Why Inflation Is Good

Inflation is the boogie man of the moment in financial media and it’s been that way for 17 years.

Quantitative easing, the rise of Bitcoin, and the idea of “sound money” — whatever that is — has led a lot of people to think the U.S. government and the Federal Reserve are somehow screwing us over with inflation and the U.S. dollar is somehow junk.

But the Fed has an inflation target of 2% long-term for a reason.

Why does the Fed want inflation?

The simplest answer is to think about the counterfactual. If you’re anti-inflation, you must be pro-deflation!

What happens in a deflationary environment? A dollar buys more in the future than it does today. The incentive is to put off spending.

This leads to less consumer spending. Less economic activity.

It leads to the hoarding of money.

Just ask Michael Saylor, who thinks Bitcoin is “sound money”, and what he’s doing with his Bitcoin. He’s accumulating more and more and more. He’s hoarding.

He’s not spending Bitcoin.

And spending money is how the economy functions.

I’m here to make the argument that inflation — in moderation — is good!

What Is Money?

We often talk about money in terms of wealth like, “Elon Musk is worth $80 bajillion dollars.” But Elon Musk doesn’t have $80 bajillion dollar bills.

At its core, money is a medium of exchange.

When you go to a store, you need to exchange something for the good or service you’re looking for. Beaver pelts are no longer socially acceptable to carry around and tulip bulbs didn’t turn out to be a great medium of exchange. What the world settled on was coins and paper denoting a currency and the most common medium of exchange today is the U.S. dollar.

Dollars are fungible, meaning one dollar is the same as the next.

A dollar can be used to pay for a hot dog, massage, airline ticket, software, etc.

Go to almost any country with a dollar bill and you’ll be able to exchange it for goods and services because people think it has value and they can exchange it for something they need.

That’s what money is for. It’s what the U.S. dollar is for.

So, why isn’t the U.S. dollar “sound money”?

Is There Such Thing As Sound Money?

While the dollar is a solid medium of exchange, the critique is that it doesn’t hold value. And that’s true. It’s not “sound money” as Saylor and other inflation critics want it to be.

Here’s the official definition of sound money:

For centuries, investors have been in search of an asset class that holds its value over time. Gold was thought to be that asset and the U.S. dollar was once on the gold standard, something some would like to see us return to.

But gold has value because people think it has value, just like currency.

And gold can be mined, increasing supply, just like currency.

A currency backed by gold is also inflexible.

Let’s say the economy is booming and people are building houses and businesses and wages are going up and economic growth is 10% per year.

But the gold in reserve backing the currency is only growing 1% per year.

The demand for the currency backed by gold rises because the economy is booming, which leads to more value in the currency, which means people will think the value of the currency will go up in the future, so they should save it.

When people start saving money instead of spending it…you get a recession.

At the end of the day, there’s no such thing as a currency or asset that has a stable value. Values change. What the Fed and government need to decide is whether they want the value of a dollar to get stronger or weaker over time.

Without Sound Money, Do You Want Inflation or Deflation?

The government’s job — and in this case the Fed’s job — is to encourage people to take the dollars they have and spend them. If the incentive is hoarding, the entire economy falls apart.

So, the Fed wants to incentivize people to put dollars to work. Buy groceries, homes, cars, businesses, whatever. The incentive needs to be moving dollars through the economy and the faster the better.

The rate of spending of each dollar is known as the velocity of money.

The Fed would like to create incentives for you to spend.

They want the velocity of money to increase.

The best way to do that is by ensuring prices are going up over time.

(I’ll get to the pace of price increases below)

The Terrible Alternative: Deflation

No one likes higher prices. But if it’s impossible to ensure prices stay exactly flat over time, inflation is better than the alternative.

And the alternative is deflation.

With deflation, the price of goods and services goes down over time.

Think about this with the next vehicle you’re considering.

In a deflationary environment, the price of a vehicle goes down over time. Let’s say this year the vehicle costs $50,000 today and each year the price goes down by $5,000.

In a deflationary environment, when are you buying the vehicle? Can you put it off for a year or two? If you can, you’ll save thousands of dollars.

In a similarly inflationary environment, the price goes up by $5,000 per year.

When is the best time to buy the vehicle? Now!

The cheapest price will always be now.

Ask yourself, is it better for the economy for you to buy the vehicle today or in two years?

Of course, it’s better for the economy if you spend the money now. It keeps the factory worker employed, and ensures demand for steel and fabric for seats, and those people and businesses then spend money in the economy as well.

That’s what the government and the Fed want to encourage.

More consumer and business spending.

More economic activity.

The higher velocity of money.

Moderation In Everything

I hope I’ve laid out a solid argument that inflation is better than deflation, but as with most things, there’s a limit.

Inflation of 50% or 100%, as we’ve seen in countries like Argentina, can lead to economic instability and unrest.

What’s the point of having money if the value of the money evaporates before you can even spend it?

So, the Fed’s 2% inflation target is higher than zero to avoid deflation.

But it’s not 10% because that makes people angry.

It’s not fun to look back on the days of filling my gas tank with a $10 bill and bemoan the $50+ fill I have today. But those increases in prices were slow and were rarely a shock to the system.

If the tradeoff is inflation for a functioning economy, it’s worth it.

How to Combat Inflation

What should you do with money in an inflationary environment, even if inflation is moderate?

PUT YOUR MONEY TO WORK!

Buy land.

Buy stocks.

Buy bonds.

Start a business.

Do something PRODUCTIVE that will make your money into more money. 

Putting your money to work helps grow the economy and grow the pie for everyone.

You win and so does everyone else.

That’s the incentive of inflation and it’s an intentional side effect that the returns on productive assets are higher than putting dollar bills in a coffee can buried in the backyard.

Bitcoin & Sound Money Bullsh*t

Michael Saylor may tell you Bitcoin is better money because there will only ever be 21 million Bitcoins. But Michael Saylor is conflating Bitcoin as an asset with money, which is a medium of exchange.

If you want proof that Bitcoin isn’t real money, ask this question: Is Saylor spending his Bitcoin or hoarding it?

The answer tells you everything you need to know about why Bitcoin will never be real money exchangeable for goods and services.

Real money inflates slowly over time or it wouldn’t be a good medium of exchange.

Like it or not, inflation is good for a functioning economy. And a functioning economy is good for everyone.

Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.