30/06/2022
*** A SIMPLE EXPLANATION OF INFLATION IN PLAIN ENGLISH*****
THIS ESSAY COMES TO US FROM OUR FACEBOOK FRIEND, ECONOMIC RESEARCHER AND CONTRIBUTOR, JOEL APPLEBAUM CORNELL UNIVERSITY
THANK YOU JOEL
The Four Main Reasons for Inflation
We are all feeling the effects of inflation and are trying to figure out how we can make it through these difficult times with as little pain as possible. This essay will focus on how we arrived at our current
situation, rather than offering advice as to the best ways to combat inflation and return to a stable economy.
I divide the causes of inflation into two major categories:
1. Unforeseen “shocks” to the economy by factors that were difficult to predict and control. These are known as “Black Swan” events.
2. Policy decisions that could have been (and were) predicted in advance to have inflationary consequences.
Our economy has suffered two major unforeseen shocks:
1. The Covid Pandemic. This unforeseen event crippled global economies as Production shut down due to illnesses and precautionary measures. Factories produced less goods, resulting in supply shortages. Everyone will remember supermarkets bare of certain items, and how we were
forced to pay more for those items. Various industries are suffering from supply shortages up to
this day. China takes extreme lockdown measures to combat Covid, as can only be done in a non-democratic society. When a giant city such as Shanghai is locked down due to Covid,
production is brought to near-zero. Right now, we are feeling the effects of their recent shutdown, with cargo containers stacked high in their ports waiting to be loaded onto ships.
Even when the containers are placed onto ships, they still must arrive at ports in the U.S., get unloaded, and be transferred onto trucks for transport throughout our country. It takes a while
for these bottlenecks to be relieved. This is at the heart of the Supply Chain Shortages we read about in various articles.
2. The Ukraine Conflict. Russia’s invasion almost immediately raised energy prices, as they are a major global supplier of oil and natural gas. European and U.S. sanctions on Russian energy
sources are intended to punish Russia for their aggression, but the sanctioning governments now suffer from energy shortages and we must pay extra for these items due to the diminished global supply. Additionally, many countries are dependent upon Ukrainian grain supplies, and are suffering from food shortages due to the conflict.
Policy Decisions that have contributed to Inflation are:
1. Increased government spending intended to stimulate the economy and minimize pain to individuals and companies during the Pandemic. These various spending measures had bipartisan
support in our government and are considered to have been generally successful in preventing a recession during the peak Covid years of 2020 – 2021. However, government spending beyond our revenues has inflationary consequences. Furthermore, it can be argued that our politicians continued to spend recklessly even after the economy recovered from the Covid crisis. We became
comfortable with Trillion Dollar deficits, thinking that spending beyond our means would not have an inflationary impact. This has (predictably) proven to be false, and we are suffering the
consequences now. There has never been, and never will be, a “free lunch”. Governments can operate with an increased level of debt in times of crisis, but that debt must eventually be drawn
down as the economy stabilizes.
2. “Green” Energy. If we consider global warming to be an existential threat, then we must accept
sacrifice to achieve zero carbon emissions. However, many have been falsely led to believe that we can transition to Green Energy sources without economic pain. As pipelines were shut down and
the fossil fuel industry was discouraged from investment in refineries and oil exploration, this inevitably created energy price increases. These increases occurred prior to the Ukraine conflict and
have obviously worsened since that unforeseen event. Electric cars are expensive and perhaps not
yet practical, and green energy sources are not yet able to displace the need for fossil fuels.
Politicians get elected by promising a bright future free of sacrifice and economic downturns, but this is
not how the real world operates. As our government enacts policies to reduce inflation that may also bring us into a recession, be aware of the events and decisions that brought us to this condition in the first place.via wellnrar
