For as long as money has existed through the years in its different forms — Silver, Gold, paper money; Inflation has subsisted.
It’s chronicled, that in the fourteenth century during Mansa Musa’s pilgrimage to Mecca; through his travel across Cairo, he gave away so much gold that its price was debased for a decade — Inflation.
In the most basic terms, Inflation is the rate at which prices rise over a given period of time. Alternately, it’s the decline of a given currency’s purchasing power over a period.
It’s caused by increasing the supply of money in the economy through its printing, and quantitative easing. Equally, Inflation is brought forth by disruptive shocks like natural disasters that fracture production and raise costs.
It [Inflation], is measured by collecting the price changes of all services and goods in an economy inclusive of the fickle — food, and energy [oil]; to capture what is known as Headline Inflation using the Consumer Price Index [CPI].
The CPI tracks these price changes over a period of time — monthly, quarterly, yearly; and the changes in the CPI, is what is generally recognised as the Inflation rate.
Over the years, different schools of economic thought, have expressed their viewpoint with regard to Inflation.
In this essay, I’m going to divvy up philosophies between the Keynesian, Chicago and Austrian schools of economic thought: spearheaded by their protagonists — John Maynard Keynes, Milton Friedman and Friedrich Hayek.
John Maynard Keynes (Keynesian School of Economics)
Patronized by his contemporaries for having ‘many great ideas but knowing little economics’ [because he only took eight weeks undergraduate training of the subject, and never sat any exam in it], Keynes established himself as the most influential economist of the 20th century.
As the inaugurator of the Keynesian school of economics, whose very expansionary methodologies effectuated inflation, Keynes in his 1931 book Essays in Persuasion had this to say about Inflation.
First, he notes that inflation affects different classes unequally and transfers wealth from one to another. He goes on to mention that it ‘bestows affluence here and embarrassment there’.
He continues to observe that through history, the deterioration of money hasn’t been accidental as it has had two great forces behind it: Governments, and the Political influential class.
Keynes expounds that by continuous Inflation, governments can confiscate secretly, arbitrary and unobserved an important part of the wealth of its citizens. This process he asserts, impoverishes many but enriches some.
He goes on to articulate that the profiteers [business class], are a consequence of inflation and not the cause. Keynes points out that the profiteering class faces the danger of attracting hatred from the masses because they make more profit as the prices soar.
In short, he affirmed that as inflation proceeded, the real value of the currency fluctuated from month to month.
Milton Friedman (Chicago School of Economics)
An apostle of the neo-classical Chicago school of economics, and a recipient of the Nobel prize in Economics in 1976. Milton Friedman in his celebrated 1980 Free to Choose television series, in the episode — How to Cure Inflation remarked, ‘The early stages of inflation are enjoyable because there’s plenty of money around, jobs are plentiful, and business is brisk’.
He affirms that the reason for inflation is the rapidly growing volume of money in comparison to the quantity of goods, services produced.
Friedman reveals that inflation is created at the centre of power — Government; because, central government is the place where power resides to determine how rapidly the amount of money will increase.
The Nobel laureate economist discloses that inflation moves people into higher tax brackets, meaning: The more you work, the more money you make, and the more you’re taxed!
With Inflation, the cost of living goes up, so do the expenses; and when a big chunk is taken off as taxes, what is left for the individual to spend is very little, that is, their purchasing power is lowered as a result.
He clarifies that higher wages are mostly a result of inflation rather than a cause of it.
The economist counsels that the way to stop inflation is by stopping the rapid growth of money: ‘Stop printing money, it’s that clear, that straight forward,’ he boldly asserts.
Friedrich Hayek (Austrian School of Economics)
A disciple of the Austrian school of economics that emphasizes the solving of complex economic problems with logic and reasoning other than complex mathematical models; Hayek was the recipient of the 1974 Nobel prize in Economics.
On NBC’s Meet the Press in June 1975, Hayek had this to say about inflation: ‘Inflation produces the misdirection of labour which ends in unemployment’.
To paraphrase Hayek, when governments print money to create aggregate demand to solve unemployment, and it halts the process of printing money, the situation gets worse; and the government has to start the process all-over by returning to Inflation.
Hayek asserts that Inflation is caused by the belief in Keynesian policies of creating aggregate demand by distributing ‘helicopter money’ to the public to stimulate economic growth.
He observes that Inflation does a great deal of harm before it’s cured and in the past, all Inflation has been stopped by the government stopping the creation of money.
The laureate highlights that to achieve a tolerable stable rate of inflation, you have to go through ‘a hell of inflation’ for more than a year.
Hayek infers that the longer you have inflation, the more unemployment becomes inevitable. Inflation’s worst effect, he clarifies is — ‘it draws labour into employments where they can’t be kept employed except through accelerating Inflation.
On a more reassuring note, Hayek advises the average investor to hedge against inflation by putting their savings/money into equities to preserve a sizeable portion of it.
Even though the Brahmins [Keynes, Friedman, and Hayek] didn’t see eye-to-eye on many issues, one thing they agreed upon was that Inflation was a creation of governments because only they controlled the printing of money.
Distressingly, governments continue to use Inflation sinisterly to redistribute, to profit the influential class and control the economy — diminishing the principle of a free market.
I for my part find that a ‘little Inflation’ is motivation for people to make profit, as price increments from an entrepreneurial standpoint, are looked at as payoffs. This drives people and businesses to cash in on the quantum leap by all means necessary.
Meaning, borrowing goes up; at low interest rates [because the government at this point is endeavouring to stimulate the economy], and so there’s a lot of ‘cheap money’ available in the system; to the benefit of financial institutions and businesses.
It’s for this particular reason that the US experienced real GDP growth of 5.5% in 2021 together with the S&P 500 recording 70 closing all-time highs, and a 28.7% increase in the same year; along with the cryptocurrency market valuation swelling to $3 trillion for the first time, as US companies hit valuations never before reached: Tesla $1 trillion, Apple $3 trillion; and commodities seeing double digit returns.
The aforementioned windfall springing from the Federal Reserve edging-in $8.76 trillion pushing inflation to its current rate — 7.5%.
Nonetheless, with inflation, another shoe is bound to drop because as Friedrich Hayek warns, ‘Inflation is like over eating and indigestion. Over eating is very pleasurable, so is inflation, indigestion comes afterwards . . .’
Independent Financial, Investment Analyst