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- Herausgeber: WS
- Kategorie: Fachliteratur
- Sprache: Englisch
Inflation is a degenerative, asymptomatic and endemic disease of our society. It represents the greatest economic calamity, affecting the middle class and workers. Like a sneak thief, it steals moments of life, silently but inexorably destroys the value of savings and household assets.
The real causes are kept hidden and their explanation is incomplete and partial, Monetary authorities and statical institutesv limit themselves to recording nominal values using inadequate analysis methodologies and data observations, which distort reality.
This book analyzes what are the true causes and who are responsible for inflation, as well as how it destroys the savings and wealth of families.
A new theory of inflation and public employment, in order to correctly understand and gain a new perspective on this economic reality.
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Seitenzahl: 392
Veröffentlichungsjahr: 2024
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Copyrights ˂<©>˃ 2023: Giuseppe Ruffini
The total or partial reproduction of this work, by any means or process, including reprography, computer processing, use of scanners or photography, as well as the distribution of copies of this work by public rental or loan, is strictly prohibited without the written authorization of the copyright holders, under the sanctions established by law.
Acknowledgments
Special thanks to my wife, Laura, who has accompanied me in the creation of this work, and for her research work. Thank you for our daily walks of inspiration and creative discussions.
A special recognition to my great Panamanian friend Jaime Moreno, for his help and deep revision of the book, investing a lot of time in this process. Thank you, Jaime.
Thanks to Miguel Angel Quesada, for his valuable contributions in the correction of the work.
I thank my friends Luis Manuel Castro and Oscar Villa for their point of view and for the time they have dedicated to the work.
Thanks for the faithful collaboration of Andrea Soto in the layout of the work and the execution of the graphics.
