Economics: Why Is Inflation Sinking In Spite Of Trade War & Tariffs?

  

(Drivebycuriosity) - Tariffs or not, the US inflation rate is sinking. In December the number dropped to 2.4%, rebutting the pundits who predicted that Trump`s tariffs will hike inflation again. Their predictions are based on economic illiteracy & ignorance of history. In the last quarter the US economy (measured by the GDP) grew about 3.7% (atlantafed ), the money volume M2 advanced in December just 4.6% (macromicro ). There is not much room for inflation. 

“Inflation is always and everywhere a monetary phenomenon”, declared Milton Friedman. The money volume, the amount of money available in the whole economy, restricts how much people can spend. If they - for in instance - pay higher prices for imported goods, then they purchase fewer of them or they spend less for other goods & services.

                        Helicopter Money 

Friedman got forgotten in the recent decades but the recent inflation wave confirms him again. The hot inflation at the begin of this decades was caused by a deluge of money in the years 2020 & 2021. Then the Biden administration flooded the economy with stimulus checks in the value of trillions of dollars to fight the Covid19 recession (American Rescue Plan). The government checks got financed by massive bond purchases by the Federal Reserve (Quantitative Easing, known as QE1,QE2 & QE3).

The government money landed directly on the bank accounts of the Americans, blowing up the money volume M2 (bank notes & coins & short term deposits at banks). Milton Friedman described this as helicopter money (cato ). As a result in 2021 & 2022 the US money supply M2, the engine of the inflation, jumped 40%. Unfortunately the money deluge met a constrained supply of goods & services partly - partly because of Covid19. So the price level inevitably had to jump and the inflation rate (first derivation) went up.

                         Causal Relationship

The causal relationship between the money supply and inflation was already recognized by Nicolaus Copernicus! The astronomer explained in the year 1517 why "too much money" causes inflation. Copernicus` "quantity theory of money" is based on observations: Early in the 16th century Spain conquered today`s Latin America and looted the silver stocks. The Spaniards send the precious metal to Europe where it was printed into coins and used as money.

As a result the European money supply jumped, but the supply of goods & services did not change much. The flood of money raised suddenly the demand for scarce goods & services and caused a jump of the price level.

Elaborated studies by Milton Friedman, Karl Brunner, Allan Meltzer and many other economists (known as Monetarists) confirmed Copernicus & the quantity theory of money. They described in the 1960s elaborately how and why the inflation rate follows the growth rate of money with a time lag (causal connection).

                   Poorly Informed

I assume that the public is as usual poorly informed and misguided by economic illiterate pundits and uneducated journalists. The inflation callers focus on the recent tariff hikes, but ignore that rising prices for internationally traded goods & services are just a part of the story and are compensated by falling oil & natural gas prices, cheaper homes & rents and that there are no tariffs on domestic services like dentists or the vast US leisure industry.

 

Economics: Should We Be Scared By Falling Fertility Rates?

 (Drivebycuriosity) - There is a lot ado about the so-called fertility crisis. Worldwide are the numbers of births dropping. If we believe the Cassandras the world is doomed. I beg to differ.

First, I think a smaller population is a big win for the environment and could be the answer to global warming, another favorite subject of the doomsayers. 

Fewer people would burn less energy - and they would emit fewer greenhouse gases. Fewer people also eat less; therefore the incentive to destroy forests, to gain more land for farming, becomes weaker and the problem of over-fishing disappears.

A shrinking population also slows down the trend of turning forests & meadows into the sprawl: fewer people stops the trend of constructing more and more one-family houses, streets, strip malls, store houses & parking places. A shrinking population makes the world greener & cleaner!

A smaller population is also the answer to another doomster alert: "The robots are coming" And: "Automation will destroy our jobs!"  (" thehill). Both trends are mostly compensating each other: A falling demand for workers, thanks to automation, compensates a declining supply by shrinking populations.

 

                      Industrial Revolution 

Machines have been replacing labor for many centuries. In the middle ages wind & water mills already substituted human & animal labor. In the 18th century followed steam power, starting the industrial revolution. In the recent centuries the ongoing automation process has been raising productivity of labor considerably - and the progress has been accelerating. 

