Over the next few years you’re gonna hear a lot of theories on where inflation comes from, and here’s mine

I‘ve sort of come to the conclusion that inflation is just a recognition of the reality that we are all poorer than we think we are. We want stuff, and as a result of gas prices and housing shortages and supply chain problems, the stuff simply doesn’t exist to buy. At some point it’ll end either because someone makes more stuff or because we get to a level where all the stuff we need (that’s available to buy) takes up all our spare money, so there’s no extra money to create demand for stuff we can’t get.

On the internet there are all these crackpots who blame inflation on our unsound currency. Maybe they’re right, I dunno. Stimulus money did make us feel richer than we actually were. But there are also legitimate shortages of stuff: a housing shortage, a car shortage, a gas shortage. We just have fewer things available to buy, relative to our population levels, than we used to have, and that’s not really a problem you can solve with monetary policy.

This comment comes to you courtesy of a deep dive into Roman inflation. People associate inflation with debasement of the currency (which means reducing the amount of silver that’s actually in a coin), but actually if the economy isn’t fully monetized (not all transactions are conducted in money) then debasing the currency merely increases the velocity of money rather than increasing prices—that is to say, it doesn’t increase prices because it simply allows people to spend money faster and conduct more transactions more easily. Like if you were conducting most of your transactions using tally marks and mental balance sheets and suddenly the money supply increases and you have hard currency that doesn’t cause an increase in prices. You just do the same transactions in actual currency.

The Roman currency was debased routinely for hundreds of years—Caracalla’s coins had like a tenth the silver of Augustus’s—and it didn’t cause any increase in prices, coins still circulated at their face value.

Then during the crisis of the third century, population fell and output dropped. Suddenly there was less stuff to buy, so there was inflation. At this point the government was used to effectively creating free money through debasement, as it had for centuries, but the demand for the money dropped precipitously. People who had commodities already had all the money they needed, so giving away their commodities for money started to look like a bad deal. Stuff was in short supply, not money. So why give away your stuff in return for money when perhaps there would be nothing to buy with the money? As a result the value of the money dropped precipitously, basically becoming worthless. People blame Rome’s currency debasement for the fall of the Empire, but it seems more like a symptom to me. For one thing—Rome continued in full or in part for another 1200 years!

If you have a well monetized economy where most people are agriculturalists / producers and you’ve been paying your soldiers in money and suddenly there are severe shortages of goods, then of course money will become useless. You’ve been paying people in IOUs and they’ve suddenly realized there’s nothing to cash them in for. Essentially, until that point the government had been in the business of creating a commodity (money) that was heavily in demand. And each time they made more, they merely met that demand—they were running a business (minting coins) just as surely as a silk grower or coal miner is running a business. It just happened to be a business only a large government is allowed to and is capable of running.

What happened wasn’t that they ran the business poorly, what happened was that the underlying demand for that commodity suddenly dropped and there was a supply glut, and the business essentially went bankrupt. And when your government goes bankrupt that’s kind of a huge problem, and it needs to find a new line of business (which in this case turned out to be the forcible extraction of surpluses from the population via price controls and proto-serfdom)

On the other hand, in Europe in the Middle Ages, it was impossible for this kind of thing to happen, because at that time people weren’t really conducting transactions in money, they were conducting them in a certain weight of silver. And if a government debased its currency, then eventually that currency simply became worth less, and everyone adjusted (oh yes these thalers with these markings are actually worth X pence and not Y pence). It was complicated, but you couldn’t go bankrupt in precisely the same way because, essentially, there was free market competition. No government could really make a significant profit coining money because there were too many other competitors.

That’s my take on it anyway! The thing is, we have inflation right now, but the US government doesn’t really RELY on printing money to survive. Admittedly it is in the ancillary business of selling treasury bonds, and I imagine that with this inflation the demand for treasury bonds will sink, unless their yield increases, and if their yield increases the government will have decreased revenue in the future (because part of its revenue will be earmarked for paying the yield on treasury bonds) but people do expect SOME amount of fiscal discipline from the government. They expect its expenditures to bear some vague resemblance to its revenues. What would be bad is if people started expecting that the government would meet future obligations by printing even more money (or issuing even higher yield bonds), because then you wouldn’t want to buy today’s treasury bonds because you’d think inflation would be even higher in the future, which would ruin the market for t bills and mean they would need to issue even higher yields, which would in turn make the government seem even more unsound. Essentially, if you start thinking the government simply has no ability to bring in additional revenue / cut spending in a crisis, then at that point you’re saying you think the government stands a good chance of going bankrupt and being unable to meet its obligations. My understanding is this is what happened in Sri Lanka. They reached a point where there simply wasn’t a price point at which anyone was willing to buy their government debt (too high and the debt itself risks toppling the government; too low and the potential yield isn’t worth the risk). The current working theory is this could never ever happen to the US, because if we become insolvent the world economy would collapse—we are too big to be allowed to fail. So I’m not really worried about either hyperinflation or a government bankruptcy scenario. Essentially, I do think our government is fundamentally solvent.

But yeah, we are all poorer now, and it’s not anyone’s fault, it’s just the fault of our dumb planet and our dumb economic system that for some reason isn’t producing enough stuff to keep up our standard of living.

PS I am not a real economist so all of this is probably wrong. But if you Google this most of the articles you’ll find are from Austrian school quacks and bitcoiners who think the sky is going to fall. Inflation doesn’t make the sky fall, guys—inflation is just our system’s way of recognizing that the sky is falling.