Notes on inflation

Zbigniew Lukasiak
5 min readNov 10, 2022


100 000 000 German Marks banknote

What is inflation?

In economics, inflation is a general increase in the prices of goods and services in an economy.[3][4][5][6] When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.

from wikipedia

In many places the measure of inflation is Consumer Price Index (already omitting capital goods). But what about other things that we buy with money? What about stocks market?

Why now? Why not earlier?

For decades US Feds tried to induce moderate inflation with Quantitative Easing — causing many people worrying about a run off inflation — but in fact they were failing to even reach their 2% ideal inflation targets.

But they did induce inflation in asset prices. What does it mean that value of companies goes up relatively to the consumer goods they produce? If we treat equity of a company selling $x for $100 expenses (x% is EBIDTA-CAPEX margin?) as a kind of inflation adjusted bond paying x% and just calculate its value as a function of discount rates — than it makes sense that the lower rates the producer value is bigger. But how much of the stock market growth was result of this accounting trick, how much of it was real economy growth — and how much was it a result of growing money supply?

A company market value is somehow related to the value of the machinery and other capital goods it has — that is its book value — but it is not simple relation. I suspect that capital goods prices did not diverge so much from consumer goods as company valuations did (there must be data on that).

M1 and M2

hmm — it really looks that there was a lot of banknotes printed in the pandemic!

What is the global picture?

Most of the information I can find on the internet are about the USA — but with the current globalisation this is dangerously incomplete picture. Even with the USD there is huge demand outside of the USA because of its status as the main reserve currency.

Sources say we have now inflation all over the world. Everyone follows USD, EUR, YEN. Polish złoty has even higher inflation. But what about China?

Was it also similar global picture in the past decade (or two) with central banks trying to induce inflation and undershooting?

Can the USD enter hyper-inflation?

Probably not in any close term — but: No one knows how much the government can borrow.

Since 2020 money velocity is now record low — but started going up:

Ray Dalio have been arguing for some time that the USD reserve currency status is not set in stone and that various economic cycles seem to suggest a big regime change soon. But right now with the war in Ukraine, energy crisis and the whole world sucking USD, that seems far away.

More info with links

Real Vision: Why This Isn’t a Great Inflation Redux

Differences from 70s:

  • Labour had bigger influence
  • Much liquidity in the system — with low money velocity (big reserves), but inflation can drive velocity by disincentivising holding cash
  • US has more services based economy and services requires less capital goods (Uber does not own the cars)
  • De-globalisation means less ‘just in time’ inventory — more capital needed for production
  • De-globalisation will probably continue (regime change)

Lyn Alden October 2022 Newsletter

I wrote about an upcoming “checkmate” scenario for central banks, where they are forced to print money into a high inflation environment due to a combination of untenably high debt and commodity-driven inflation. Japan has over 250% public debt-to-GDP. Italy has over 150%. The UK and USA are both over 100%. The thesis here is that the macroeconomic environment is like the 1940s for them (high debt and high inflation), not like the 1970s (low debt and high inflation), and their sovereign bond markets therefore require support from central banks to avoid a fiscal spiral and nominal default. This support typically takes the form of yield curve control, yield curve management, and various other types of financial repression.

  • Liquidity problems in Treasuries can force Fed to buy Treasuries despite high inflation (just like it happened in UK)
  • If that happens this might be top of dollar strength (leading to more inflation)
  • Problems with energy — lead to inflation
  • High interest rates with high debt means high financing burden which will probably be covered by more debt (Treasuries) — but there are concerns with liquidity in the Treasury market
  • But stock market capitalisation reached 200% of GDB in 2021 — historically unprecedented — so now opportunities are in energy, commodities, precious metals, infrastructure, chemicals, biotech, bitcoin, and select foreign markets

Arnold Kling

  • two attractors for inflation: low and steady or high and variable
Any number of developments can break patterns of comparative advantage, sometimes temporarily but often permanently. A temporary break might occur when, say, auto manufacturers have excess inventory, so that they shut down production for a few months, after which they recall the same workers to the same jobs. A more permanent break occurs when, say, print newspapers are put out of business by competition from the Internet.

When permanent breaks take place, the only way to reduce unemployment is for entrepreneurs to discover new patterns of sustainable comparative advantage. That is what job creation means. It is a process that involves trial and error, and it takes time. It is like solving a jigsaw puzzle. When an entrepreneur creates a profitable business, some pieces click into place.

This does not seem very helpful — we don’t know when a break of patterns of comparative advantage could happen, nor if they would be temporary or permanent. But I think it goes into the direction that the economy is like a — and you cannot predict how big a change would be.