Understanding inflation
The inflation that most Americans are now experiencing is strong, and will have far more consequences than just raising prices at the supermarket and the gas station.
But if you are a left-leaning Keynesian economist, you say, "So what; gasoline sellers and supermarket owners are better off, inflation does no net harm, it just moves wealth from one player to another." The Keynesians are wrong, net harm is done by inflation, not just in the US but across the world.
First, let us define inflation. It is a case of too much money chasing too few goods. Put another way, the idea is that the general price level is proportional to the quantity of money: More money, absent extra production, means higher prices for the constant quantity of things to buy, and vice versa.
The simple definition needs some unpacking. At the time the first clear written statement of what is now known as the quantity theory of money and prices was enunciated, by French intellectual Jean Bodin (1530-1596), the definition of money was fairly simple: coins, currency, and bank deposits.
In order to understand how today's quantity theory works, we expand our definition of money, the engine of inflation, making it include not just traditional cash, but all financial, governmental or privately produced "paper" claims, documents, legal and traditional social devices that allow the holder thereof to lay claim, acquire or control "real" goods and services.
The result is to deny or transfer control or ownership of "real" economic items away from persons who would, in the absence of these new "paper claims," retain the purchasing power over goods and services that they possessed prior to the creation of the new paper claims.
(Sorry the definition is so long-winded - it is essential to understand just how broad any modern definition of money must be, to apply the quantity theory of money fully in today's economy.)
When new "modern money" is created, but newly created goods and services do not come into being (immediately or at some well-defined future delivery date) at the same time, we have a case of added money chasing a fixed quantity of goods, with the excess purchasing power in the hands of the lucky folks in possession of the new money being able to out-bid unlucky competitors in the scramble to take ownership of the goods in play.
New money in the context of a modern understanding of the quantity theory includes government welfare payments, government programs that give favored groups access to real goods such as housing, medical care, schooling, retirement benefits, even food typically create purchasing power but do not give rise to new production.
Government bonds, issued to finance government debt and deficits, give bond holders purchasing power over current and future goods but do not normally give rise to new production.
Increasing speculative values placed on existing assets, ranging from collectable autos to old-master paintings, existing houses and land, even stocks and bonds (if the underlying firms show no promise of productive innovations or discoveries), and other cases of speculative asset price appreciation (caused by anticipation of everaccelerating inflation) can give rise to selfaccelerated price hikes and a redistribution of buying power that is unconnected with productive activity.
The brand-new purchasing power that comes from the various sources of inflationary pressure, whether from rich stockmarket speculators or poor receivers of new welfare, will bid away purchasing power, perhaps diminishing the availability of resources sought by savers who seek to invest "old" dollars they hoped to put to use in projects likely to produce, by way of innovation and true invention, added output of a genuine kind.
Perhaps (this is not necessarily so, of course) economic players who operate with "new dollars" place their bets on speculative purchases of existing homes, adding more fuel to a real-estate bubble. Or, as old-fashioned conservatives might claim, the welfare dollars are dissipated in the beer and cigarette market. What can be said for certain is that the pattern of future spending will change, and new persons with new dollars will alter the distribution of future spending and investment.
Other more complex events follow from asset price inflation. Real-estate bubbles cause a form of national division and separation, as, for example, in the case where California (average house price $392,000) four-bedroom suburban gated-community houses, once considered at best to be uppermiddle class, suddenly cost a million dollars and physically identical upscale homes in South Carolina (average house price $172,000) sell for one-half to one-third the price of the California alternatives.
Southerners can't readily move to California in search of better jobs, while retiring Californians are able to take over the South Carolina waterfront.
Intra-class political antagonisms are provoked, as extra "new" dollars are added to unemployment benefits (possibly allowing some folks to take a holiday from work) while other "essential workers" stay on the job, responsibly reporting to work at modest posts in big-box stores or as cleaning staff in hospitals.