There Is No Such Thing As Rising Prices

There is no such thing as rising prices, generally speaking. Prices reflect cost of production. As long as supply chains remain intact, there is no reason for cost of production to change.

Let’s understand this with a simple example. Imagine a primitive economy with a handful of members. One of its members collects dry wood from the forest to sell in the local market. As long as there are no major droughts, floods, or wildfires, there is no reason for the cost of wood to change. The same can be said about everything sold in our local economy. Worthwhile noting is that his income also remains constant, unless he finds areas with more wood. In a normal economy, price represents the significance of the corresponding product. Wage represents the significance/value of the corresponding activity. Wages and prices change only when the culture itself changes, causing a shift in what its members need/want.

Milk is not more expensive than it used to be 20 years ago. Cows are still the same. The process of milking them is also the same. It costs more today because the measure/scale of cost itself has changed. In other words, the real cost of milk, which summarizes the manpower and the resources needed to produce milk, is relatively still the same. The nominal cost, which reflects the growth/decline in money supply, has increased dramatically. As the money supply increased, markets recalibrated to reflect prices in the new measurement.

If the money supply was to be halved ($2 would now mean only $1), really nothing would break. Wages and prices would roughly get halved. Overleveraged companies and governments would collapse because they are bound to the nominal value of their loans. Unleveraged individuals and companies would barely notice the difference. The concept can be compared with reverse stock splits. When a reverse stock split happens, the cost of each share doubles, but shareholders don't become richer. The total value of his shares remains the same.

Inflation does not mean rising prices, because real prices generally don’t change much. It means devaluation of money. The entire game of inflation and deflation is played by central bankers and governments. When they devalue money, they blame the market for rising prices and call it inflation. When they appreciate money, which they rarely do, they destroy over-leveraged individuals and companies and call it deflation. Price instability is caused by currency manipulation.

Story time:

In the fall of 2016, I was made to take a class on American Government. One of our assignments was to present a bill. One of my peers, Jonothan Cimino from Alabama (probably Decatur or Huntsville), proposed abolishing the penny. He argued the minting process costs more than the value of the penny. He was right, but the penny is not at fault here. Chances are, the real cost of minting pennies is still the same. Only the nominal cost has increased. If the value of the penny is recalibrated to reflect the lowest denomination used today, there would be no need to abolish it.