Preface: Inflation is taxation without legislation – Milton Friedman
A Primer on Inflationary Business Conditions (Segment II)
Credit: Donald J. Sauder, CPA | CVA
To maintain the assumption that the financial utility of a subway token only has intrinsic value for an entrepreneur when riding a specific subway system and not for purchasing a coffee at Starbucks would be sensible, therefore, if progressive printing of any Scrip (or subway tokens as a proxy for a currency), those who can benefit from that intrinsic token’s utility will obtain the most significant, immediate and perhaps only economic advantage, such as riding the subway system.
Economically, a currency is a rainwater to a currency watershed. Excess rainwater ultimately changes a landscape, and sometimes permanently, not to mention the times of clouds. Let’s look more closely at this financial rainwater and landscape illustration.
Moderate inflation rates, i.e., appropriate rain precipitation levels, will bring economic sunshine and an apparent healthy financial eco-system with periodic recessions to drain excess liquidity. With these moderate and predictable financial weather patterns, the financial weather cycle continues successfully. A little inflation is certainly a key characteristic that can lead to all balmy economic conditions because the financial eco-system has adequate precipitation for seedtime and harvest.
Unlike the global water supply, where perhaps there is little change in the worldwide aggregate gallons in recent decades, i.e., more water is not being created, money supplies increases – finitely. Therefore, absent expansion, only the water allocation in the global weather patterns is shifted per evaporation, clouds precipitation including changes in glacier sizes. The only changes that occur are in the form of, say, glacier ice and the location., e.g., there is a minimal expansion in the gallons of global water the can cause immediate or cataclysmic changes.
Inflation in a currency of a financial system can be clearly understood by illustrating that in an eco-system in a [financial] watershed with an expanding amount of water, other than aquatic creatures that thrive in such an environment, there are incrementally and logarithmically increasing risks with the monetary supply expansion, .e.g. inflation from printing of currency.
Since currency is not fish, paper currency printing eventually floods and saturates a financial system watershed beyond the point of sustainability for seedtime and harvest. An economy with that higher than averages rates of inflation in its currency will wane in operational success. This, unfortunately, is the proven history of each currency in the millenniums of financial history. Perhaps, the US dollar will be the first currency to avoid that currency destiny.
Again, to use a weather analogy, inflation is an expansion in specific financial watershed precipitation. At some point, that liquidity necessitates either a deflationary adjustment to maintain economic equilibrium or some financial reset equivalent to a financial Noah’s Ark moment.
For business management purposes, tracking the money supply (water levels and precipitation in the financial watershed) is becoming increasingly opaque because of how liquidity expansion or money supply growth is followed, according to Federal Reserve data. Therefore, if rainwater levels are increasingly non-quantifiable, e.g., the printing of currency raining in the financial watershed, the ability to make informed and sharp business decisions grows increasingly challenging and requires adaptive approaches.
I am not stating that the US Dollar is imploding for the record, although perhaps that is not a remote possibility. That is entirely the Federal Reserve’s discretion to manage the money supply, interest rates, and the government’s concerted ability to adjust tax rates.
These three economic items are crucial to business conditions and entrepreneurial management, although only interest rates and taxes have been chief concerns to most entrepreneurs in recent decades.
To be continued…..