PREFACE
1.1 BOSS OF BOSSES
1.2 FROM THE SYMBOLISM OF THE 4 HORSEMEN TO THE REALISM OF THEIR IMAGES
1.2.1 THE PLAGUE AS THE PANDEMIC
1.2.2 THE WAR
1.2.3 HUNGER AND DEATH.
1.3 LIMITS OF THE THEORIES
1.4 KEYNESIANS VERSUS MONETARISTS
1.5 CHAOS THEORY.
1.6 POLLUTION FACTOR
1.7 DIFFERENT POLLUTING ELEMENTS, "TO PIVOT OR NOT TO PIVOT -- THIS IS THE DILEMMA".
2 INFLATION
2.1 INFLATION
2.2 OTHER MONETARY AND ECONOMIC PHENOMENA RELATED TO INFLATION
2.3 INFLATION AND ITS RELATIVE NORMALITY LEVELS
2.4 BEYOND THE DEFINITION.
2.5 IS THE INFLATION CALCULATED BY THE STATISTICAL INSTITUTES A CORRECT REPRESENTATION OF THE PHENOMENON?
3 WHERE INFLATION COMES FROM
3.1 CAUSES THAT DETERMINE THE INFLATION PHENOMENON
3.2 THE NEW INFLATIONARY SPIRAL AND AN AILING SYSTEM
3.3 FROM AN OVERSUPPLY TO A SCARCITY OF ENERGY SOURCES
3.4 IMPACT ON THE GLOBAL SUPPLY CHAIN
3.5 WHAT THEY DON'T TELL US WELL
3.7 REFLECTIONS ON THE DEMOGRAPHIC EVOLUTION IN THE WORLD
3.8 LATIN AMERICA AND AFRICA
3.9 WESTERN DEVELOPED COUNTRIES AND JAPAN
3.10 WHAT WOULD HAPPEN UNDER NORMAL CONDITIONS IN OUR ECONOMIES?
3.11 PUBLIC EXPENDITURE AND DEBT: THE GALLOWS OF MODERN SOCIETIES
3.12 WHO IS RESPONSIBLE FOR INFLATION?
3.12.1 POLICY AND THE PUBLIC ADMINISTRATIVE SYSTEM
3.12.2 HOW DO POLITICIANS AFFECT INFLATION?
3.12.3 ESSENTIAL AREAS OF GOVERNMENT ACTIVITY
3.12.4 THE ROLE OF THE CENTRAL BANK
3.13 CAUSES OF INFLATION
3.14 THE BRETTON WOODS AGREEMENTS AND THE ROLE OF THE DOLLAR
3.15 THE PARTY STARTED
3.16 THE VACUUM DOOR
3.17 INTEREST RATES
3.18 PUBLIC EXPENDITURE
3.19 PUBLIC DEBT AND TAXES
3.20 MONETARY BASE EXPLOSION
3.21 A DOG CHASING ITS TAIL: THE LABYRINTH OF MODERN SOCIETY
4 THEORIES AS CAUSES AND DESCRIPTION OF COMPLEX PHENOMENA
4.1 WHY IS THE KEYNESIAN ECONOMIC MODEL THE PREFERRED MODEL?
4.2 MONETARY THEORY
4.3 SIMILARITIES BETWEEN FISCAL AND MONETARY INSTRUMENTS
4.4 CONCEPTUAL DIFFERENCES OF SUBSTANCE
4.5 THE POLITICAL PERSPECTIVE AND HOW IT HAS IMPLEMENTED THE LESSONS LEARNED FROM THE TWO ECONOMIC GIANTS
4.6 THE BEGINNING OF THE END
4.7 THE KRAKEN MONSTER
4.8 UNTIL THERE IS WAR THERE IS HOPE
4.9 HOW WAR BECOMES THE PERFECT EXCUSE
4.10 BACKGROUND INTERPRETATION OF ECONOMIC THEORIES
4.11 HISTORICAL CONTEXTUALIZATION
4.12 THE KEY TO UNDERSTANDING THE ARCANE
5 THE MONEY PRODUCTION MACHINE
5.1 CONTROL OF MONEY SUPPLY
5.2 FRACTIONAL RESERVE BANKING
5.2.1 BANK MULTIPLIER
5.3 MONEY GENERATED BY CENTRAL BANKS
5.4 THE STATE ISSUES NEW DEBT
5.5 MONETARY BASE
5.6 QUANTITATIVE EASINGS
5.7 WHAT IS MONEY?
5.8 THE VALUE OF MONEY
5.9 IN A WORLD IN REVERSE
5.10 CRYPTOCURRENCIES
5.11 THE CROSSED ARMS
5.12 AN IRREPARABLY ILL SYSTEM
6. CONSUMER PRICE INDEX "CPI " AND ITS CONTROVERSIES
6.1 CONSUMER PRICE INDEX
6.1.2 HARMONIZED CONSUMER PRICE INDEX
6.1.3 HOW IT IS MEASURED GLOBALLY
6.1.4 THE PPI INDICATOR
6.2 HOUSEHOLD EXPENSES (Tab.1)
6.3 COGI VERSUS COLI
6.3.1 HEDONIC CHANGES IN PRODUCTS.
6.3.2 GEOMETRIC MEAN.
6.4 CONSUMER GOODS AND SERVICES
6.4.1 GROSS DOMESTIC PRODUCT.
6.5 A SLOW PROCESS
6.6 THE MISSING LINK IN INFLATIONARY EVOLUTION
7 THE EMPIRE STRIKES BACK. A WAR OF FALSE POWERS
7.1 THE ROLE OF THE U.S. DOLLAR
7.2 "WEAPONIZATION" OF THE U.S. DOLLAR
7.3 ADVANTAGES FOR THE U.S. ECONOMY
7.4 COMPETITIVE ADVANTAGES AND DISADVANTAGES
7.5 IS THE EURO THE FUTURE OR THE FRUIT OF FAILED IMPERIAL VESTIGES?
7.6 THE DOLLAR IN PERSPECTIVE WITH OTHER CURRENCIES
7.7 LIMIT TO THE USE OF MONETARY EXPANSION
7.8 THE ROMAN EMPIRE AND ITS DECLINE
7.9 WHAT ABOUT OTHER WORLD CURRENCIES?
8 THE FAILURE OF KEYNESIAN ECONOMIC POLICIES
8.1 REASONS WHY KEYNESIAN POLICIES CANNOT WORK. THEORY OF THE IRRATIONALITY OF THE PUBLIC EXPENDITURE
8.2 THE ROLE OF THE STATE AND ITS LIMITS
8.3 THE HONEY-COATED HANDS OF PUBLIC ADMINISTRATORS
8.4 INEFFECTIVENESS OF FISCAL POLICIES AND THE FABLE OF WEALTH REDISTRIBUTION
8.5 NOT EVERYTHING IS VISIBLE AT DAYLIGHT
8.6 TAXES: INEXHAUSTIBLE SURPRISES
8.6.1 A STEALTH TAX
8.7 EVERY EXCUSE IS A GOOD ONE TO GET DRUNK
8.8 THE CASE OF SILICON VALLEY BANK AND CREDIT SUISSE
8.9 IF WE LOOK UP AT THE SKY ON A STARRY NIGHT, WE WILL GET THE ANSWER
8.10 WHY CENTRAL BANK MONETARY POLICY ACTIONS ARE DOOMED TO FAIL
9 THE IRRATIONALITY OF PUBLIC SPENDING CAUSES AND EFFECTS
9.1 FROM THE DECLINE OF THE GREAT IDEALS TO THE LOSS OF CONTROL MECHANISMS ON POLITICIAN ACTIVITY IN THE GREAT DEMOCRACIES. THE ORIGIN OF THE IRRATIONALITY OF PUBLIC SPENDING
9.2 THE COMPLOT THEORY: HOW CITIZENS DO NOT UNDERSTAND WHAT THEIR ADMINISTRATORS ARE DOING.
9.3 THE IRRATIONALITY OF PUBLIC SPENDING, NEW INFLATION THEORY
9.4 HOW PUBLIC SPENDING IS USED
9.5 THE PRODUCTIVITY OF COUNTRIES AND PUBLIC ADMINISTRATION
9.6 HOW THE INEFFICIENCIES OF THE PUBLIC SYSTEM CAUSE A POOR DISTRIBUTION OF WEALTH AND THE IMPOVERISHMENT OF THAT COUNTRY