Artificial Intelligence (AI) is raising the productivity of labor even even further, reducing the demand for human workers even more. DeepSeek, the newest incarnation of the technological progress, is another step in the ongoing progress to more productivity. Microsoft CEO Satya Nadella claims that Moore´s law is "working in hyperdrive" (finance.yahoo ).

And there is more: science is making exponential advancements in the field of robotics and artificial intelligence and will support the economy and the labor markets in the coming decades. 

      Less Work, More Income

Today even farmers are using robots, for instance for harvesting strawberries or milking cows (wikipedia). Drones are being used in warehouses and yards for inventory management. Robots also help restaurants to deal with the scarcity of labor.  

"Domino’s Pizza Inc. is putting in place equipment and technology that reduce the amount of labor that is required to produce our dough balls", reports time.com. 3D-printers are also replacing workers, even in construction. "A 3D printer can build the walls of a house in as little as two days versus weeks or months with traditional construction materials" notices today.com.  

 A study by economists John G. Fernald and Charles I. Jones from Stanford & the Federal Reserve Bank of San Francisco claims that "it becomes possible to replace more and more of the labor tasks with capital" (robinhanson ). Fernald & Jones define capital as physical capital (machines including robots & computers), plus human capital (knowledge & skills) plus discovery of new ideas (inventions like computer, internet etc.). According to them "artificial intelligence and machine learning could allow computers and robots to increasingly replace labor in the production function for goods", meaning that the society can produce more things without increasing hours worked or even with a shrinking labor force. As a result the growth rate of income per person and the long-run growth rate (now around 2%) will rise as well: "The possibility that artificial intelligence will allow machines to replace workers to some extent could lead to higher growth in the future.

                 Universal Basic Income

Naive observers claim that a shrinking population reduces the demand for goods & services and will destroy many markets and businesses (noahpinion). These pessimists ignore that demand is the number of potential buyers multiplied with the purchasing power per capita. Thanks to the accelerating technological progress the purchasing power per capita is rising and will overcompensate the shrinking number of consumers.

We can learn from history: In England the bubonic plague (1348 Black Death ) reduced the English population by about 30%. As a result the living standard of the survivors climbed! The reduced workforce caused higher salaries and the diminished population lowered the demand for food and cut food prices ( driveby). 

I reckon that technological progress leads to:

    - rising salaries (for those still working), 

    - climbing dividend incomes and stock market gains 

which will raise the purchasing power of most people - enough to compensate the shrinking number of buyers. Even those who don`t invest in the stock market may participate via pension funds and insurance investments. 

The productivity gains will finally translate into higher tax revenues for the governments (by taxing company profits, dividends & stock market gains). Some day a much greater part of goods & services will be produced by robots and other machines. Then fewer people may work than today and many things will cost less. Then the time could come for an universal basic income, paid to everybody, and financed by productivity gains delivered with automation (driveby ).

Small is beautiful.
 

 

 

 

 

 

 

Books: Pacific By Simon Winchester

 (Drivebycuriosity) -  I am fan of Simon Winchester. I enjoyed "The Professor And The Madman" (my review ), "The River At The Center Of The World: A Journey Up The Yangtze And Back In Chinese Time" (review ) and "The Alice Behind Wonderland " (review ). His book with the title "Pacific: Silicon Chips and Surfboards, Coral Reefs and Atom Bombs, Brutal Dictators, Fading Empires, and the Coming Collision of the World's Superpowers – An Acclaimed Natural Wonder 
" is not as strong, but worth reading anyway ( amazon).

Winchester structured the text into 10 episodes, all related to the Pacific region: The rise and fall of Sony; American & French nuclear tests on remote Pacific islands, destroying their culture & environment; the culture of surfing; bizarre life forms many miles below the Pacific surface, fed by submarine wells, the Korea war and Kim`s dictatorship - and much more.

"Pacific" is - like the other Winchester books - very well written, entertaining and I learned a lot there. I plan to read more by this amazing author.