Over the past few months, some have begun to ring alarm bells about the specter of inflation. Nowhere is this more clear than in the world of cryptocurrencies, where a growing number of enthusiasts have promoted digital coins as hedges against rising prices.
The typical argument is that loose monetary and fiscal policies are keeping interest rates low and government spending high, which is eroding the value of the dollar while pushing up prices for all goods and services beyond an ideal rate of inflation. Cryptocurrencies such as Bitcoin have a capped and diminishing supply of new units and are thus deflationary, and cannot be devalued by the actions of a central bank or deficit-spending state.
For well over a year now, there’s been an surge in crypto enthusiasts asking #whathappenedin1971―a reference to the year that President Nixon took the US dollar off the gold standard―with the Twitter CEO Jack Dorsey tweeting out the hashtag this week. Cryptocurrency has even been offered as a possible solution to the invasion of Afghanistan by promoters, provided you go back in time and facilitate its mass adoption, because in libertarian thinking, inflationary currencies fund wars.
In political discourse, inflation is often presented as a technical issue independent of politics. In one scenario: if the government spends too much money, the logic goes, there likely won’t be enough goods to consume and prices will increase. If prices are no longer stable, workers will demand higher wage increases, those labor costs will be passed onto consumers in the form of prices, and a vicious spiral similar to the last major inflation crisis from the late 1960s to early 80s (a “wage-price spiral”) will happen.
While most discussion of inflation is concerned with an increase in consumer prices, crypto enthusiasts are more interested in inflation in terms of the supply of money. Central banks, after all, can effectively “print money” by expanding the supply of money available to banks, as well as buying up debts to free up more capital. Bitcoin advocates maintain that over time, the value of crypto will rise relative to the dollar as the digital coin hits its supply limit while US dollars continue to be created.
All of this confuses and assumes a bunch of things all together. The first assumption is that runaway inflation at the moment is a real concern.
In June, the core Consumer Price Index―which tracks prices for certain goods and services bought by urban workers excluding volatile food and energy prices―rose at its fastest annual rate since 1992 and sparked concern among economists that stimulus programs would cause serious inflation. Closer examination, however, reveals that most of the increased prices experienced over the past few months comes from temporary bottlenecks and specific industries hit hard by the pandemic returning to pre-COVID prices. As economist Paul Krugman pointed out on Twitter, used cars, hotel rooms, and airfares accounted for over half of price inflation for the past three months but are less than 5 percent of the consumer price index.
Today, the price increases that have sparked frenzied debates over inflation are not of all goods and services but very specific groups. More specifically, these are price increases that have come out of supply shocks that represent temporary bottlenecks, not widespread inflationary pressure.
In a recent essay on inflation calculation, historian and Columbia University professor Adam Tooze asks whether any of the ongoing debate makes sense when you consider that some prices go up at different rates for different reasons: "If microchip prices surge because of drought in Taiwan, can we speak of inflation? What, if a spike in demand for lumber in North America drives plywood prices sky high? Is that inflation?"
The policy responses to higher fossil fuel and automobile prices are very different, depending on if you think the rise in prices are caused by inflation or by supply-chain issues. The former would call on us to tighten fiscal and monetary policy by, say, cutting public spending and raising interest rates. But if the problem is a supply shortage, then you would want to pursue public investment and easier access to credit to increase manufacturing production. (Higher fossil fuel prices, however, in the face of impending climate apocalypse, should probably stay.)
Indeed, there seems to be confusion about what inflation actually is among many commentators, including within the Bitcoin crowd. In an interview with NY Mag's Eric Levitz, J.W. Mason—a professor at John Jay College and economist at the Roosevelt Institute—suggests that the way inflation is being discussed is confused, for example insisting on tight links between money supply and inflation when that’s not the case.
Inflation is calculated when you “take all the prices that you can observe, and you average them in some way,” Mason explains. The debate emerges in how you actually do this, however, because you must make choices about what goes in your basket of goods and services and implicitly what group of consumers you are following to understand how prices are developing.
Today, one of the major indicators is the Consumer Price Index, which allows for tracking the prices of a specific basket of goods and services purchased by urban workers. That index itself, as important as it is however, has been politically constructed at various points of its history for different political aims.
"It can't be underestimated how much we politically construct and talk about inflation,” Nathan Tankus, the research director for the Modern Monetary Network, told Motherboard. “It’s associated with this ‘getting out of control’ narrative that overlaps with how crime is talked about in a racialized way in the United States. Inflation's going out of control, we have the crazy Biden administration going out of control with their spending, we've got crime going up, they’re defunding the police, it mixes in a way that's resonant of the 1970s but not as politically potent."
Achieving inflation targets, as well as warning that we are at risk of runaway inflation, are ultimately political moves. As Tankus has pointed out elsewhere, there are real world consequences for keeping inflation at a certain level: unemployment has to be kept at a sustainable level, but the groups left unemployed also have to be managed somehow so that things don’t get out of control.
"Mass incarceration becomes a key piece of austerity, and not just about managing this unemployed underclass, but also integral to the process of regaining control over things that have fallen apart. In that way, the Volcker shock and the rise of mass incarceration, especially as it took off in the 80s under Reagan, but also among the Democrats who gave up any last vestiges of social democracy" Tankus said in a previous interview on this subject. "Therefore, to fundamentally attack the mythical monster of race in America, of racialization, you also have to attack the mythical monster of inflation."
Overlooking the politics of pricing has only made some of the misconceptions about it even worse, poisoning the debates that regularly pop up as older commentators warn of inflation that hasn’t been around for close to five decades.
One misconception is rooted in a confused understanding of what role the money supply plays in affecting price levels. Mason points to this in an essay on the various “versions” of inflation people talk about, stating that "even mainstream economists have largely abandoned the idea of money stock as a meaningful economic quantity" as well as the idea that "there is a straightforward relationship between money and inflation." This is the viewpoint taken up by many including Bitcoiners, more or less. It’s misconceptions like this that help spark political debates about what should be sacrificed in the name of price stability.
“Political convenience is obviously a factor,” says Mason. “If you admitted that tight labor markets actually are effective at redistributing income from profits to wages—and that slack labor markets redistribute from wages to profit you would bring the question of income distribution into the political arena. And I think that one of the successes of what we might call the ‘neoliberal’ model of politics was to move those questions offstage.”
There’s a few ways to push against this model, but they all start with challenging common conceptions of inflation. One proposal from Tankus starts with constructing different measures that track price stability through the frequency of prices or the median price, as opposed to an index that changes over a year.
“If you see that 30 or 40 percent of prices haven't changed in the past year, that gives you a very different sense of what's going on with prices,” Tankus told Motherboard.
"This changes focus from the idea that there's a price setter who changes prices. Instead it focuses on them as products of our corporate dominated economy, as opposed to the product of this fantastical naturalized economics. The parameter of pricing is being filtered through our corporate economy."