9.7 INVERSE WEALTH REDISTRIBUTION THEORY
9.8 INFLATION AS A MONETARY AND ECONOMIC PHENOMENON
9.9 CORRUPTION IN A RESOURCE-WASTING SCHEME
10. HOW INFLATION HAS DESTROYED THE MIDDLE CLASS
10.1 THE GREAT FINANCIAL BUBBLE, MYTH OR REALITY?
10.2 GROWTH OF ECONOMIES
10.3 THE GREAT PARADOX OF TAXATION ACCORDING TO CURRENT IDEOLOGY AND ITS PRACTICAL RESULTS AT THE SOCIOECONOMIC LEVEL
10.4 THE NOMINAL VALUE OF FINANCIAL ASSETS
10.5 YIELD CRISIS
10.6 WHAT HAPPENS WHEN A GOOD IS NOT SCARCE?
10.7 BITCOIN
10.8 THE HOUSE
10.9 ART
10.10 EXTREME LUXURY GOODS
10.11 LIKE A RIVER IN FULL
10.12 HOW INFLATION DESTROYS THE MIDDLE CLASS
10.13 AN INVERSE REDISTRIBUTION OF WEALTH LIKE THE FLOOD OF BILLS BENEFITS ONLY A FORTUNATE FEW
10.14 THE STEADY AND CONTINUOUS DECLINE IN THE QUALITY OF INVESTMENT PRODUCTS: A PROBLEM NOT ONLY OF THE MASS CONSUMER PRODUCTS
11 WHITE HOLES AND BLACK HOLES - THE DAY AFTER
11.1 THE LORD OF THE APOCALYPSE AND HIS BRAVE WARRIORS
11.2 BLACK HOLES AND WHITE HOLES
11.3 WHERE ECONOMIC MODELS GO WRONG IN THE CALCULATION OF INFLATION
11.4 SLOW AND GRADUAL LOSS OF CURRENCY VALUE
11.5 NEW CURRENCY AS A SUBSTITUTE FOR THE DOLLAR
11.6 THE GREAT RESET
11.7 THE CATASTROPHISTS
11.8 WAR
11.9 REPTILIANS ARRIVE FOR REAL, THE HUNT FOR EASY PROTEINS
12 THE LIGHT AT THE END OF THE TUNNEL, ECONOMIC AND MONETARY POLICY STRATEGIES TO STABILIZE THE SYSTEM
12.1 CONSPIRACY THEORISTS
12.2 LET'S START WITH A NEW FORMULA FOR INFLATION DETERMINATION
12.3 FROM BRETTON WOODS TO THE PERMANENT PARTY
12.4 THE ROLE OF BANKS FROM THE PALEOLITHIC TO THE PRESENT DAY
12.5 FOLLOWING THE LOGIC IMPLIES STRONG READJUSTMENTS
12.6 FOR INVESTORS
12.7 PROTECTING SAVINGS AND BUILDING A WEALTH PORTFOLIO IN TIMES OF FINANCIAL TURMOIL
12.8 HOW TO START
12.9 A GOOD STRATEGIC PLAN
12.10 TIDYING UP THE HOUSE
12.11 TYPES OF ASSETS
12.12 WHAT DECISIONS TO MAKE?
12.13 CONCLUSION
Preface
In a society where information and news circulate at a speed that the human eye can barely comprehend, everything is communicated almost instantaneously. Many times, we have predictions of events even before they occur. It could be said that it is a reality where transparency predominates; citizens are spectators of a narrative that provides them with certain answers for almost everything that involves them and induces in them an evening-time acritical numbness. All the questions and the consequent answers are already given, there is no need to think critically, reflect, or develop elaborate logical theories, except for those defined as conspiracy theories, which are only outlandish ideas to deal with the boredom of the day.
Do the information we receive and the interpretation of the facts correspond to the truth or something remotely resembling it? Or are we able to see the reflection of a different reality?
The current situation is dominated by an excess of information. What we don't need is precisely more news. Much of the news we are bombarded with comes from various sources, such as television, newspapers and online platforms. It comes delivered with different types of sauces during the day and at night. Social platforms are the new megaphones through which we gather information, stay informed on various topics, and believe we have the answer to everything.
This oversupply of news and stimuli produced by the super technological society in which we live generates a lot of noise and modifies our perception of our environment. In the end, it distances us from understanding what is important, leaving us dazed by so many impulses to which we are constantly exposed. In addition to the excess of information and news, globalization puts within our reach a plethora of consumer products, which provides a sense of satiety within a life that has become alienating and empty.
In perspective, a new global virus has marked the beginning of a significant change in the way we live on Earth. Young people now prefer to stay at home, work in telework mode or play video games in a virtual and fantastical reality that is safer and disconnects them from their real lives and personal interrelationships.
Our world is gradually moving towards self-extinction where the demographic evolution of the global population (See: Chap. 3 Fig. 3) is reaching disturbingly low proportions. The major Western economies are replacing baby diapers with adult diapers for the elderly through an involution into senile societies.
How many economic news are truly incisive? How many filters are applied in order to present a different and better reality? In this complex environment we encounter great economic theories that cannot give clear and conclusive answers to the events that occur since they are the fruit of the era in which they were conceived. Similar to these ancient economic theories, there are others that are considered modern1 that, in many cases, offer nothing new except for the adjective that defines their name, being only a mere justification of the status quo.
Government interventionism in Western economies seems to be an instrument to feed a bureaucratic machine incapable of truly dealing with the economic and social problems of that society. The real needs of citizens are far from the areas of public intervention, resulting in a continuous decline in their living standards and a victimization by a system that generates an inverse redistribution of wealth. Some few are fortunate and will become increasingly richer, while millions of others will have less every day. The middle class is the victim of this dystonic system, which evolves in an irrational and uncontrolled manner resulting in a continuous reduction of its purchasing power. This is the result of an aging of the political-administrative systems and their interference in the economic and monetary spheres, which have become incapable of meeting the present-day challenges.
