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On the flip side inflation and wealth inequality has gutted the average workers relative pay check. 200k today is comparable to 100k a short time ago. SWE has a

• imtringued 5y ago
  >On the flip side inflation and wealth inequality has gutted the average workers relative pay check. 200k today is comparable to 100k a short time ago. This is only true if you stick with the same job for 10 years assuming 7% inflation and never get a raise. If you switch jobs the new job will keep up with inflation. If anything deflation has gutted the average workers' relative pay check because existing wealth is being rewarded at the cost of wealth that could have existed in the future. If you increase productivity via automation or enact free trade a portion of your nation's workforce becomes redundant, that's not a bad thing if you can give these people a better job. However, the core principle behind deflation (or rather low inflation) is that you won't give them such a job and instead you put these people into a "reserve pool of labor" hoping that one day an employment opportunity will present itself to them. This ignores that it may take a long time to find such a job and it is entirely possible that they won't be able to work by the time such a job exists. Here is an attempt at an intuitive explanation: When you issue money you are creating work, if the economy cannot keep up with the newly created work then it will have to shrink the average order size by the relative percentage of work that could not be done. Therefore the inflation rate is a measure of demand exceeding supply. Stagflation is what happens when an external factor prevents supply from catching up to demand. Let's assume we have an economy that can produce 10 pizzas per day. 10 people each spend $10 per day on one pizza. You double productivity via automation. Only 5 people need to work to make 10 pizzas thus the price of pizzas drops to $5. 5 people now buy two pizzas. However, there are 5 unemployed people who receive no income. The government gives these 5 people $10 and they buy two pizzas as well. Here is the problem, we still have 10 pizzas but 20 pizzas are being ordered. By issuing money we have created more work to do but the economy cannot sustain this much work. The price for pizza rises back to $10, thus the average order size shrinks back to 1 pizza per person. However, there is now an arbitrage opportunity. It costs $50 to make 10 pizzas, because customers are paying $100 in total for 10 pizzas you could earn $200 for 20 pizzas if you employ all 10 workers and the pizza shop can afford to pay $20 for each worker. Therefore a 2x increase in productivity led to a 2x increase in income but prices stayed the same. The problem with deflation becomes obvious. There is no need to increase productivity yourself because your real wealth will grow through the productivity increases of other people. If enough people think this way there won't be any productivity increases at all. The economy doesn't grow but the purchasing power of the wealthy grows because they hold onto cash which means they simply get a bigger portion of a stagnant economy. When you put this into perspective with the Weimar Republic then it becomes obvious why hyperinflation happened. The victors of WW1 demanded reparations paid in a foreign currency. The Weimar Republic's economy was destroyed by the war. The amount of work being demanded of the Weimar Republic exceeded the capacity of the economy significantly. By printing money the government demands the population to work for the sake of paying the reparations. The average order size of the citizens (the goods they can purchase) has to go down significantly to make room for the reparations. The obvious solution isn't to conduct austerity and suck it up, it's to first rebuild the economy so that it can later service its reparations obligations. Americans learned this lesson after WW2 and created the Marshallplan for this purpose.