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To understand this great wealth shift, we must first understand two opposite terms: "deflation" and "inflation". In the same way that "inflation" originally meant an increase in the money supply, it is now almost synonymous with rising prices, when in reality a decline or increase in commodity prices is only a possible phenomenon of a decrease or increase in the money supply. However, since the common definitions of deflation, inflation, and price pegs have become proliferated, I will not dwell on their original definitions below.

Let's start with a simple thought experiment: assuming that the total amount of money remains the same, when the gross value of production increases and wealth is continuously created, what happens to the price level?—— commodity prices will obviously fall, in other words, the so-called "deflation" will occur naturally. However, contrary to this naïve logic, it seems that as the economy develops, prices rise gradually, and inflation seems to have become integrated into daily life—a "common sense" that is unnatural and is closely related to the continuous increase in the money supply, and this inflation that people are accustomed to is the engine of this little-known wealth shift.

Before explaining why the additional monetary issuance is just a wealth transfer, let us briefly clarify the origins of the mainstream rhetoric that advocates for this expansionary monetary policy.

As early as the ancient Greeks, Aristotle considered the relationship between the money supply and wealth creation to be insignificant, and about two thousand years later, classical economists held a similar view, which, according to the later famous economist Schumpeter, continued into the late 19th century and beyond.

Unfortunately, at the beginning of the 20th century, when socialist and interventionist ideas were surging, one of the leading figures of economics in this era, Baron Keynes, believed that increasing the money supply and creating inflation would increase production, stimulate economic growth, and reduce unemployment in the short term The earth has become the target of public criticism, and deflation is seen as a demon in the eyes of the mainstream that must be imprisoned.

At present, the neo-Keynesian school and the neoclassical school, which represent the mainstream of the economic community and the financial circle, are afraid of "deflation". Mainstream people believe that the fall in prices during deflation not only compresses the marginal profits of businesses and makes it difficult to survive, but more importantly, people become more reluctant to consume and borrow, because prices are getting lower and lower, money in their hands is getting more and more expensive, people will hoard money, expecting prices to fall further, as a result, aggregate demand is depleted, production is stagnant, the economy is falling into the abyss, and unemployment is skyrocketing, so deflation is the demon that leads to recession and depression, and appropriate inflation can avoid all this and make the economy go smoothly.

The mainstream logic is absurd. First of all, in a deflationary environment, prices are generally falling, which means that when the price of goods falls, the cost price also falls, and the merchants and manufacturers will not be unprofitable. More importantly, when the price falls, everyone's due demand will not end, no one will wait forever, forever postpone consumption, which is especially obvious in products such as mobile phones, computers, etc., which are iterating rapidly; we all know that a mobile phone with the same configuration will often be reduced in price after half a year of release, and even a 20% discount after a year, and it may be equivalent to a 6% discount after two years, or from another angle, the same amount of money can buy a computer with a better configuration than today after half a year, and a year later, you can buy a higher and better machine—— These products are highly "deflationary", and the annual "inflation rate" may be -20% or lower, but these industries have not disappeared, and people's enthusiasm for consumption is still high; however, the mainstream economic interface is too low for the inflation rate of 0.5%, and the inflation rate below 2% will make them restless, and even invented the word "lowflation" to warn against the risk of deflation, which is a big joke in the world.

Employment is another important argument used by the mainstream to resist deflation: in deflation, nominal wages fall due to falling prices, and although the purchasing power of the unit currency increases, the shrinking nominal income creates the so-called stickywage effect, which casts a negative shadow on people's psychology and hits the employment rate; Businesses have more money to use to hire more employees, and unemployment falls – is the mainstream logic right? Yes, it's creepy, because the secret to reducing unemployment is to exploit workers' ignorance of inflation: slow and insidious inflation is not deeply felt by ordinary people, and thus lacks relevant awareness and appeal (if people have accurate expectations of inflation, the unemployment rate will not be affected by this; if people have too high expectations of inflation, there will still be a negative employment impact). Of course, the mainstream assumption is that people are ignorant, that is, they quietly kill you without discussion) – reading this, you may have a hint of how inflation transfers wealth.