This book analyzes the phenomenon of inflation and how it has been destroying the purchasing power of families over the years in a non-traditional way, trying to find the real reasons that constitute and cause the problem. The palliatives to this loss of wealth of the middle class will be analyzed, from the true nature of inflation, how it is generated, and the way in which it destroys patrimonies. The impotence and inability of institutions to control these events, being in many cases the origin of the same problems.
The inflationary phenomenon is described by economic institutions as a fairy tale. The analysis focuses primarily on measuring it, with limited understanding of its causes and solutions. However, there is a lack of understanding of the causes and potential solutions to address the impact on society, and most of the population suffers from its effects.
A new theory of inflation is needed to understand the current moment and the societal challenges we face in comprehending and addressing its significant impact on the society.
1 The lord of the apocalypse
1.1 Boss of bosses
If we were to try to group the personalities of the villains of the crime world into categories, we would finally find three typologiesof characters with well-defined characteristics and a common denominator. This common denominator is that all of them are nefarious beings, some with attributes that render them truly harmful and some with particularly malevolent tendencies.
The first group are the enforcers, the soldiers of the criminal organizations, people without feelings who carry out orders regardless of the inhumanity involved.
The second group are mid-level bosses similar to the managers of large companies, characters in search of notoriety to advance their careers within the organization. Like the enforcers, they are not guided by principles of humanity. However, the key difference is that these are smarter and much more manipulative.
In the third group we are in front of the truly dangerous characters of the story. They are radically different from the other two groups, being the puppeteers of criminal organizations. Their appearance is different from the others, these are fine-looking individuals, and their manners are also refined. They have sophisticated intellects, may appreciate art, know how to navigate high society environments, may even collaborate in charitable causes, and sometimes communicate with bureaucrats and politicians of the state. But let us not be fooled, they are much worse than the others. These puppeteers are the ones who give orders, issue sentences, and build and structure criminal activity. Sadly, I have more bad news for you. The story is not likely to have an idyllic, Disney-like ending. It will more likely end dramatically, perhaps closer to true fairy tales than to their positively revisited fables.
There has always been an underlying question in the justice and police spheres: whether there is someone higher - someone not named, seen, or known. This ultimate boss, the maximum puppeteer, is the one who activates and outlines the strategy of the bosses and their organizations. Sometimes this character could be just a myth, a shadow of reality. And I have more bad news for you here: this character indeed exists in history. I am referring to the Lord of the apocalypse, the great chief of the four Horsemen that will lead us to chaos and destruction. I would like to clarify that this writing has nothing to do with the sacred scriptures, even though I just mentioned the concepts of the apocalypse and its horsemen, because strangely, they explain very well the current picture in which we live. Perhaps it is just a coincidence or a literary license on my part. I hope you will excuse me. When we talk about the lord of the apocalypse, we are referring to inflation, the havoc it wreaks in workers' lives and its capacity for destruction. Inflation cannot be seen or felt, it is asymptomatic, but it is among us and by the time we begin to notice it, it has already inexorably and violently destroyed the fruits of our labor.
1.2 From the symbolism of the 4 horsemen to the realism of their images
Strangely and unfortunately, the examples of the Apocalypses in recent years, beyond religious symbolism, have concrete and realistic representations in the daily lives of most citizens of the planet. The world and its human inhabitants, since their historical and conscious presence on the planet, have always had to struggle with the four apocalyptic calamities. If we want to analyze the past, these phenomena have accompanied the development, evolution and, at times, involution over thousands of years of human history.
1.2.1 The plague as the pandemic
The plague, as the pandemic of 2020 has been in this bleak picture an unusual event. In the past, human beings have survived countless epidemics, ranging from the Black Death to Ebola and other influenza-like viruses. However, the reaction to these contagious diseases had never materialized as a global event, so widespread in the aggressiveness of the response by the health authorities of the wealthiest states. This disastrous and calamitous event in terms of human lives and economic destruction, has been or could be compared to the horseman of the apocalypse in terms of deaths and government response actions. For the first time humanity had to aggressively confront catastrophic events related to a contagious disease. Many countries across the globe have implemented these responses with the closure of cities and confining people to their homes for several months. Only the poorest countries were unable to react in this manner, and the effectiveness and necessity of these measures still remain unknown.
1.2.2 The war
The war, like the plague, has also been an element, a conductive thread of humanity throughout its history. Once a war ends, the circumstances are fostered for the beginning of a new one and thus, history repeats itself endlessly. However, the war that is developing in Eastern Europe between Russia and Ukraine is a little more worrying than the war conflicts of the last decades, for a simple reason that is easy to understand. First, we have on one side a nuclear power fighting with a former country in its sphere of influence. On the other side we have other nuclear powers supporting the second country at war. As you may understand, this situation poses a significant threat to mankind. I consider this second horseman to be a real element and its impact on global affairs current and unprecedented.
