One of the things I brought up in my objection to “UBI”, and one that defenders of the concept tried to elide over was that of inflation. Most people use inflation to mean rising prices, and there’s some justice to that but the rise in prices is a consequence of inflation, not inflation itself.
When I was about…eleven I think… I had read in the World Book Encyclopedia and Book of Facts (my family had a set which I dearly loved, along with the late 60’s “Childcraft” supplements) about the US Mint and printing money. Prices were a big concern. President Nixon was implementing wage and price controls. I asked my mother why, if prices were such a problem, the government didn’t just print more money to be able to pay for it. She explained, as if to a child (well, yeah) that that would just increase inflation.
That was my introduction to the concept of what inflation actually was. It was also my first lesson in the science of economics.
Put simply (very simply), inflation is an increase in the supply of money relative to economic output. “Economic output” is simply the sum total of goods and services produced by the society in question. I would also add “traded for” as part of that. Basically, it’s everything that can be purchased in a society. On the one hand, you’ve got the economic output. On the other you have money. You can increase the economic output (this is called “economic growth”) or you can decrease it (“economic recession”). You can increase the money supply and you can decrease it.
So long as the money supply and the economic output remain consistent, prices remain stable. When some prices go up–more money being spent on that good or service–that generally requires other prices to go down because there’s now less money to be spent there.
It’s when the money supply increases faster than economic output that you have inflation.
At first, an increase in the money supply can look good. It looks like “economic stimulus.” Consider. People buy SharpieTM pens. They have more money, so they buy more at the local store. Local store sees them moving faster so they order more from the distributor. Distributor sees them moving faster so they order more from the manufacturer. Manufacturer is selling out so they increase production, ordering more raw materials and maybe hiring more people to produce more pens.
And that’s great, so far as it goes. Now, normally, people buying more SharpieTM pens will buy fewer MicronTM or BicTM or whatever. And the reduced demand on those will lead to them buying less, using less in the way of raw materials and hiring fewer people. The result being the moving of resources from an area of less demand to an area of more demand.
But in the case of inflation, it’s not more SharpieTM and fewer MicronTM and BicTM. It’s more SharpieTM and more MicronTM and more BicTM. So, they all end up trying to grab more of the same scarce resources that have alternative uses. This bids up the price and so the cost of those resources to those manufacturers goes up, forcing them to raise the price of their product, and that works its way down the line to higher prices of pens (and everything else–pens was just an illustration of the general concept) in the stores. So while people have more money from that increased money supply, the increased prices means they can’t buy any more than they could in the first place.
If it were just that, inflation would be neutral. Increasing money supply increases prices so that buying power remains unchanged. But that’s not the only effect. The steady state of “this much money supply” and “these prices” neglects the factor of time. And this effect can be brutal on people who invest. In investing one buys an asset (including stocks) or makes a loan (including “buying” bonds) in the hope of exchanging it later for more money. To a certain extent assets can accommodate inflation. The price of the asset will be inflated along with everything else. Loans, including bonds, are a different matter. These generally specify a fixed rate of return. Inflate the money supply and suddenly their value plummets. Now, if the inflation is known in advance, that can be dealt with. You simply specify the rate of return to take inflation into account. However, fail to do that, or get caught flat-footed by an unexpected increase in inflation and the loan can soon descend into worthlessness. This makes people unwilling to lend money or only to do so at interest rates high enough to compensate for the risk, both of which tend to stunt economic growth.
When inflation gets really bad, termed “hyperinflation”, in the time between when one can get paid for a transaction (receive a paycheck from work, sell something, whatever), and go to buy something else (dinner, say), prices can change drastically.
In the end, what you want is to keep the money supply roughly commensurate with economic output. This keeps prices stable and, indeed, as a greater variety of goods and services become available (economic growth) many things end up being cheaper individually. Thus, entry level and economy cars have features today have features and amenities that would have been more at home on high end luxury cars of a generation ago. Thus, I have a computer in my pocket, costing about a week’s pay, with the power of high-end supercomputers of a (human) generation ago which ten years of my current salary might, possibly, have paid for.
Thus, the poor of modern America have wealth beyond the dreams of those a century agone.
I’ll deal with money supply and what affects it (it’s not just government printing presses) another time.