Inflation is always and everywhere a monetary phenomenon.

— Milton Friedman, Nobel Laureate

Welcome to the latest issue of the Bitcoin For Families newsletter. This issue will explain how the arguments given by Central Banks to blame others for inflation are bogus:

• 💡 Businesses are not the cause for inflation
• 🐦 Notable Notes
• 📝 Recommendations

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Businesses are not the cause of inflation

Central Banks, and particularly the European Central Bank (ECB), have spent the last few weeks blaming others for inflation.

Central Banks cause inflation but they won’t accept the blame because doing so would endanger their ability to print money at will.

A week ago, the ECB Podcast released this video blaming business for inflation because they are i) raising wages; and ii) increasing their profits.

Wage increases

A business will pay you as much as they need to in order to keep you as an employee, and not one penny more.

A business will only raise wages when employees demand it because of a shortage of certain skills: for example developers in the AI space are in high demand now and can command salary raises.

The situation that we’re facing now is one where people are demanding salary raises because inflation has raised their cost of living and no one likes to be poorer that the day before.

And if my employer doesn’t raise my salary significantly but the one across the street is smart and offers to do so, then I will walk across the street to get that salary raise.

Many Europeans, with their strong unions, don’t even need a smart potential employer across the street. The unions will negotiate the salary raises for them.

It’s very straight forward: inflation came first, and as a result, wages are going up. But companies will not raise your salary above the inflation rate. At most they will match it.

In the best case scenario where your salary increase matches the price increase caused by inflation, then you continue to buy the same amount of things at the new price level. The prices won’t continue to go up. You’re just trying to maintain your standard of living.

But Europe is far from the best case scenario. The reality is that salaries increases are below inflation. Eurostat, the official office of statistics of the European Union reports that for 2022 wages increased by 4.4% (source) and inflation increased by 9.2% (source).

Blaming inflation on salary wages is a double insult. First they insult you by not accepting their responsibility for causing the inflation and then the insult you by blaming you for inflation, when all you’re trying to do is to maintain the same standard of living for your family.

Greedflation

A business will charge you as much as it can in order to keep you as a customer, and not one penny less.

It is very likely that some companies have increased their prices more than the increased cost of energy, materials and labor.

When you’re running a business that is facing inflation and you don’t know how much inflation will grow, you will, if you can, increase your prices higher than the current inflation to prepare for further increases in inflation. It’s easier than increasing the price a second time because the first time you didn’t get it right.

However, this is always going to be controlled by supply and demand. If you raise the prices too much, people will stop buying your goods.

Again, inflation comes first. Price increases come second. And if you increase the price too much, the competition will undercut you and you will need to lower the price to maintain the customer.

Blaming inflation on greedy businesses is a diversion so that you focus on the evil business man instead of focusing on the really evil central banker.

Agustin Carstens, Head of the Bank of International Settlements

Climate change

Climate change affects inflation

— Christine Lagarde, President of the European Central Bank

This is so funny that I had to include it here as a bonus.

How exactly does that work? I can see how an extreme weather event could cause a temporary increase in prices for certain items but not real, core inflation.

For example, let’s say that an unusual cold weather patch in the midwest of the United States decimates the wheat crops days before the harvest. Now there is less wheat available for the same expected worldwide demand and the price of wheat globally goes up.

People respond to prices of wheat going up by buying less bread or flour and, as a result of the lower demand, the prices go down until they find a new equilibrium. This is not inflation. This is the market working as intended. The price of wheat is signaling the lower supply. That is the purpose of money: to convey information about the value of an item and this value, off course, is impacted among other things by the combination of supply and demand.

But a temporary increase in prices is not what we’re experiencing. We’re experiencing systemic inflation.

Blaming inflation on climate change is an attempt to cast inflation as an unpredictable calamity that no one is really responsible for.

According to Ms. Lagarde, inflation came out nowhere. And it’s Putin’s fault.

The real cause of inflation: too much money

Price inflation happens when more money chases the same amount of goods and services.

We all know it at the basic level: too much money printing devalues the currency and therefore prices must go up because the value of a kilo of apples doesn’t change, what has changed is the value of the euro.

The ECB knows it as well. But they won’t say it aloud. Check the chart below with the Euro money supply. Growing well above the GDP until very recently when they started scaling back.

Euro money supply (millions of Euros)

Their problem is that taking money out of the system is painful. It’s like eating cake, sure you enjoy it when you eat it, but losing the extra weight later is painful. And so they won’t do it for too long or as much as it is needed.

Watch this fantastic speed by Milton Friedman for a clear and simple explanation of inflation. He even predicted today’s deflection tactics by the ECB!

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Notable notes

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Recommendations

Lyn Alden

Lyn Alden is a fantastic macro analyst with a gift for distilling complex data sets into simple to understand concepts.

Here is the February 2023 newsletter with her fantastic analysis, in this case focused on inflation.

She is a strong believer in Bitcoin and you can follow her here.

Bitcoin Therapy 🧠

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Subscribe here.

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See you again next week! — Alejandro

This newsletter is for educational purposes. It does not represent financial advice. Do your own research before buying Bitcoin.