1.2.3 Hunger and death
Although they have accompanied mankind throughout history, these other horsemen of the apocalypse have not yet had such a clear and perceptible manifestation as the first two. However, considering the possibility of a full-scale war accompanied by some other type of pandemic, these last two horsemen would finally come to visit us in a much more violent way than we have seen from them so far. But let’s recall one important detail: Russia and Ukraine are the world's largest producers of grains, so please make your own considerations.
What makes the global outlook and the future perspective worrisome, in this somewhat catastrophic logic, is the arrival of the lord of the apocalypse, inflation. This endemic evil, when out of control, can become the fuel for highly unbalancing events that have a much greater impact on society than could be expected under conditions of apparent normal stability.
1.3 Limits of the theories
This monetary phenomenon and its economic implications have grounded many economists, making it a subject of extreme interest for this category of scholars. Throughout the centuries, as I mentioned, there has been an abundance of writings on inflation, one of the most intriguing topics of modern society.
We find a large number of pages, theories and mathematical formulas that support a wide variety of considerations, and suddenly something new emerges that invalidates much of the basic doctrine, presenting new scenarios and new paradigms that need to be understood.
What are the limits that prevent us from developing a sufficiently comprehensive theory to describe this phenomenon?
The limits lie in the complexity of the environments under analysis, their interrelationships, and contaminations. In an aseptic laboratory, it is easy to isolate the elements in order to test and document a series of events. Things change as soon as we apply the models under analysis to the complex reality of the environment they are meant to explain. Here the variables at play increase hyperbolically, as do their interrelationships. Finally, there is a background inertia in transmitting impulses that do not exist in a laboratory, therefore, the results vary, which generates the need for more explanations and theories to describe the initial phenomena.
If we were to regroup the theories on inflation, we could find some analytical foundations in the different background explanations they give us. This indicates that the different paths to explaining the phenomenon demonstrate a common feeble ground of viability and consistency within the most common theories.
The limits we face when studying and explaining inflation with any theory on which to base our analysis lie in the specifics. “The devil is in the details” and they confuse us. The inflationary phenomenon is analyzed with models that are too closed, making it impossible to explain and understand beyond the obviousness that it represents. This leads us from the observation of small details to the loss of vision on the totality of the problem and of our ability to explain and understand it. Based on that crucial consideration, to explain inflation coherently, we must abstract from the smallest details and achieve a real global vision of analysis.
1.4 Keynesians2 versus monetarists3
Two apparently antagonistic economic philosophical theories, both in their basis and historical development, have guided the reflections and possible explanations of inflation in the last century. On one side we find the Keynesians, and on the other, with a relatively “opposite” vision, we find the monetarists. Milton Friedman4 was the father of the school of economic thought that developed the monetary theory. This theory states that governments, through central banks, are the entities that control the amount of money in circulation and the money supply in a given economy; therefore, its expansion or reduction translates into an increase or decrease in aggregate demand. However, according to this theory, the effects on Gross Domestic Product or employment are short-term and are not permanent. The monetary theory of inflation relates this phenomenon to the amount of money in circulation. An increase or decrease in money in an ideal laboratory context where all other economic variables remain unchanged would cause increases or decreases in inflation. This school of thought, often associated with neoliberalism, also relates to the monetary theory of inflation.
According to neoliberalist thinking, in short, state interventions in the economy through a more aggressive monetary policy lead to an increase in inflation. Simplifying the concept to a maximum, we could affirm that the market would be better off left alone with minimal government intervention; therefore, the forces of demand and supply, which in extreme synthesis constitute the market, would be able to more effectively adjust and balance the different economic variables such as production, employment levels and inflation.
The Keynesian theory conceived by John Maynard Keynes5, on the contrary, considers the state’s activity in the market to be a fundamental instrument to increase the production of a country, reduce its unemployment and finally control inflation. As you can see, we are in front of two profoundly different schools of thought. Now, the objective of this work is not to analyze which of the two basic philosophies is the most correct or the most current; what we ultimately need to understand is how these theories are incorporated into government actions or, in other words, how the political system incorporates them into its economy-controlling activities. Upon analyzing these two theories in depth, we, however, discover that, although they are considered philosophically antagonistic, they in fact have many similarities, and therefore they have common elements and grounds.
1.5 Chaos theory
All plain and simple, right?
Well, not so much. The great limit we face when applying theory to practice is to discover that reality is somewhat more complex than theory. Theoretical models therefore work very well on paper and laboratory experiments are successful in the aseptic environments they delimit. In an environment as complex as today's globalized world, the number of variables and their interrelationships are almost infinite (if you will allow me the poetic license) and practically uncontrollable. This reflection is not intended to highlight inconsistencies or possible errors in the theories, but simply their limits when applied in the real world. These limits, when we put theory into practice, to calculate the phenomenon of inflation and to implement strategies for its correction are particularly dangerous because they can divert countries and ultimately investors toward realities far removed from the truth. We can therefore affirm that, although economics is based on mathematical formulas, it is not an exact science because it is not capable of giving exact numerical explanations. In my opinion, here lies the great limitation of the economic sciences.
