The US, European, and Japanese governments undertook quantitative easing in 2009 in order to stimulate their own economies after the collapse of Lehman Brothers in 2008. However, despite pumping huge amounts of currency, their economies have not recovered as expected. SORAnomics explains this is because the currency being created is simply going overseas and towards tech-stock speculation or areas of economic activity where profit rates are higher.
According to Adam Smith, it is natural for wealthy countries to have lower profit rates than poor countries, since the lower profit rates indicate that there is less oppression going on. This is true in industrialized countries which have good systems for transportation, utilities, healthcare and security. People in poor countries on the other hand, have to compete for the few services that are available, leading to higher prices relative to their natural productive capacity. The discrepancy between high demand and low supply attract foreign investors to pour in the money generated from quantitative easing which would otherwise have produced lower profits if invested at home:
..if in any of those distant employments..the profit should happen to rise somewhat higher than what is sufficient to balance the natural preference which is given to nearer employments, this superiority of profit will draw stock from those nearer employments, till the profits of all return to their proper level. This superiority of profit, however, is a proof that, in the actual circumstances of the society, those distant employments are somewhat under-stocked in proportion to other employments, and that the stock of the society is not distributed in the properest manner. It is a proof that something is either bought cheaper or sold dearer than it ought to be, and that some particular class of citizens is more or less oppressed either by paying more or by getting less than what is suitable to that equality which ought to take place, and which naturally does take place among all the different classes of them. (WN IV.vii.173)
Since the time of Keynes, governments have stimulated their economies either through government spending (borrowing) or through monetary expansion (printing money, debasing the currency). Both increase the amount of money circulating. Money increases economic activity because metaphysically, it represents one’s ability to command the work of others:
The value of any commodity..is equal to the quantity of labour which it enables him to purchase or command (WN 1.v.2)
A person who wants to work and start a business must find money in order to command the work of suppliers which he will then process to create goods or services for his customers who will give him money in return for his work.
Unfortunately, too much money in circulation will lead to too much command of work. This excess command manifests as an increase in demand for goods and services. Those who have the excess money will demand more work to be done (ask for more goods & services which Smith calls effectual demand), actually leading to increased oppression if the work commanded is beyond the natural ability of the workers. Since human work is limited in the physical world and cannot increase as fast as the demand of the imagination (Smith calls this absolute demand), the difference in the rapidly increasing demand and the slow increase in productivity causes prices to increase. Therefore, what is normally called ‘inflation’ is actually demand inflation and ‘deflation’ is actually demand deflation.
This new definition of inflation can be applied to all ‘inflation’ problems such as stagflation (where production decreases or stagnates while rich people can still demand, as in the 1970’s) and hyperinflation (where production suddenly drops while demand stays high, as in the Weimar republic and in current Zimbabwe — in this case the overprinting of currency hides the real cause which is the sudden drop in production)
The Persistent Problem of Inflation
As inflation leads to oppression for the lower strata of society (which runs against the mission of SORAnomics to create happy societies) zero inflation must be one of the main goals of any socio-economic system. In the Principles of SORAnomics, inflation represents an imbalanced ‘societal balance sheet’ and has the effect of making the working class insensibly work for free in proportion to the currency still owned. For example, if I work one hour today and earn $10, I expect to be able to buy $10 worth of goods tomorrow. However, if prices rise by 10% overnight, then my $10 can only buy what yesterday was really $9.09. In effect, the inflation has caused me to work around 5 minutes for free. Multiply this 5 minutes by the population of a city affected by that inflation and you will see potentially millions of minutes of free work done for the benefit of the employers or profit-owners. This is why people nowadays to wonder why they seem unable to make ends meet even if they work hard and even work two or more jobs. This is because in reality, inflation is causing them to work for a certain hours for free. Business owners (who Adam Smith calls those who live by profits) do not have this problem since their profits is percentage-based and they can raise their prices at will.
The 2% Inflation Target
Since the view of economists is mercantile in nature, advocating the fallacy that the society will benefit economically only if its businessmen are happy, economists agree that inflation is good. In fact, most central banks, which are run by economists, advocate a 2% annual inflation rate. The rationale is that inflation, created by flooding society with money, encourages spending since money must never lay idle.
Let us say that a society of one million wage-earners working for 1,600 hours per year at $10/hour or $16 billion collective work-value agrees to a 2% inflation for the next year and that each person saves half of his wages or collectively $8 billion to spend for the next year. When the next year comes, instead of being able to buy $8 billion worth of additional goods, they will only be able to buy $7.84 billion. They would have collectively forgone $160 million worth of work or around 16 hours working hours per person. In other words, the inflation rate of 2% made every wage-earner work two days for free. Where did the $160 million worth of work go? Since all trade by money is measured objectively in numbers, the work that was lost by the wage-earners simply went to the profit-earners through the higher nominal prices of the succeeding year. This explains the rising gap between the rich and the poor in all capitalist countries. The poor wage-earners unknowingly give their work for free to the rich profit-earners via inflation as time passes.
Preventing Inflation by Eliminating the Dual Purpose of Money
In the succeeding posts, we shall examine how a universal system of exchange using the barter of commodities can reduce or even eliminate the problem of inflation, reducing or preventing social inequality or the gap between rich and the poor.
Edit Oct 2017: Added Piketty’s R>G and stagflation and hyperinflation