Why Inflation Is a Runaway Freight Train, by Charles Hugh Smith

Dramatically higher labor costs look like a sure thing. From Charles Hugh Smith at oftwominds.com:

The value of these super-abundant follies will trend rapidly to zero once margin calls and other bits of reality drastically reduce demand.

Inflation, deflation, stagflation–they’ve all got proponents. But who’s going to be right? The difficulty here is that supply and demand are dynamic and so there are always things going up in price that haven’t changed materially (and are therefore not worth the higher cost) and other things dropping in price even though they haven’t changed materially.

So proponents of inflation and deflation can always offer examples supporting their case. The stagflationist camp is delighted to offer a compromise case: yes, there are both deflationary and inflationary dynamics, and what we have is the worst of both worlds: stagnant growth and declining purchasing power.

What’s missing in most of these debates is a comparison of scale: deflationists point to things like big-screen TV prices dropping. OK, fine: we save $300 on a TV that we might buy once every two or three years. So we save $100 a year thanks to this deflation.

Meanwhile, on the inflationary side, healthcare insurance went up $3,000 a year, childcare went up $3,000 a year, rent (or property taxes) went up $3,000 a year and care for an elderly parent went up $3,000 a year: that’s $12,000. Now how many big-screen TVs, shoddy jeans, etc. that dropped a bit in price will we have to buy to offset $12,000 in higher costs?

This is the problem with abstractions like statistics: TVs dropped 20% in cost, while healthcare, childcare, assisted living and rent all went up 20%–so these all balance out, right?

There are two glaring omissions in all the back-and-forth on inflation and deflation:

1. Price is set on the margins.

2. Enterprises cannot lose money for very long and so they close down.

Let’s start with an observation about the dynamics of price/cost: supply and demand. As a general rule, things that are scarce and in high demand will go up in price, and things that are abundant and in low demand will drop in price.

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