We could, however, ask for help from chaos theory, which, in terms of theoretical analysis, could be perfectly applicable in its essence to economic theory. After all, if a butterfly fluttering in Brazil could cause a tornado in the United States, imagine what a delay in a government debt payment could produce in the same country. The consequences could be intriguing and it would certainly be challenging to apply this effect within an economic model. However, we must reflect on the word chaos and its most common misinterpretation. If we think of chaos as the infinite complexity of the universe, we can never confuse it with disorder (yes, you heard me right, disorder.) The chaos theory is finally not applicable to the calculation of inflation and its mathematical models, because the environment in which inflation is born, measured and conceptualized is a very disorderly one with diverse types of contamination. On the contrary, the chaos of the universe can be a representation of the purest perfection, the divine vision of infinite complexity could be affirmed.
1.6 Pollution factor
One of the most difficult elements to decipher is undoubtedly the pollution factor. To describe it correctly, consider the multitude of economists who want to explain this phenomenon. But if we look at this environment correctly, we can categorize these professionals into two different groups: those who work with the government of their countries directly as its employees or indirectly as employees of "autonomous" institutions, and those who do not work for the government and are totally independent.
One could observe that individuals working for government institutions may have different considerations compared to those who do not work for the government.
In the end, inflation does not look good, and this simple consideration makes the problem clear: High inflation is not in the interest of governments. High inflation can affect gross domestic product readings, and the well-being of its citizens.
Another element to analyze is the point of view of foreign investors and the attraction of foreign capital for investment and job creation. High inflation coupled with a low gross domestic product, known as stagflation, makes a country a less attractive investment location.
Recognizing a high level of inflation can be a negative factor for the governing party and its re-election. Let’s not forget that inflation ultimately destroys wealth and impoverishes particularly the middle class and segments of the population with lower incomes, which happen to represent in many cases the majority of the voting population.
We should therefore first ask ourselves whether the numbers provided by the statistical institutes represent the phenomenon and describe it correctly, or are rather not so representative. What are the factors that influence the results of inflation analyses?
Finally, contaminating factors depend on erroneous interpretations of the phenomenon by those who should be analyzing it more correctly and accurately. These erroneous interpretations give us wrong or highly erroneous data. It is quite evident to understand how in an environment with so many interests involved and with so many usable variables, the final results can be contaminated and, therefore, there is no chaos theory that can adequately explain that complexity, which cannot be included as a quantifiable variable in any functional mathematical model.
1.7 Different polluting elements, “to pivot or not to pivot – this is the dilemma”
To fully understand the contaminating factors, an important consideration arises to which we must provide an answer. I refer to the question: Could the numbers representing inflation be adjusted by requirements other than the mere academic exercise? Or could they simply be improved to make them look different? I will give you some additional examples in this regard. We have seen that inflation does not look good, but let’s imagine an inflation that is several percentage points higher than the nominal one. What would be its effect on the state's balance sheet? How much would it cost in terms of interest that the state must pay in full? This is not to mention inflation-indexed bonds, which are also affected by high inflation rates.
"To pivot6 or not to pivot -- this is the dilemma7. When will the dilemma of pivoting in restrictive monetary policy arise? Let Hamlet rest in peace, after all, life has been much harder for him than for us. To aid in understanding the reflections that follow, this famous Shakespearian phrase may prove helpful. Many decades of very soft monetary policies have resulted in an abrupt increase in the monetary base and the consequent increase in nominal inflation. To contrast the new reality of high nominal inflation, monetary authorities around the globe have been forced to take monetary restrictions through the injection of securities into the banking system, known as "Quantitative Tightenings8, and through a hike in interest rates. These policies have a direct effect on financial market indices. For a state, therefore, dealing with high inflation implies taking robust actions to control the phenomenon. These actions are transmitted to the results of stock prices. Therefore, in this view, the consequences of these actions can be devastating for investors. This generates a lot of pressure on the monetary authorities to keep interest rates low through the high finance lobbies. It is enough to recall all the discussions in 2022 and 2023 surrounding the Pivoting concept. Pivoting is nothing more than the beginning of the change in the Federal Reserve's monetary policy. Financial investors and analysts were focusing their discussions on the potential occurrence of the pivot moment in 2022 and 2023, speculating on the potential onset or less of this pivot moment. It is funny to think about how dangerous and damaging inflation is, so much so that it should be the main concern of the financial sector. Analysts as well as politicians have shown a preference for holiday periods and times of easy money with low interest rates near zero over controlling inflation.
This example will make it easier to understand that there are many different types of contributing factors that affect how inflation is calculated and conceptualized.
The primary influential factors are whether the weights assigned to goods and services for calculating inflation represent the spending pattern of a country, or instead, do not correspond exactly to reality.
A second typology of factors is the conceptualization of inflation and how it is measured over time.
A third typology for complex and multi-country realities such as the European Union or the United States is the difficulty of aggregating data that is sometimes very different from each other.
It is also important to consider the pressures that different interest groups exerted on the government and monetary authorities, to prevent both a dramatic increase in the inflation rate and the draconian measures necessary to control it.
If we carefully reflect on all the contributing factors and the forces in the field, we should be able to come to an eye-opening conclusion: The inflation values we have been reported are perhaps not an accurate representation of reality and are possibly partly functional in offering a different image of reality.
2 Inflation
2.1 Inflation
To visualize inflation correctly, we should think of it as an asymptomatic,chronically degenerative disease that robs us of our lifetime.
