In its most fundamental form, inflation refers to the upward movement in the prices of goods and services. For example, if the price of a particular item was initially and rose to the next month, the inflation on that item within one month amounts to 20%. Many economists believe that a moderate level of inflation sustained over time is typical in a well-functioning economy. However, significant price hikes or hyperinflation can lead to severe economic and social problems.

Unraveling the Complexities of Inflation and Its Impact

Inflation: A Simple Definition

Inflation simply means an increase in the prices of goods and services. It is a concept that affects every aspect of our lives, from the cost of daily necessities to the value of our savings. For instance, when the price of gasoline goes up, it directly impacts our transportation costs and, in turn, affects the overall cost of living. This simple increase in prices can have far-reaching consequences for individuals, businesses, and the economy as a whole.

Low levels of inflation are often considered normal in a healthy economy. It indicates that there is a certain level of economic activity and demand. However, when inflation spirals out of control, it can lead to a host of problems such as reduced purchasing power, increased uncertainty, and economic instability.

The Weimar Republic and Hyperinflation

In the early 1920s, the Weimar Republic faced a severe case of hyperinflation. A wheelbarrow full of money was unable to buy a simple newspaper. There were food riots, pensioners were starving, and farms were looted in the countryside. This situation not only undermined the citizens' faith in the German democracy but also led to the rise of conspiracy theories.

The hyperinflation in the Weimar Republic was a result of various factors, including excessive money printing and a lack of economic stability. It serves as a stark reminder of the dangers of uncontrolled inflation and the importance of maintaining a stable monetary system.

Money Supply Theory and Inflation

For proponents of the money supply theory of inflation, the central bank plays a crucial role in determining the money supply. The central bank provides money to commercial banks in the form of reserves, which are then loaned out to consumers and businesses.

If the central bank decides to increase the money supply, it lowers the interest rate charged to commercial banks. This, in turn, leads to lower interest rates on loans, encouraging borrowing and increasing the money supply in the economy. However, if the productive capacity of the economy (as defined by mainstream economists in terms of labor and capital) does not grow at the same rate as the money supply, it can lead to very high inflation.

The Trophic Theory of Money and Inflation

The trophic theory of money, developed by Brian Czech, emphasizes the importance of land and natural resources in productive capacity. According to this theory, inflation occurs when the growth rate of nominal money outstrips the growth rate of real GDP.

In nature, nutrients and energy flow from plants to primary consumers and then to higher consumers. Similarly, in the human economy, the agricultural and extractive sectors form the base, providing the materials and energy needed for the manufacturing and service sectors. If these base sectors collapse, the entire economy can collapse.

Money, according to the trophic theory, originates from agricultural surplus. If there is no agricultural surplus, there is no division of labor, no exchange of goods and services, and no need for money. Therefore, the money supply managed by the central bank should be in line with the agricultural surplus to maintain a stable monetary structure.

The Case of the United States

Over the last half-century, the relationship between money supply, real GDP, and inflation in the United States has been complex. Global trends suggest that natural resource scarcity is a significant factor, although global data on money supply is incomplete and inconsistent.

In the United States, from 1960 to 2023, we can observe various trends. Until 2020, money supply was between and trillion lower than real GDP. However, in the last few years, the money supply curve surpassed the real GDP curve, leading to a decrease in the velocity of money. This was mainly due to the unprecedented quantitative easing employed by the Federal Reserve in response to the pandemic.

The increase in money supply was followed by an inflation spike, but the real GDP bounce-back in 2021 and the decrease in inflation in 2023 suggest that the lag in productive capacity was temporary. It was more due to supply-chain disruptions and other pandemic-related impacts than natural resource depletion.

However, we need to be cautious as we continue to draw down nonrenewable resources and exceed the Earth's capacity to regenerate renewable ones. This will have a long-term impact on the U.S. productive capacity and the global economy.

Implications and Future Considerations

The simplistic view that "printing money" always leads to inflation is flawed. Money supply increases only lead to inflation if the economy does not have the productive capacity to increase supply accordingly. The importance of natural resources in productive capacity is demonstrated by the supply chain disruptions in the 1970s and early 2020s.

As we face the challenges of economic growth and environmental sustainability, we need to think outside the box and use monetary policy tools unconventionally. We can choose to slow down economic growth and preserve the remaining environmental integrity rather than continuing on the path of unrestricted growth.

Understanding the complex relationship between money supply, natural resources, and inflation is crucial for policymakers, economists, and individuals alike. It can help us make informed decisions and navigate the challenges of a changing economy.