The inflation advocated by the mainstream is certainly not to add two 0s to everyone's account and cash; your 10 yuan becomes 1,000, and I have 1 yuan becomes 100, this kind of inflation will be neutral and meaningless. Therefore, it is inevitable that some people will first get freshly printed money (it is okay not to print it now, and directly type the number on the central bank's computer out of thin air), which will have an effect on the economic structure. Suppose that a, b, c, D's four-man society has a total of 100 yuan, and this is all the wealth, of which A accounts for 40 yuan, B accounts for 30 yuan, C accounts for 20 yuan, and D accounts for 10 yuan; the currency issuer who is in charge of this society now prints a new 20 yuan bill, A gets 14 yuan of 20 yuan, B gets the remaining 6 yuan, C and D do not get the money, at this moment, the total wealth does not change, only the amount of money has changed, inflation, and the other change is the proportion of the wealth of the four people: A has risen from the original 40% to 45% (54/120), B remains unchanged at 30% (36/120), C drops from 20% to 16.7% (20/120), D drops from 10% to 8.3% (10/120) – the transfer of wealth is complete, A is the biggest beneficiary, B is just equal, and C and D are equivalent to theft.

Roughly speaking, the order of circulation of newly released money is as follows: The central bank issues base money -- >the major banks lend credit -- > enterprise financing and development, and so on -- > the ordinary people who receive salaries; inflation gives the people who get the new money first an advantage over those at the end of the chain. At the same time, inflation dilutes the debt, making debtors less stressful because the currency repaid depreciates and the corresponding wealth of creditors shrinks. In addition, the CPI, the main indicator used to assess inflation, does not record the overall inflation situation, and the seemingly stable CPI makes people mistakenly believe that it is the full picture of inflation, while many asset price surges are not captured and reflected. In summary, the face of the inflation-induced wealth shift is that wealth flows from those closer to the bottom to those closer to the upper echelons of the new money, from more than enough savers and lenders to more indebted debtors, and from more proletarian cash and deposit holders to those with more assets.

In reality, it is clear that the beneficiaries of all this are not ordinary people, but people who have more political connections, are wealthier and more powerful. For example, after the 2008 financial crisis, the Federal Reserve's several rounds of credit expansion nearly quadrupled the money supply, and in doing so, it did not save the economy, but only saved Wall Street's elites and maintained a semblance of prosperity;

Under a monopoly monetary system, inflation is stealing, and deflation is another transfer of wealth, but in the opposite direction - inflation is a hidden plunder, and deflation is a hidden charity: for example, if a person burns his 100 million yuan, he reduces the amount of money and creates deflation, in fact, he also distributes his purchasing power to everyone.

The free market is the most efficient and fair system for the provision of goods and services, and money is no exception, and free competition under the free banking system will lead to a reliable, responsible, and robust monetary system (I will write about how free banks work in a future article). However, the central banking system will not disappear in the foreseeable future, so taking a step back, deflation should not continue to be demonized, and deflation should be people's friends, and I am certainly not advocating that anyone quietly convey purchasing power to others by burning money, but that falling prices should be a natural phenomenon of economic development, as in the thought experiment above, and that falling prices are one of the factors that improve people's quality of life, even in recessions. With declining income levels, do we still have to make people suffer from high prices?

Although the gap between the rich and the poor will naturally exist and be justified, the injustice caused by this kind of monetary intervention is immoral, and worse, the injustice caused by this immorality is often blamed on the free market and capitalism - it is obviously a privilege to do evil, but capitalism is carrying a black pot and is more wronged than Dou E. However, the hidden transfer of wealth is only one of them, and the bigger danger is probably the misleading investment and distortion of the economic structure, so that the illusory "prosperity" created will sooner or later be liquidated by the market, until the bubble bursts, and the bitter consequences will not appear.

The next time you see mainstream academics or financial people advocating monetary stimulus and worrying about low inflation, don't be misled by them. Imagine, you are very patriotic and decided to help the motherland achieve the inflation target, you hummed in the studio to make a batch of delicate and realistic fiat currency banknotes, you are preparing to put them into the market to stimulate the economy and raise inflation, but the result can be imagined, your patriotic heart will be severely stifled, because personal money printing is a felony of counterfeiting, and only the central bank printing money is called stimulating the economy - hehe, this is very interesting, right?

Outside a correct business cycle theory

The business cycle is a lofty concept that can give people a sense of "overpower", and there are many interpretations of the business cycle, such as Keynesian theory, monetarist theory, Marxist theory, real business cycle theory, Austrian school business cycle theory, etc., the former two occupy the mainstream academic circle. However, there is one theory that has long been rejected by the mainstream but has persisted, especially after the worst financial crisis since the Great Depression more than 80 years ago (the "Great Recession" of 2008), which has attracted even more interest – the Austrian Business Cycle Theory, after all, almost all those who pointed out the problems and warned of crises before 2008 held the insights of the Austrian School.