Beyond any other philosophical considerations about money and the different symbolisms it can assume in our lives, there is a much simpler and intuitive concept to understand. To earn money, you need to invest one of the scarcest assets a human being possesses, that is time. You invest your time, and finally, the sum of these temporary spaces in which you work represent moments of your life. Inflation stealthily and sometimes inconspicuously steals your time, or, in other words, steals a little bit of your life.
When asked for the definition of inflation, we could find many, but in my opinion, the most accurate one is the following:
The average cost difference between my current purchases and purchases of identical items made in the past.
If we extend this same definition to an economy, it would be: The average cost difference that households pay today for exactly the same items (goods and services) that they acquired in the past.
If we analyze the definition, we observe three components:
The concept of inflation must be well understood, since it is always composed of these three elements and varying them would constitute manipulating the information.
Although its visualization is not so difficult to conceptualize, calculating it becomes more challenging due to the inclusion of fundamental variables that must be taken into consideration.
The quantities of goods and services traded in a country undoubtedly represent the main challenge when synthesizing their price evolution. At the same time, inflation is affected by geographical characteristics.Therefore, this aspect is a further complication, representing possible different behavior and price evolutions for different geographical areas. In the United States, inflation in one state does not necessarily coincide with inflation in another. At the same time, if we consider the US dollar, there are also other countries that adopt it as their national currency (e.g., Ecuador, Panama and El Salvador in Latin America). Inflation within these countries, even if they adopt the same currency, will most likely not coincide with inflation in the United States.
The calculation of inflation is based, therefore, on the data produced by the statistical institutes of the different countries or states, and after this first analysis, in order to arrive at a single data to synthesize it, it will be necessary to find a fair compromise of weights.
In the particular case of the Eurozone, we as a result have different inflation rates, depending on whether we are referring to individual countries or to the overall inflation rate of the entire area.
Therefore, we can speak of inflation as representing the loss of value of money over time. When a basket of goods becomes more expensive over time, my purchasing power decreases, resulting in a reduced ability to acquire the same number of products and services with the initial amount of money.
The essential elements that characterize inflation are the cost levels of products and services, the time, and the goods under analysis. Cost levels of goods and services within a time frame are, therefore, the key variables that describe this monetary economic phenomenon. Any manipulation of these elements can significantly alter the outcome of the calculation.
2.2 Other monetary and economic phenomena related to inflation
Economic recessions: Economic recessions are normal times when an economy stops growing and for various reasons begins to decline, registering a decrease in both the Gross Domestic Product (GDP) and in its employment level. This phenomenon can be described as normal within the economic cycle of an economy. In simplified terms, nothing goes up infinitely and corrections are in fact normal and healthy for any economy.
Stagflation: Onthe contrary, in stagflation, there is an increase in the costs of goods and services, but not in the quantity of goods and services traded. In this scenario everything becomes more expensive, but the economy in real terms does not grow, but rather decreases.
This phenomenon is simply an economic recession with inflation.
If we classify them according to their degree of threat, stagflation is much more sinister than inflation, because stagflation gives an apparent idea of economic growth, which is not the case.
In other words, there will be an increase in the cost of living without an increase in the production and consumption of goods and services in real terms. As a result, over the long term, there is a significant devaluation of the purchasing power of families, leading to increased poverty.
Deflation: Deflation is the opposite phenomenon to inflation; in this case, there is a decrease in prices. It is not as normal and common an economic event as inflation, and when it has occurred it has typically been limited to short periods of time, unlike inflation, which is a continuous and constant endemic evil for all economies.
Economic depression: Economic depression is related to recessions, but it is a completely different phenomenon. In an economic depression, we have a decline in the major indicators of an economy, including gross domestic product and employment over an extended period of time.
The difference between a recession and a depression is that in a recession, the economy declines for a few months (two quarters) to a maximum of two or three years, while in a depression the economy declines for more than three years.
Now we understand that an economic depression is much more serious than a recession.
The characteristics of a depression are similar to those of a recession but with a manifestation of phenomena that are more prolonged in time and of greater incidence. High levels of unemployment and a decrease in available credit represent these phenomena, causing a prolonged drop in productivity and the country's declining Gross Domestic Product.
The economic results of a depression include bankruptcy of companies, default on government debt, and a prolonged bear market9 for stock indexes. Moreover, there is a high likelihood of economic deflation exacerbating the situation.
If we compare recession and depression, recession is a normal state of the economic cycle, while depression is something extraordinary that occurs very rarely; when it does occur, it is a very serious moment in the economy signaling that it will be affected for many years to come. A typical case is the great depression of the 30's, where it took almost 30 years for stock indexes to return to the values prior to the economic collapse.
2.3 Inflation and its relative normality levels
When we talk about inflation, it does not necessarily have a negative connotation. We could ask ourselves: at what moderate levels could it represent the state of a healthy economy? What would constitute moderate levels of inflation to define it as a normal state of the economy?
Inflation levels that can be registered in an economy10 :
We can understand, therefore, that inflation within a range between 0 and 5% can be considered moderate; however, the monetary authorities of the main industrialized countries ideally consider that it should be around 2%.
The reasons that have allowed for the relative control of inflation levels over so many decades are basically of three types.
Globalization is a strongly deflationary element, reducing the price of many products because goods produced in markets where labor and energy costs are lower are traded. Therefore, the ease of international trade and the integration of markets have been the main elements determining this “apparent” control of inflation for many decades.
