Inflation: Keynes, the Gold Watch and Everything

August 13, 2021

Demand isn’t the problem, supply is
the problem, and it can’t be resolved by printing more currency or lowering interest rates
or cranking up inflation.

To the degree that we inhabit an economic order dominated by Keynes and “demand,” then
any discussion of inflation has to circle round to Keynes and his magic solution to all
economic ills: “demand”, otherwise known as money burning a hole in your pocket.

Keynes’ solution to depression, unemployment and virtually every other economic ill was to
stimulate demand for goods and services by giving people more money and making it easier for
them to borrow more money, with the key incentives being to promote more spending, not more
savings and investment. The more people were encouraged to borrow and spend, the more demand
for goods and services would increase and this growth would solve all economic ills.

Productivity and supply aren’t issues in the magical world of Keynesian economics:
Keynes famously suggested that paying people to dig holes and then fill them was one way to
get more money into pockets for people to spend.

In this economic order, inflation is a useful incentive to nudge people into spending their
money rather than saving and investing it, as all cash will buy less next year in an inflationary regime.

Here’s the problem with the Keynesian economic order: it stopped the gold watch in 1932
when the world’s supply of oil and other resources could still be viewed as semi-infinite:
supply was just waiting for more demand as a signal to increase. If demand increased, supply
would always magically increase in parallel.

In this magical kingdom of Keynes, any scarcity / shortage would be transitory
for two reasons: 1) stuff was basically infinite; there was always some new source to
mine, drill, extract, etc., and 2) there is always a substitute for whatever is temporarily
scarce: if the beef supply can’t be ramped up to meet demand, then people can buy a substitute,
which is presumed to be in unlimited supply.

In 1932, the world was still awash in oil, and hydrocarbons and minerals seemed abundant
beyond measure. The human population was growing but nowhere near utilizing the planet’s
agricultural and fresh water supplies. Everything was essentially infinite; scarcities were
transitory or localized.

Set the gold watch for 2021 and none of these conditions apply. The human populace has
roughly quadrupled from 2 billion to 8 billion, the energy consumed per capita in developed
nations has skyrocketed, resources are limited by depletion and costs of extraction, and as a result, scarcities are not transitory, they’re permanent.

Inflation isn’t just a mechanism to incentivize borrowing and spending now rather than later, it’s a policy of impoverishment of the bottom 90%. The wealthy have income and capital
gains from assets which bubble higher in the magical kingdom of Keynes, while those who depend
on wages for their living lose ground every second the watch ticks forward in time.

Keynesian magic can’t conjure substitutes for fresh water, wild fisheries, cobalt or
even semiconductor-grade sand. In the world of 2021, demand is not the issue; supply
is the issue, and the Keynesian magicians are literally blind to the consequences of this change.

The problem isn’t there isn’t enough money burning a hole in consumers’ pockets; the problem
is the price of goods extracted from the physical world and shipped across the world
is rising far faster than the Keynesians can stuff money into pockets. The other problem is
that there are no substitutes for what is scarce, and unless the Keynesian conjurers can
magically turn dirt into cobalt, make heat and pollution vanish and provide magic carpets
for moving stuff around frictionlessly, then the economy will increasingly be dominated by
scarcities and shortages of resources and other inputs for which there are no substitutes.

It’s a different world, people, so move your gold watches from 1932 to 2021, or suffer
the consequences of delusional faith in fake magic. Demand isn’t the problem, supply is
the problem, and it can’t be resolved by printing more currency or lowering interest rates
or cranking up inflation.

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