Bubble, bubble, toil and trouble
(How inflation can turn on you)
The politicians' time may have run out. The media can no longer pretend that inflation does not exist. They still report phony government numbers, but even those are starting to get troublesome.
In the news May 12, 2021
A dozen eggs cost 20 cents in 1931. Ninety years later they cost $2, ten times as much. That is inflation for nearly a century at 2.6% per year. If inflation had been 4.2% per year over that same time period a dozen eggs would cost $8 today. Make a note in your calendar on today’s date so when eggs are $20 you can look back and see how long it took. My guess is you won’t have to wait 90 years. You might not have to wait 90 days.
All we are dealing with is a rate of change. In the graph below are four types.
Working from the bottom up, the most benign (in green, labeled "t") is just an increase equal to the initial price after each period. This is what we have had in the past. Thus, a dozen eggs which cost $2 today cost $4 after two periods, six after three, etc. This is a simple linear relationship. Input time increment, get back price multiplied by time increment. There is no compounding. After ten periods today’s dozen eggs are $2 x 10 = $20. If the time period is decades and you start with 20 cents in 1931, at this rate, you get approximately today's price.
The second (in blue, labeled "2 * t") is also linear, just twice the first one. Hence, after ten periods our $2 dozen eggs cost $40. Of course it is more if you multiply by a number larger than 2.
Now we introduce non-linearity. The third type (in brown, labeled "t²") is a power function where the power is 2. So in ten periods our price goes up by the square of time, here to $200 ($2 x 10 x 10 = $2 x 10² = $2 x 100 = $200), a big difference. If the power is more than 2 the difference is, of course, a lot bigger.
The most dramatic (in red) is exponential. This involves compounding. Things happen very fast. The force of time is stronger, each period building on the one before. Another way of saying it is that not only is the price increasing but the rate of increase is also increasing. After ten periods of this increase the dozen eggs will cost you $44,053. If the period is days, the speed at which chicken feed price changes exceeds the rate at which it can be produced, so as a practical matter you need not worry about paying that price as there will be no eggs for sale.
I have been using "period" for the time unit. This allows for any increment of time, decade, years, months, weeks, days, minutes or seconds, the math does not care. Annual inflation in Venezuela in 2019 was 344,510%. Thus, if a dozen eggs cost $2 on January 1, on December 31 of the same year a dozen eggs would cost $6,890. This is an inflation rate of more than 2% per day compounding daily. Of course this does not happen because the government enforces price controls which assure nothing is available at any price.
What if I am interested in something with a price today of more than $2? Below is a fixed version, but at this link I provide a way to put the initial price of any commodity into any rate increase type you prefer. So, pick your favorite purchase: gas, lumber, sausage, dentures, Fruit-of-the-Loom underwear. If you imagine periods are very short (days, hours, minutes) you get some pretty sobering outcomes. This is government run amok. Society cannot withstand this sort of monetary expansion without collapsing.
The next day's news on May 13, 2021
Expect more of that…