Productivity is another element that allows an economy to control its price evolution. To thoroughly understand how productivity works we must think of a very simple concept which is: do more with less. It means, therefore, to produce more with lower cost -- producing the same goods at a lower cost is a deflationary factor.
However, should we ask ourselves if we can be satisfied with these two basic explanations? Not so, unfortunately. To understand the enormous damage that inflation has caused we have to contextualize it within a few more parameters that describe its real evolution over the years.
The fundamental element is to understand the formula and how inflation is calculated and the consequential implications on the results obtained through these calculations. Another fundamental element we must ask is: What does the increase in value of financial assets represent in relation to the exorbitant flood of money in the economy? The increases in the value of these assets are not incorporated into the inflation calculation.
2.4 Beyond the definition
There is an abundance of literature on this phenomenon. There are, however, few relatively clear answers to the possible repercussions that this endemic evil is causing to society. If we want to study inflation, we have the possibility of studying clear definitions of the phenomenon. But I have the impression that things become more complex the more we want to delve further into the underlying reasons and causes that generate them, to finally reach concrete and real solutions that allow us to cure it.
We easily come across answers that seem to be the result of paraphrasing the same definitions; in other words, when reading and studying the phenomenon many times the answers are nothing more than the same definition worded in different terms. Therefore, one of the great dilemmas surrounding inflation is caused by the interests that revolve around it. We should reflect on the interests of the different powers and economic groups surrounding inflation, hence the difficulty in finding clear answers to an apparently incurable evil. Solving hazards like potential floods in a village becomes easier when the population agrees to work together to save their homes and belongings. With inflation, the reality is different and much more convoluted.
Inflation is undoubtedly a destructive and devastating phenomenon for the middle-class and lower-income groups, but it is not necessarily the same for those who have more or for those who have power; in some cases, the readjustments caused by inflation can even be beneficial for some. In the case of public debt, if the State's revenues increase as a result of inflation, or of the change in the tax brackets of taxpayers and companies, this means more money coming in and, therefore, a greater control of the debt itself. In all these situations we are facing an important dichotomy: on the one hand we have the interests of the people who are significantly and negatively impacted by inflation; on the other hand, politics and the government, which can benefit from a certain degree of inflation. Here things get complicated in facts, but not in manners, no government will recognize that it will wait for inflation for a rebalancing of public finances, rather the discourse will be absolutely in line with popular common sense. Whether things will be done correctly is another story. At the end of the day, politicians in all latitudes of the world have accustomed us in the best of hypotheses to see them fail to fulfill exactly what they promised or in the worst of cases to do exactly the opposite. The problem becomes more complicated when we add the interests of corporations and large groups to the chess game of the State, where even in some cases a little inflation may not be so harmful.
2.5 Is the inflation calculated by the statistical institutes a correct representation of the phenomenon?
To answer this question, one must carry out a complex analysis of different factors that come into play when calculating inflation. Factors that go beyond the simple number which can represent or synthesize inflation in a temporal arc, factors that contribute to build inflation as we know it.
Numbers, in their essence, represent an abstract concept of purity. However, when we consider numbers and their usefulness to explain complex phenomena with qualitative interrelationships, purity becomes lost.
Purity is lost when numbers are used to reach predefined conclusions or to construct a priori conclusions that are not the simple representation of a phenomenon, but a representation of a reality constructed with the intention of giving a better picture of the situation. Numbers, depending on how they are used, can therefore yield different data. It may, however, be a bit difficult to understand the point I am referring to. It is the construction of data according to a predefined narrative, rather than the use of numbers as an instrument of pure observation and analysis. Then the numbers can be or become functional, to modify the reality they are meant to describe and create a perceived and instrumental reality aligned with the objectives of the person manipulating the numbers.
Are the data provided by the statistical institutes regarding inflation correct or are they instrumental to explain and mitigate the aspect of this phenomenon?
We will try, throughout the first chapters, to give an answer to this question; obviously, we will not provide a conclusive answer, they are simply ideas around complex concepts that, nevertheless, can have a devastating and destructive power within your life.
3 Where inflation comes from
3.1 Causes that determine the inflation phenomenon
If we were to ask ourselves what are the causes that trigger inflation, the traditional answer would lead us to factors related to demand and consumption, or to an increase in company costs, wage increases, expectations about inflation itself, and many other logical elements that could describe the problem analytically. The limitation of this methodology of analysis is that it can describe the phenomenon without giving us a true diagnosis of the triggering reasons. We will try to arrive at the construction of the problem starting from a traditional perspective until we discover the real reasons behind it, moving from the obvious to the less obvious.
Demand or consumption: According to the traditional limited view, the first cause of inflation is an increase in the demand for goods or services. Since goods and services are scarce, obviously, as demand increases, those who offer goods and services increase their prices.
Cost: Continuing with this simplified perspective, another factor that generates inflation is the increase in the production costs of goods and services. When companies transfer these price increases to the products or services they provide, the increase in costs ends up causing inflation.
Wages and expectations: Finally, wage increases due to inflation expectations or for other reasons such as contract renewals or personnel shortages force companies to pay more. Consequently, a sustained rise in wages within an economy becomes an inflationary factor. The same inflation expectations can lead companies to increase their prices and raise their workers' wages, both of which are inflationary.
