster than the increases in the money supply. This would lead to a natural deflation in prices, without a corresponding decrease in the supply of value. This would be the positive outcome scenario, because people could afford more goods and services provided the same supply of money. It’s like how TVs get both better and cheaper each year, but applied to things that matter like healthcare, transportation and housing. This is what we should all be aiming for.
The next best option would be that humanity collectively finds a way to move off of political money supplies. If we had a money supply that could not be affected by populist policy choices, at least that money supply’s relation to value would not be influenced by popular opinion, but rather by some intangible relationship between it’s perceived value and the supply of actual value. Unlike gold, cryptocurrencies could eventually be easy enough to use for spending, so it would combine the benefits of a store of value with the liquidity of a medium of exchange. Most cryptocurrencies still fail to provide a sufficient medium of exchange. They are measured in “relative to USD” values, suggesting value storage rather than mediums of exchange (where they would have intrinsic value). Because it is possible, this becomes appealing in all scenarios, but it becomes appealing to the opposite party: non-government holders and users of currency.
The rest of the options are pretty bleak. If you stick to the existing money supply, the policy choices afforded the West right now are all bad. One lever is interest rates, which are near zero. The only way to reduce inflation would be to increase interest, to affect the ratio between money and value. The prices of financial assets are based on potential future cash flows. If the supply of money is reduced through higher interest rates, the price of those assets goes down by a lot. The alternative in normal times would be stimulus. But the economy has already experienced so much stimulus, arguably that stimulus is the directly attributable reason for the inflation. It’s an increase in the supply of money without a corresponding increase in the supply of value.
Alternatively, you can debase the currency, which is basically “inflation as policy choice”. This is a nice way to choose when and how you are able to pay off mounting debt obligations, but it’s the fastest and most harmful path of all for the holders and users of that supply of money. In today’s world, with the internet access afforded people, this seems to lead to a rapid loss of trust in the government and rapid adoption of cryptocurrencies. Cryptocurrencies are volatile, but they are less volatile than many South American governments, so adoption there is strong.
Ultimately, governments have no more levers left to support populist programs and currency policy choices, and trust can only go down from here unless technology progresses faster. The question is whether the government has the will to spend on R&D fast enough. It has been done before, and actually worked in some cases, but not when populism was so acute, interest rates so low, and stimulus for consumer spending so played out. The US infrastructure spending plan seems to focus on areas of low technological potential, like roads. Whether we spend on roads or not will not really result in productivity growth, or doing more with less. If we spent even a fraction of what gets spent on defence, on things that lead to productivity growth, it’s quite likely that we could avert disaster. It’s interesting to think we still have choices that go beyond fiscal and monetary policy, and disturbing to realize how unlikely it is that we will make them in time.
At each level of abstraction (e.g. for ourselves, communities, businesses, and nations), the question becomes: what is the right way to respond to a harsh environment of populism induced inflation? For one thing, you’d want to keep anything dollar denominated and depreciating off your books. Pay off that variable rate car loan, spend what you make, and seek inflation hedged stores of value like land and cryptocurrencies. But the most fundamental thing would be to own the means of production itself, especially a means of production with an essential good, and one that benefits from technological progress (doing more with less resources). It does seem like a good way to do that in an environment like this where cash is abundant is to start a startup.
The question becomes what startup will benefit the most from a society that heavily depends on productivity growth? And the answer is one that has some kind of compounding advantage in the form of productivity. It’s fine if it takes a lot of capital to start, and loses money in the short term. People have too much capital in the form of money to begin with. But it has to eventually lead to compounded productivity growth advantage. This usually shows up in revenue per employee, which starts very low, but should have the potential to become very high. Start a startup, regardless of upfront cost (because the world has capital in abundance unlike almost all of history), that has the highest potential revenue per employee. It almost takes the form of a commandment, which maybe it eventually will be, but for now it can be an open secret.