In fact, the classical economists David Hume and David Ricardo already had a fairly accurate explanation of the business cycle: the credit expansion of partially prepared banks and the consequent inevitable credit contraction, with the intervention and protection of the government, led to a boom-bust cycle – a prototype of a correct theory of the business cycle, but it was not sufficiently complete until a group of Austrians appeared.

The Austrian Ludwig vonmises studied under Eugenvonböhm-Bawerk in Vienna and laid the framework for the Austrian school's theory of the business cycle in his 1912 book Theory of Money and Credit. Mises' student F.A. Hayek (K) also contributed greatly to the Austrian theory of the business cycle, for which he was awarded the Nobel Prize in Economics in 1974 – sadly, Mises died in 1973, missing the Nobel Prize.

To understand the Austrian School's theory of business cycles, we must first understand the role of interest rates. Interest rates are not just the price to be paid to rent money, it also coordinates people's time preferences and determines the structure of production.

When interest rates are determined by the market, more savings means a greater supply of loanable funds, so interest rates (the price of money) fall, people choose to save because they expect this wealth to be used for future consumption, and are not in a hurry to enjoy the consumption of the moment, and at the same time, because more savings lower interest rates, it becomes more reasonable for businesses to invest in longer-term, larger, and riskier projects, so low interest rates elongate the structure of production. It's all natural that people's time preferences are matched to each other: future consumption matches future production. Vice versa.

However, interest rates are manipulated by monopolistic central banks, and central bank intervention in the market disrupts the important signal of interest rates. The central bank has artificially depressed the real interest rate by printing money out of thin air in a different way to promote credit expansion and inflation, and created the illusion of abundant savings and surplus resources in the case of low savings and limited resources. Projects that require more capital, and people's time preferences for consumption have not changed in the long term, and even become more inclined to current consumption due to lower interest rates, resulting in a mismatch between current consumption and future production, and consumers and producers are competing for limited resources in front of them - all this is "thriving" in the short term, and the economy is a hot and prosperous scene. But eventually, when long-term investments become unachievable or unprofitable, a wave of losses, bankruptcies, bankruptcies, and unemployment ensues, and this irrational boom based on malinvestment and overconsumption collapses – the bubble bursts.

This is the basic concept of the Austrian School's business cycle theory. There are many criticisms of the Austrian business cycle theory, and the most common voice is: "Entrepreneurs are not so stupid, they are always misled by the central bank's interest rates, they will not take the bait every time to participate in it, so the Austrian theory does not hold." This question is untenable, because in the midst of market competition, enterprises that are indifferent to credit expansion will probably let their expanding peers eliminate themselves first; even if they know that it is a bubble that is destined to burst, a normal enterprise will strive to occupy resources and occupy an advantage in the market, so that when the bubble bursts, it is not itself but its opponents who will fall.

There are also many mainstream scholars who criticize the Austrian business cycle theory for failing to explain the "Great Depression" of the 1930s, for example. But in fact, as early as the "boom" of the 1920s, Mises pointed out that the central bank's aggressive credit expansion represented by the Federal Reserve would inevitably turn into a severe recession, and sure enough, disaster struck in 1929. Although it was said by Mises, the Austrian school prescription prescribed by Mises was not welcomed in the slightest.

From the perspective of the Austrian School, the "boom" generated by the government injecting water into the currency and intervening in interest rates is unsustainable, and the false prosperity is precisely when resources are misallocated and the economy is harmed, and the recession that follows after the bursting of these bubbles is the healthy process of the market correcting and repairing itself. It is clear that this view of the Austrian school is difficult to mainstream because those in power do not want to see painful corrections happen during their term of office, and it is for this reason that some theories have become mainstream precisely because they are in line with the appetite of politicians who are more concerned with short-term results, as is the case all over the world. For example, the Keynesian prescription for recession is for the government to spend more to make up for the shortfall in aggregate demand (this is a fallacy, it is wrong, see my article 5) – and politicians are happy to advocate government spending. Moreover, in the short term, "it works", as for the long term, to quote Keynes: "In the long run, we are all dead." In other words: it's my business for a long time.

In today's information age of the Internet, the diffusion of knowledge is no longer limited to classrooms, textbooks and other channels that are easily grasped by the mainstream. The financial crisis in recent years and the frantic actions of major central banks have made the Austrian school's business cycle theory more recognized, and also brought the Austrian school of economics back to many people's vision. It is gratifying to see the revival of the Austrian School in this era. (To be continued.) Mobile phone users, please browse and read, a better reading experience.