Through all historical periods of inflation, assets inflate first, then consumer prices inflate and then, eventually (if ever), wages inflate. When assets inflate but wages stay stagnant, investing in markets becomes more inaccessible to everyday people, but the rich get richer as stocks rocket to the moon. When consumer prices go up but wages stay stagnant, the least wealthy suffer the most. The dollars they’ve saved up little by little buy them fewer goods and services.
Inflation isn’t a way to take from the rich and give to the poor, it’s quite the opposite. Inflation makes rich people richer through asset inflation, and makes poor people poorer through consumer price inflation.
So, What Actually Happened In The 1970s?
Bringing this back to the example Chamath initially brought up: the 1970s, aka, Stagflation.
Consumer price inflation spiked up to 20 percent annually in the ’70s for two reasons. First, geopolitical events related to the oil crisis caused a supply shock. Second, we abandoned the gold standard and established the fiat standard, which gave central banks around the world the ability to create unlimited amounts of money, causing inflation.
Inflation was high, and wealth inequality was relatively low, but the former didn’t cause the latter, and even if it did, it certainly wasn’t a good thing. The reason wealth inequality was low was because everybody was having a tough time. The ’70s had one of the highest rates of unemployment in recent history, and prices rose significantly while growth and wages stayed stagnant (stagnation + inflation = stagflation).
To combat this, former chair of the Federal Reserve Paul Volcker raised interest rates to 20 percent at the end of the decade, sending the country into a recession. Equity prices went down as treasury yields rose, and most people who owned stocks suffered. And everyday folks, out of jobs with little in savings, suffered far more as their money had less value and purchasing power.
Stagflation was a miserable time for most Americans. To imply that both wealthy and poor people suffering is good because they’re somewhat equal is preposterous. Perhaps Chamath knows all of this, and chooses to misinform his 1.4 million followers? Given Chamath’s exposure to both bitcoin and his heavy involvement in U.S. equities, both of which would benefit from inflation, this could make sense. Regardless of his motives, Chamath’s comments on inflation and wealth inequality are wrong. Inflation causes wealth inequality. Well… what now?
The Cantillon Effect and Populism
by Heike Lehner
Monetary policy and everything concerning it has to be one of the most interesting topics out there. With monetary economics, there are quite a few interesting concepts which come with it. One is the so-called Cantillon effect.
Richard Cantillon was an economist in the 18th century who mainly wrote about money and how it circles around the economy.
The so-called Cantillon effect describes the uneven expansion of the amount of money. If a central bank pumps more money into the economy, the resulting increase in prices does not happen evenly. The Austrian economist Friedrich August von Hayek compared this monetary expansion with honey. If you pour honey into a cup, it won’t spread out evenly. It will clump in the middle of the cup first before spreading out.
Same with money: in case of a monetary expansion, the ones who profit from it are the ones who are close to the money. “Close to the money” in this case means everyone who can access the money right at the beginning, i.e. big companies, banks, etc. They get loans and make investments. Prices then start to rise even though the rest of the population has not received any of the new money yet. This part of the population usually is not the one with too much money. Nonetheless, they have to pay the higher prices even though they have not profited from the increase in money at all. And they will never profit from it in the same way as the ones who received the money first. The result is a redistribution from the poor to the rich.
Central banks which try to control the amount of money in the economy are the reason for this redistribution of money. Even John Maynard Keynes who was in no way opposed to government intervention and central banks accepted the Cantillon effect as a valid problem.
But why is this effect so crucial?
Well, the reason is that this phenomenon has been completely ignored by groups and parties on the left. Newspapers are full of populist campaigns advocating for higher taxes for the rich, and redistribution from the rich to the poor. All of that despite the fact that the concept of central banks was advocated by Karl Marx in his Communist Manifesto. Central banks have been one of the main institutions established by the left in the last two centuries. Nowadays, central banks are a given, almost nobody questions them. Inflation would also exist without central banks, but it would definitely be not as high.
What is most bothersome is that central banks as socialist institutions cause an enormous amount of redistribution from the poor to the rich on the one hand, but on the other hand the left blames capitalism and demands higher taxes for the rich. Since nobody really thinks about the effects of central banks and takes them as a given, leftist groups thus are thought of as “social,” and “thinking about the poor.” However, their demands are the root of these problems. They try to balance out their regressive tax caused by the central banks with a progressive one. Of course, the Cantillon Effect is not the only problem, but it is a problem which should not be ignored entirely.
All in all, this effect causes other problems which we probably wouldn’t have without central banks. And as usual, government causes problems which wouldn’t happen without its interference.