The Inflation Age

bariton

So what is inflation?

Inflation happens when there is either a supply or a demand-side pressure on the price of products and services. Excess investment may increase demand temporarily. Lower demand may pressure companies to increase their prices to cover the costs of real estate, management, or marketing.

Let’s look at the microeconomic side. Assume a chocolate factory produces 10K cartons of chocolate with a variable cost of 1M and a fixed cost of 1M. This makes a carton cost $200.

Supply chain issues and general economic downturns may cause the loss of ten percent of the customers. The variable cost of the firm drops to 900K laying off 10% of that workforce immediately. The cost of a carton still increases to $211. The customer base may not accept such an increased price. The company may decide between lowering production or pushing up the prices by 5.5% to $211. The former will obviously trigger more layoffs hurting the revenues of others.

An economy with low fixed costs of real estate, sales, and administration will suffer less. If all 2M of the expenses of the same company is on the variable side of the Contribution Margin Income Statement, then the price of a carton can still be $200 after the drop in production. Only retaining idle staff may require increasing the unit price. Countries with higher regulation thus have a higher risk of suffering from inflation of such a kind.

Does crypto help? The opinion of the author is that it does not help with inflation. It helps with deferring some of the revenue of the unemployed. People can make a basic living selling their existing crypto assets. Do governments need to fear? I do not think so. All central banks and governments need to require taxes paid in the country’s currency. Crypto owners will need to sell some assets to cover taxes, which helps build a thriving market of digital assets. This also helps speculators to assess the value of nonfungible nontangible products of the digital economy. Some circulation of digital assets may also help the private economy distance itself from the excess government spending and devaluation of the official currencies as a result. Few lower-income jurisdictions have already chosen Bitcoin as an official payment method.

What about semiconductors? Many commodity and product markets of the world economy today are similar to Comecon, an economic association of eastern European countries founded in 1949 and analogous to the European Economic Community. High research, development, intellectual property, and education requirements make these markets inelastic due to the fixed demand of customers. Production is bounded by long-term trade agreements, or enforced by long-term arbitrage contracts, just like lords rule their counties. These markets create classes of countries with specialization. The lost Afghanistan War of the Soviet Union proves the inefficiency of such a market.

Semiconductors fulfill both of these requirements. The industry needs decentralization. Many factors reduce the speed of decentralization, including labor training, politics, national security, and the high cost of capital. The spread of semiconductor manufacturing, the Internet of Things, and low-cost computing will bring many benefits to regions outside conflict zones.

The world faces many supply chain issues. The internet will make it easy to spread knowledge even faster than today. Billions of people are just a click away. This will lead to more globalization but the distributed kind this time. Simple standards can drive this. Few simple rules can prevent the build-up of monopolies and oligopolies. The entrance of small investors to the capital markets helps opportunity. Raising capital from multiple investors prevents building a single monopoly. Ensuring that an adequate number of independent suppliers are available before investment helps to tackle costs. Reduced risk will reduce interest rates.

The world is also becoming greener. Electric cars will continue to spread. Investment needs to follow demand. Excess government subsidies may increase rates of maintaining existing oil infrastructure that may hurt the economy, causing inflation unnecessarily. Carbon taxes and quotas were the past. They prove to be useful but inadequate. The author’s opinion is that the spread of green products can easily be promoted by existing infrastructure. Tariff controls are already there for international trade. Enforcing green standards, quotas, and pricing of imports at the border can help domestic industries as well. Using border traffic instead of domestic carbon quotas reduces regulation and creates a thriving competition between international green products and domestic dirt.

Digital currencies and financial innovation may lead to a green currency that affordably improves the spread of natural solutions. An annual universal green dollar check per person can not just ensure that everybody has a universal basic income. It can also be required and used to enforce cleaner technologies without much economic and bureaucratic overhead.

Digital currencies will have a long-term impact. They seem to be likened more to liberal states. They may act as securities representing ownership of assets, corporations, or partnerships. They may replace early funding, or they may replace loans for expensive equipment.

Digital currencies may fill the gap where central banks are inefficient. A rural area with high capital needs may benefit from loans whose rates reflect local environmental risks. Specialized industries may also benefit. A crypto-asset loan may finance expensive semiconductor equipment, and the crypto payments converted to real currency may help to resell the equipment if there is an oversupply.

Digital currencies will probably have their biggest benefit ensuring quick and cheap transactions. Decentralization of such Web 3.0 assets will help many smaller companies cheaply avoid scammers and fraudsters.

Big tech and American corporations may get competition, but they will hardly be challenged. They rely on their brand visibility and press coverage to support their sales and marketing. European companies are much more tied to government influence. European governments are strong enough to question how many of their citizens are employed by a company before signing a lucrative contract. Such political correctness, on the other hand, drives influence and inefficiency compared to American rivals. A government spending cut in a European country after elections can affect the job of many of their citizens at a company, impacting income, happiness, or even the cohesion of a family. It may also lead to higher corruption.

The individualist approach of public Big Tech companies is impacted less by such factors, making them more reliable and less risky for innovative investment. Once Big Tech can learn to distance themselves from governments, they can be even more powerful, driving the spread of cutting-edge innovation. Their oligopolistic power may be cut by international conflicts, regulatory pressure, and distributed Web 3.0 technologies.

Inflation will be solved by supply chain innovation in the long run. Reliable and secure computing systems are there to help. While Russia and the world may get a hit by sanctions and reduced trade, the independent institutions and solutions built as a result may leapfrog the inventor of Sputnik to one of the leading innovators of the world. Micro nuclear plants may ease the impact of oil sanctions. Cheap hydrogen will eventually drive planes initiated by France, increasing global tourism. Container computing clouds, container shipped machinery, and container farming can distribute the wealth of nations. Transparent component markets and the spread of low-cost chips will eventually ease the pressure on silicon and computing industries and their customers. Low-cost marketing may open the way for the competition from small low-GDP countries.

Inflation is here, but there are so many ways to keep it at bay.