The Deadly Duality Of The Definitions Of 'Inflation'

Asking ourselves what is and what is not being “inflated” is critical to understanding the economic concept of “inflation.”

“’Cause you know, sometimes, words have two meanings.”

That warning from the famous Led Zeppelin song should inform us about how our discussion of the economic phenomenon known as “inflation” is lethally blinkered, causing death and destruction and poisoning society.  Actually, this is true for so many of the terms that we use, and I hope to write soon about how this is also true for terms like “taxpayer” and “paying for” something, but let’s talk now about how this works with the word “inflation” when describing a phenomenon involving money.

What do I mean?  Well, first, remember that “inflation” is just a generic word that can be used to describe – or applied to – something like a balloon or a person’s ego.  So, right there, we know that its generic nature means that it can, in more specific but not specific-enough contexts, be used by bad-faith actors – or good-faith confused people – for bad ends.

So, I must ask you, when we say “inflation” about money, what, exactly, is being “inflated”?

Did you ever stop to think of what the answer to that question is?

If you think about this for a little while, and if you think about what the conventional narratives about the causes of “inflation” are, you will likely – hopefully – realize that, according to the traditional monetarist narrative, more than one thing is being “inflated”!

And, if that’s true, then maybe there is something wrong with the explanation!

Serendipity Of Specificity

Have you noticed that I usually am specific with my terminology in that I usually say “price inflation”?  There is an important reason for that, and I will explain it here.

Let's talk briefly about inflation, about a particular problem stemming from confusion and misinformation over its dual definitions.

The first things – yes, ‘things,” plural - that come to most people's minds when they hear "inflation" (the money kind) are

• inflated prices

• inflated quantities of monetary instruments

It’s extremely important to know that these are two separate, distinct phenomena.

Doublespeak

The confusion and misinformation about “inflation” and what causes it stems from the conflation of these two separate phenomena.  Notice that that conflation almost always comes most energetically from those opposed to emancipatory social-welfare policies of universal benefit.  That’s not a coincidence!

A big problem, though, is that far too many proponents of such policies, whether genuine proponents or pretend proponents, have swallowed this conflation, ceding premises to their opponents and, as such, giving away the entire fight.

The real reason that “inflation” is an actual problem is the steady rising of prices, regardless of whether the so-called “money supply” grows.

This distinction is key, because prices can rise without a change in the size of the so-called “money supply” – a concept with a shaky legitimacy itself – if there is a supply shock.

But think about what that implies!

Look, again, at those two definitions that I cited above, please.

Do you see how these two definitions allow bad faith actors to use facts about inflation to monger fear about inflation?

Disaggregate The Positive, Eliminate The Negative

Now, check this out:

Monetary inflation is a sustained increase in the money supply of a country (or currency area).

That is one definition of inflation, but it is not a very good one, because it describes – or is premised upon – a concept based upon false premises.  Money is not a commodity.  While it might make sense to conceptualize of something called “the money supply,” it’s often highly misleading, because people tend to think of money as a commodity.

So, there is something called “monetary inflation.”

There is also something called “price inflation.”

We are very much encouraged to think that these two phenomena always happen simultaneously, which is to say that we are encouraged to think that these two phenomena are actually merely two components of one phenomenon called “inflation.”

But that’s lethally wrong.

If one definition of inflation is an increase in the supply of money, regardless of the outcome of such an increase, and if the other definition of inflation is an increase in prices, regardless of whether the ‘supply’ of money has been changed, then that not only leads to plenty of confusion but, as in any situation with confusion, it allows bad-faith actors to make bad-faith arguments against any kind of useful policy that might involve “increasing the money supply”, i.e., increasing the size of the so-called “deficit,” even if there is no reason to fear shortages, which means that good-faith actors who don’t know any better will end up thinking, saying, and doing destructive things.

You Can And Do Have One Without The Other

For example, as I often preach, the enactment of universal healthcare would be a counterinflationary measure.  Enacting it without any corresponding tax increases would increase the size of the “money supply,” but it’s also a form of price control and, essentially, degrowth, and the government money funding the healthcare workers would be a replacement for the private credit that now funds them.  The same would be true for the construction of a high-speed passenger-rail system.

(Much of that money working its way through the economy would find its way back to the US Treasury as increased tax revenue, without an increase in tax rates, anyway, but that's beside the point that I am attempting to make here.)

Anyway, the point of my example is that it is an example of monetary inflation happening without price inflation – the real “inflation” – happening.

See the difference?

What about the opposite combination?  What about a situation in which we experience price inflation absent of any “money printing” or increased “deficits”?  Climate change, if we don't do something now about it, is likely to cause inflation irrespective of how much money is out there.

If we can't grow crops anymore, we'll have price inflation even if we don't have monetary inflation. If more homes get destroyed, we’ll have prince inflation even if we don’t have monetary inflation.

You could have the same amount of money in the economy 50 years from now as you have today, which is to say, no monetary inflation, but if we don't have as much stuff to buy with that money as we do now, then we will see price inflation.

(I just told you why Bitcoin is a scam!)

