Monetary Debasement Impossible In The Digital Age
There is a lot of conversation about inflation.
In the title of the article, I use the term "monetary inflation". This is done intentionally since the concepts have been warped.
If we go back to Milton Friedman, probably the most influential advocate of monetarism. He is best known for this statement:
Notice how he talks about the quantity of money. Nowhere does it refer to price increases. While this can result from inflation, there are many factors for price increases. More on this in a bit.
Monetary Debasement Impossible In The Digital Age
The contemporary view of things now terms any price increase inflation. We have the CPI and PPI, neither of which measures the quantity of money. There is no factoring in whether the money supply (not the monetary base) expanded or contracted.
Instead, the focus is upon price.
This leads to the belief in monetary debasement. Here is where we are dealing with outdated ideas.
Inflation, under the contemporary view is stated at "too much money chasing too few goods or services". This is something that most of us heard.
Thus, the conclusion is that, as this situation occurs, currency is debased because it loses its purchasing power.
If we take this from a mathematical perspective, it would look like this:
Number of units of goods and services/Number of units of currency
Let us give an example:
If the units of goods is 4 and the currency units 2, the purchasing power is 2.
Keeping the units the same, but doubling the currency units to 4, gives us a result of 1.
This affirms the view whereby the purchasing power was cut in half. One unit of currency, in the first example, got to units of goods whereas it only acquired 1 after the doubling of the money supply.
Digital Impossibility
If this was the 1920s, it might be a valid theory. However, it is easily debunked.
What happens when the equation looks like this:
Infinite number of goods divided by currency units of 2. What is the purchasing power? Infinite.
If we double the currency units, to 4, what is the answer? The same: infinite.
What we have is the digital reality. There is no limits to the number of units since there is no number. Instead, we are limited by bandwidth. People can download an unlimited number of songs from ITunes. There is no numerical limit. Of course, there is a cap but that is based upon bandwidth. How quickly do the Apple services enable the download? What is the speed of the payment processing? How fast is one's connection?
Here we are not dealing with monetary variables but technological. One thing that should stand out is these systems are only increasing in speed. That means the numerator in our equation keeps going up.
Cognitive Units
Many will take exception to this, pointing to fancy graphics online that show the US dollar's purchasing power declining 99% in the last hundred years. This is pure foolishness.
Look at all that one can purchase that wasn't even around 100 years ago. On top of that, what is not in the numbers. People like to isolate specific markets to "prove" their point. Raoul Pal likes to use real estate. Yet, if you think about his analysis, he doesn't take into account factors such as population growth, regulations or urbanization. Instead, he simply correlates the price increase as evidence of currency debasement.
If we are going to operate in select markets, tell me the currency debasement rate in processors. How about in photographs? Songs?
Even more importantly, with the advent of LLMs, what is the debasement of the currency in cognitive units? Anyone who is following AI is seeing the cost of this drop like a rock. This means we are getting more cognition, per unit, for the same (or less) money as before.
Of course, we do not think in these terms. It is taken for granted when a chatbot spits out a 750 word article in a few seconds. This is overlooked when research, something that took significant time in the analog days, can be waned down to an hour or two.
In the next article, we will cover the mythology of inflation bad, deflation good.
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I always love hearing about economics and finance. Trying to digest what Friedman said with your own views. Are you now saying that the way to curb inflation is to stop attributing goods to fiat prices? Won't currency always continue to have a value tag?
Currency derives its value from the economic productivity gained from it. When economies have the ability to expand at a pace faster than monetary expansion, then prices are not impacted (overall). When the economy can expand faster, and money doesnt keep up, then it is going to see a hindering of output.
Hmmm, still a little confused. Wouldn't money not able to keep up(currency scarcity) not be something advantageous to help tag more production to a little unit of money?. I know the government next step is always to print more
Most governments dont print money. That is a fallacy. The money supply under fractional reserve banking (the currency people use) is done by commercial bank lending. Central banks, which often arent gov't but are close, can print physical cash but that is only a small portion of all money these days.
As for production, doesnt it take money to increase it? If a company wants to expand, more money is required for raw materials, equipment, plants, and labor.
Take that over an economy. The question is whether the economy can expand with the pace of the monetary increase. If the economy is jumping at double digit, that is a lot of growth that needs to be funded.
Digital abundance changes the inflation game.
Where does Bitcoin fit in? 💰
It doesnt with regards to a medium of exchange or keep pace with the money supply needed.
Bitcoiners fell into the mythology about money based upon the physical realm. They believe inflation bad, deflation good. This is not the case.
I think there's some flaws in this assessment unless I'm missing something.
—An increase in the variety of units of goods that a unit of currency can afford does not mean that 1 unit can afford it all, so the purchasing power essentially isn't infinite.
—Services like Chatbots that appears to drastically drop the cost of performing certain tasks are post-paid for, indirectly, so it would be false to say that the units of currency has appreciated as the units of good expands.
Cheap labor, taxes, actual unemployment, all of these are indirectly costs paid to expand the variety of goods and services, so the final product being cheap, I figure to not mean that inflation is absent but that the cost is already covered, hence the goods and services can be low priced.
Or maybe I'm missing something or totally misunderstood what's being discussed.
You are right there are a lot more factors involved in pricing then simply money supply. That is something that gets overlooked when discussion the topics. For the last 40+ years, the supply/demand equation plays more into the role of pricing as compared to the expansion or contraction of the money supply.
As for your other questions, I will be doing a follow up article on this since some good points were raised by many.
One point regarding the chatbots is tied to the idea of a product being a tool. There are two factors here. The chatbot development (the product) and the cost to create (which is true for all software) and then what is produced by the tool (another output).
The input, like for like, of training is dropping like a rock. Training a GPT 3 level model costs a fraction of what it OpenAI paid near 3 years ago. Sure, GPT5 costs lot more but the performance is nowhere near the same.
On the output side, the cost per token is also dropping. That is one way the industry is measuring the cognitive units.
Let's play with alternative look on things :o)
Technology made certain things pretty much free and it continues to do so. But that is highly inflationary. Things optimized by technology became like air - you don't pay for them, therefore they cannot be included in the set of goods and services, so even without monetary inflation we'd have the same amount of currency units chasing shrinking amounts of goods to buy. How about that? :o)
Except that isnt true.
How many subscriptions can you have? Think of just the substack and patreon subscriptions.
Also, arent we seeing things such as GPUs expand in numbers. The total number of sensors is skyrocketing. If we think of the entire telecommunications infrastructure, it is a continual expansion in the number of units.
So I dont find your theory in this instance to be on target.
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STOPit makes sense
In the current age it is impossible.