Everyone is talking about Inflation. Well, more likely complaining, cursing, and concerned about its impact on them. There are exceptions of course; some gain from the inflationary pain and punishment that is being inflicted upon the rest of us. What is interesting about this Inflationary event is a perspective from which to objectively view it. The ‘objective’ aspect is a significant challenge in itself because it is hard to not take something personally and emotionally when it hurts you, your family, and others that you have some compassion for even if only a bit. For some that ‘objectivity’ can be easier to achieve if they are use to or trained to view things through a STEM-oriented lens. It is in that STEM spirit view that one can look at our inflation situation to consider what the a “cause and effect” relationships are. Remember, form a STEM-perspective Inflation doesn’t just pop-up out of nowhere like some medieval theory of the spontaneous generation of life from non-living substances. Inflation has its own origin seeds which only require the proper soil in which to sprout.
Fortunately, Economic Theory(ies) provides a STEM-based
framework which seeks to explain financial phenomena on the basis of scientific
laws, rules, and principles. Unfortunately, if our understanding of Economics
on a scientific basis had progressed as far of most of our other scientific
areas we would all be better protected from the realities of economics imposing
their ‘effects’ upon us due to the ‘causes’ which we ignored, generated, or
failed to prepare/account for. On the up-side, the current Inflationary epoch
will provide a wealth (pun intended) of data for students of economics to study
and research for years to come; and we will learn some valuable lessons and
just as assuredly fail or refuse to learn others.
Sometime in your early education I would hope you saw or
even performed one of the familiar “chain-reaction” experiments, like falling
dominoes or ping-pong balls on mousetraps. Taking the ping-pong balls
experiment as a conceptual idea, let’s ask a couple of questions. If you
recall, the Ping-Pong ball experiment demonstrates a cascading effect where one
ping-pong ball provides a triggering event that causes another ping-pong ball
sitting on an active mousetrap to be ejected into the air. Now there are two
ping-pong balls bouncing among other ping-pong balls resting on their own
mousetraps. These two balls fall upon two more ping-pong balls that are then
released. This process repeats and the number of balls bouncing around grows
exponentially.
Question 1: A popular economic theme today is the Supply-Chain
for goods and services. Would the current Supply-Chain conditions represent a
Ping-Pong ball situation?
Question 2: How would you characterize the roll that Demand
plays, if at all, in the Ping-Pong scenario?
Question 3: Since Profits are not a causal part of the
Supply and Demand economic principle but rather are derived from the interplay
between these two factors, is there a role that Profits play in the Ping-Pong
explosion?
Question 4: Consumers are a key factor in our US Economy. We
are no longer the Government-Industrial Complex but have transformed into
chasing the Influencers / Kardashians / “Keeping Up with the Jones” spending
creatures that need everything today. Does our economic “Herd Behavior” have a
role in the Ping-Pong experiment?
Question 5: While there was a lot of excitement about wages
rising in the early post-pandemic recovery period, the inflation which has
since not only rendered some, maybe all, of those increased salaries moot; and the
inflation has punished the majority of people by reducing their pre-COVID
purchasing power. Are wages Ping-Pong balls?
If you are having trouble answering these questions in the
Ping-Pong balls context, remember it is a “cause and effect” that we are asking
about, so you just need make the connection as applicable or not.
Answer to Question 1: Supply-Chain isn’t a Ping-Pong ball.
It is many, many Ping-Pong balls. These are all those inert balls resting upon
the mouse-traps looking very stable. It is that apparent stability which
deceives us. As long as no other Ping-Pong balls falls onto this field then
that stability continues. But whether a Ping-Pong ball falls on them is not a
choice so much as a consequences of events happening in the world. COVID
unfortunately was not a Ping-Pong ball, it was a gross of Ping-Pong balls
falling at erratic and unpredictable times. The Supply-Chain is a series of
“causal” events that play their role in inflation.
Answer to Question 2: Demand is easy. It is not a Ping-Pong
ball. I know this is a surprise because it just seem obvious that Demand would
be a Ping-Pong ball. But Demand is the sensitivity of the trigger on the
mouse-traps. It does play an important role in the Ping-Pong balls erupting.
The sensitivity responds to how Demand changes. An increased Demand increases
the sensitivity of the traps reacting to some Ping-Pong ball falling upon them
thus triggering the chain-reaction of inflation.
Answer to Question 3: Profits are often discussed during
inflationary periods, but usually in terms of the pressure that inflation
places upon a business’ ability to make a profit. However there can be other
facets of how inflation impacts Profits. In terms of the Ping-Pong balls,
profits can also represent the tension on the spring of the mouse-trap. With
inflation the springs of different businesses can tighten and increase the
energy imparted to its ball should the trap be triggered. Even outside of
inflationary periods these springs can tighten from competition and other
factors. When something occurs (a Ping-Pong ball is dropped into the mix) these
springs can be naturally and highly primed to trigger. One ball become two,
which become four, which become …; well, you’ve seen the experiment.
There is also the ‘opportunity’ aspect of profits during inflation. When
other’s are raising their prices, this can encourage others to do likewise. The
longer it has been since opportunities to increase prices has been, the easier
it is to go with the flow and do the same. And of course, if you are on the
right side of the Demand effect, you may be able to make significant profits if
there isn’t any real competition or your competitors see the profit opportunity
just like you.
Answer to Question 4: Consumers as noted are a key element
in our economy and in Economics as a whole. Consumers are the Demand. As noted
in the answer to Question 2, the Consumers determine if the triggers of the
stable mouse-traps are tripped because the Demand is higher than the Supply,
thus increasing the probability that a chain-reaction will commence.
Answer to Question 5: Wages are the consequence of Ping-Pong
ball being triggered by some event in the process. It could be Supply, Demand,
Opportunity, Inflation (yes, inflation can cause inflation), or Competition.
When wages rise (one trap triggers) a ball is tossed out and may cause others
to trigger or it may not. Whether increased wages result in the propagation of
a chain-reaction will depend upon a variety of variables. Given sufficient
conditions, wage increases can be the product of inflation, the result of
inflation, or both, or neither.
It should be clear that that the causes of
Inflation are many and varied. These causes aren’t one thing or the other; nor
are they ‘all or none’. Something that may not be inflationary in one situation
can be the direct immediate cause of an inflationary period in another
situation. To properly understand, and thus to effective react to it, the
entire context and ‘conditions on the ground’ must be accurate understood. When
Inflation is driven by one or two conditions, understanding the situation can
be easy. However, if Inflation is resulting from a plethora of factors or from
interactions among a number of them then seeing the room full of Ping-Pong
balls exploding into a cascading mass of balls flying in all directions is
going to be difficult to easily comprehend; particularly in identifying what
actions one can take to reduce the triggering of more and more traps.
Fortunately or not, at some point the process will find a new stable
arrangement. The question is how painful or catastrophic that process will be
to get through. There is no question of whether it will end, just what the new
economic state will be that you arrive in.