Furthermore, we are seeing how the war in Ukraine is causing price inflation, and we are seeing the reasons for it, that it’s not so much increased military spending as it is the fact that Ukraine’s harvests and exports are being disrupted while the West is refusing to buy Russia’s exports.  Trade halts, and, so, prices rise.

Don’t Fall For The Two-Step Con

So, do you see how one word meaning two different things is a recipe for confusion and for manipulation by bad-faith actors?

"You want the government to pay all healthcare workers and allow everyone to access their services free of charge, and you won’t increase taxes?  Well, that'll cause inflation!"

Do you see how the conflation of the two definitions of inflation gives the person saying this has plausible deniability?

The person - and this, as you might have noticed, happens all the time - is using the fear of price inflation to argue against the largely-spurious idea of monetary inflation.

But we can and do have either one without the other, which is why “monetary inflation” is a mostly spurious concept.  We have to acknowledge this mostly spurious concept, however, because it affects the public consciousness (hence the reason that I wrote this essay.)

Let’s look again at that Wikipedia definition of “monetary inflation,” but let’s look at what comes after the first sentence this time.

Monetary inflation is a sustained increase in the money supply of a country (or currency area). Depending on many factors, especially public expectations, the fundamental state and development of the economy, and the transmission mechanism, it is likely to result in price inflation, which is usually just called "inflation", which is a rise in the general level of prices of goods and services.[1][2]

See, you are supposed to think that monetary inflation causes price inflation.  You’re supposed to conflate these two things in your mind as “inflation.”

But I’ve just explained why that’s dangerously wrong.  People who want to maintain the coercive social order and their place in it, no matter if it kills people and destroys the planet, want you to think that “monetary inflation” is the cause of price inflation, which is why they call it “monetary inflation,” which is how you know that it’s a largely disingenuous concept.

They want you to conflate in your head, in your subconscious understanding, an inflation of prices with an inflation of the quantity of outstanding sovereign money – while ignoring the role of private bank credit in the economy, which I will explain shortly.

The “deficit” myth is based on this conflation.  The idea is that the so-called “deficit” constitutes “monetary inflation,” which it actually does, because it increases the quantity of US Dollars by not taxing back as many, and that this means that “deficits” cause price inflation.

Except that they don’t, despite what Robert Reich and Joe Biden – and most of the Conservative Movement, but I repeat myself (!) – say.  They are lying to you, and their lies kill, not only because their lies are the justification for not enacting desperately-needed emancipatory social-welfare policies of universal benefit and mass mobilizing against climate change but because they are obscuring what the actual causes of inflation are, something that they should be addressing.

The Common Understanding Of “Inflation” Is Bassackwards

“Printing money” – or “deficits” – does not cause price inflation.  The reason that the printing of bills – or an increase in the quantity or rate of printing bills – and “deficits” are associated with price inflation is that, as economist John Harvey at Texas Christian University explains, they are usually a result of, not a cause of, price inflation, which itself is usually caused by supply shocks.  The governments of Zimbabwe and the Confederate States Of America had to resort to throttling up the printing presses because of the price inflation that they already were experiencing due to supply shocks.  Wars tend to cause plenty of price inflation.

The claim that printing money causes price inflation – the claim that monetary inflation causes price inflation – gets the causal relationship backwards; thinking that printing money causes price inflation is like thinking that buying toilet paper is what causes you to have to poop.

Private Credit’s Role In Inflationary Pressures

Remember that most of the “money” in the economy is not money at all but is, rather, bank credit that you experience as money.  The construction and eventual staffing of a casino that uses the same quantity of labor and materials that the construction and eventual staffing of a public school uses is no less inflationary (you could actually make an argument that it’s actually more inflationary, because at least schools serve a productive function), even if only one of them shows up on a government’s balance sheets.  The sellers of the material and labor do not care whether you are paying them in Government money or bank credit denominated in the Government’s money unit of account.  It’s the same bricks and the same bricklayers, the same pipes and the same plumbers.

Therefore, the decision by private-sector actors to create a casino creates inflationary pressures on its own, regardless of any changes to government spending.  The reason that “printing money” to bail out banks and insurance companies did not cause price inflation is that the inflationary event was all of the excess lending that led to the crash, which is why the crash was deflationary.  (Remember how much the price of petroleum tumbled by the end of 2008?)

Recognize The Ruse

So, when someone tries to scaremonger you about some social-welfare policy causing “inflation,” a grotesque practice with a grotesque history, steer the conversation in the direction of price inflation, and get the person to try to explain why he thinks that the proposal in question would create a shortage of goods and services.  Remember that the enactment of universal healthcare does not mean some new army of nurses and surgeons gets employed. It just means that the nurses and surgeons that we already have, paid as they already are now by private bank credit, would be put on the government’s balance sheet, replacing the private credit and the inflationary pressures that it causes.

Remember, “sometimes, words have two meanings,” bad-faith actors use the dual meanings of words to harm people, and it’s true for “inflation,” too.  Progressive-liberal people must reject this conflation of these two definitions of “inflation” – and realize that one of them is actually bunk, meant precisely to create this kind of confusion – because, with this conflation being a factor in the absence of universal healthcare and the failure of our leaders to mass mobilize against climate change, accepting this conflation has put us on a stairway to hell.