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Money Prolongs Inflation

Updated: Jun 17, 2022

People are under lockdown. They are neither earning nor spending. How do we support the economy now? Give them money to spend anyway.

When the production of goods and services halts, it shouldn't accompany monetary expansion. If you give people money to buy things that are already in short supply, it ends only one way-- inflation. And this is exactly what governments are doing. Producers can hike up prices when people have more money to spend than they have products to sell.

You may call them opportunistic, but not all are. They too have to satisfy their liabilities. Their costs have also increased because of inflation (as a result of lockdown-induced supply-side disruptions). If they don't increase their prices to compensate for rising costs, they will go broke. Economic activities will recede if "morally good" suppliers don't raise prices and go bankrupt.

Free money is never the correct solution. The moment the majority starts spending that money, they will compete for a limited supply of goods, driving up prices. Rich people will outbid the average majority, no matter how much money the government prints. However, the more your print, the more inclined an average consumer is to spend. Thus, the market will inflate much quicker or recover much later than it naturally would've. In addition, inflation makes everyone poorer because money loses its buying potential. In short, free money is like room freshener. It hides the infestation until it becomes a rot. The more you hide it, the more rotten it gets.

The problem is short supply of goods. If you fix the supply side, you can go much further with the same amount of money. For example, here in India, if the government stops taxing fuel as much, a normal price can be half of what it is. This reduces the price of -- EVERYTHING. This means Indians can buy a lot more stuff with the same amount of cash they have.

The simplest thing that countries can do right now is to repeal minimum wage laws, labor regulations, and occupational licenses so people can work instead of begging for unemployment money. Taxes must be reduced to the bare minimum. These are the things that can restore the supply of goods and services (which you eventually buy with money). As production increases, goods get cheaper and money gains buying power. Giving free money, however, is like giving drugs to the unemployed or giving alcohol to the alcoholic and wishing that he would recover.

Some want the stimulus out of fear. What happens when the money runs out? People would have to help each other get off the system of money and rediscover their collective strength. People would have to come up with creative and innovative solutions to produce products and substitutes. They can produce valuable goods and barter. They can quit consuming things they don't need. The dependency on money is the very cause of the insecurity that the lack of money has produced.

For example, my laptop's wifi went out, but I can't get a wifi adapter because the market has been shut down. Online retailers are also out of stock. I can beg the government for money so I can import a high-end adapter or I can reach out to people in tech who can help me repurpose old hardware. This is how people can help themselves (by creating new solutions), not by not doing things that enabled the recession-- reckless consumption and little to no savings. You can't solve a problem the way it was created.

Revision April 24, 2020

As expected, food prices increased in the beginning until local stores and shopkeepers started selling groceries in the place of whatever they were selling before. For example, street food vendors now sell vegetables. This is the market's self-healing mechanism. Suddenly, people were no longer buying useless things and were demanding real food. The market adjusted accordingly. The supply increased and prices started to stabilize.

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