Money Supply (Inflation) vs Technology (Deflation)
The Impact of Money Supply and Technology
Understanding the dynamics between inflationary money supply and the deflationary effect of technology is crucial for navigating today’s economy. Let's explore how these opposing forces interact and their implications for our financial future.
The Deflationary Nature of Technology
Increased Productivity and Efficiency: Technology, such as automation and AI, enables businesses to produce more with less. For example, the technology or tool, called tractors can plow fields in hours rather than weeks by manual labour, significantly boosting productivity and lowering costs.
Innovation and Competition: Technological advancements disrupt markets, forcing companies to innovate and lower prices to stay competitive. For instance, calculators, once costly devices, have become free applications, drastically reducing costs. Or a television, once extremely costly and poor of quality, now prices are lower (despite inflation) and quality continues to improve.
Dematerialization: Digital transformation eliminates physical production and distribution costs. Netflix, for example, disrupted Blockbuster by offering a vast digital library of movies and TV shows, making entertainment more affordable and accessible.
The Inflationary Nature of an Expanding Money Supply
Decreased Purchasing Power: As central banks print more money, the value of each currency unit decreases. This process, known as base money inflation (debasement), leads to higher prices for goods and services across the board. When the money supply expands rapidly, each dollar, pound, or euro in circulation buys less than it did before. This erodes consumers' purchasing power, meaning that over time, the same amount of money buys fewer goods and services.
For example, if a loaf of bread cost $1 last year but costs $1.10 this year, the purchasing power of money has decreased. People need more money to buy the same item, which makes everyday essentials more expensive. This phenomenon affects all aspects of life, from groceries and housing to education and healthcare, making it harder for individuals and families to maintain their standard of living.
Even though technology has made the production of goods like bread more efficient, leading to lower production costs, inflation causes prices to rise. In a free market without inflationary pressures, prices would generally fall towards the marginal cost of production due to increased efficiency and competition. However, the continuous increase in the money supply prevents these natural price decreases from reaching consumers, masking the deflationary benefits of technological advancements. Thus, despite technology making production cheaper, consumers still face higher prices due to the eroding value of money.
Inflation and Deflation: A Kingston City Hall Example
Kingston City Hall, built between 1843 and 1844 at a cost of approximately £20,000, offers a historical perspective on the impacts of inflation and deflation. In the mid-19th century, this amount represented significant value, reflecting the purchasing power of money at that time.Today, due to inflation, £20,000 would not suffice for draft permits on such a grand structure.
The money known as the pound, specifically the British pound sterling (GBP), is printed (debased) by the Bank of England. The Bank of England is the central bank of the United Kingdom and has the exclusive authority to issue banknotes in England. Since Kingston City Hall was built the pound has lost 99% of its value per unit!
Conversely, technological advancements have dramatically reduced the costs and time associated with building and manufacturing. Modern construction techniques and machinery allow projects to be completed faster and more efficiently than in the 1840s. This juxtaposition underscores the dual forces at play: inflationary pressures from an expanding money supply diminishing value, and deflationary pressures from technology enhancing efficiency and reducing costs. Understanding these dynamics is crucial for navigating economic decisions in Kingston and beyond, especially when considering the role of sound money like Bitcoin in preserving value amidst these opposing forces.
Conclusion
The interplay between technology-driven deflation and inflationary monetary policies shapes our economic landscape. Technology drives down costs and increases efficiency. However, the inflationary nature of an expanding money supply erodes purchasing power, inflates prices, and encourages debt and short-term consumption.
By adopting Bitcoin, the City of Kingston can safeguard our children's future against the eroding effects of inflation and ensure everyone will benefit from the exponential advancements of our technologies.
For more on this topic please read Jeff Booth's 'The Price of Tomorrow'
