Paul Krugman, Inflation & Bitcoin

Paul Krugman, Inflation & Bitcoin
An AI rendition of Paul Krugman, credit and attribution to Marty Bent (TFTC).

Over the past week, Paul Krugman–collectively an academic "economist," a professor emeritus at Princeton, and an opinion columnist at the New Times–has weighed in several times on the status of inflation in America, assuring everyone that inflation is not as bad as everyone knows it to be. Despite Krugman being best known for his 1998 claim (or prediction) that the internet's impact on the economy would be no greater than the fax machine, his opinions continue to carry weight 25 years later among the corporate media, global central bankers and the establishment political class.

Price levels of basic goods and services are increasingly suffocating more and more Americans–especially those with very little savings. With 58% of Americans living paycheck to paycheck, that represents the majority of hard-working people in this country. But it's also not just limited to people with little savings. Everyone can feel the effects of inflation. Even still, the ivory tower, ivy league professor was surprised to learn anecdotally that "smart people" did not know that inflation is "way down." But when challenged with the fact that inflation continues to rise (just at a slower pace), Krugman was again surprised that the "perception" of inflation was tied to actual price levels rather than the rate of change month-to-month of a year-over-year metric. At the end of the day, it is an indictment of Princeton, the entire Ivy League, the New York Times, the American political class–for which Krugman is a puppet–and anyone in America still listening to "economists".  

What is inflation and why is CPI a scam?

The most commonly referenced measure of  inflation is the consumer price index (CPI), which is typically quantified on a year-over-year basis. While CPI chronically underreports the true increase in price levels actually impacting the economy, it remains the single most common metric used as an inflation reference point all the same. When people say "inflation increased by [x]%", they are almost always referring to the CPI measure published by the US Bureau of Labor Statistics (BLS). Now If you want to understand how complicated of a scheme CPI really is, you can read about it here. I recommend at least scrolling through the academic jargon to appreciate just how academic it is.

While the CPI does track a basket of goods and prices, the basket of goods is not static and the weights of individual goods change over time. However, the fundamental reason the CPI underreports inflation is tied to the fact that the consumer's ability to pay is a necessary input to the methodology, and overall consumer spending levels acts as a self-referencing governor of the CPI calculation. The CPI is inherently tied to changes in the US credit system (growth or contraction), which is controlled and managed by the Fed, rather than the change in prices of individual goods. This manipulates the CPI measure of inflation just as much as the fact that the basket of goods (and weighting of individual goods) included in the CPI changes over time because the consumers' inability to keep up with actual inflation (change in wages vs. rising cost of current standard of living) is what drives substitution to lower quality goods in the first place–i.e., the changing basket of goods and changing weight of individual goods.

In more plain language, the consumer cannot spend money it does not have and the single input most affecting overall spending levels (and price levels) is the change in the money supply, which dictates the change in the overall size of the US credit system. For example, over the past 12 months, the Fed has caused the broad money supply to decline by ~$800 billion, which represents a decline of 3.7% of all deposits in the system. This more than anything impacts the aggregate spending and price levels across all goods in the economy. It acts as a governor to the reported CPI inflation. Inflation is still rising year-over-year as measured by the CPI, but the CPI measure is not as high as the true level inflation, if measuring individual staples. Said another way, it is remarkable that the manipulated and underreported measure of CPI inflation is rising at all when the money supply is actually shrinking. But the shrinking of the money also makes the real (and higher) inflation level that much more painful.

So now, what has Krugman been talking about?

CPI inflation is rising, year-over-year, but at a slower rate than it has been and more people should be happy about that than actually are.  

Underlying source data

Krugman wants Americans to focus on the declining rate of Y-o-Y CPI reported inflation. There are two principal problems (three if you included the fact that CPI underreports inflation). First, inflation is still rising. And second, inflation compounds. If inflation is rising Y-o-Y in July 2023 by 3.2%, and it rose in July 2022 by 8.5% and it rose in July 2021 by 5.1%, the aggregate increase as reported by CPI has been  19.1% over three years. This is what everyone is feeling and focused on–both the aggregate increase accumulated over several years AND the feeling that prices continue to marginally rise from already elevated levels.

Underlying source data

But remember this is just CPI. What Americans are really feeling is actually higher, especially for the goods most needed day to day, like energy and food. Below are the changes in the US national average prices of i) a gallon of gasoline, ii) a pound of ground beef, and iii) a kilowatt hour of electricity from the beginning of 2020 (end of 2019) to today which have increased by 49%, 28% and 27%, respectively–each significantly higher than the change in "CPI" of 19% over the same period.

Source data: US Energy Information Administration
Source data: ERS/USDA
Source data: US Bureau of Labor Statistics

But it is not just the aggregate change in price levels of staples like food and energy that is suffocating the consumer. It is the fact that price levels are continuing to increase, seemingly each year which creates an expectation of future increases. The expectation of future increases, from levels significantly elevated from just a few years ago, is particularly damning psychologically because it comes at a time when the Fed is shrinking the money supply. While most people probably do not even know this is happening, they are feeling it in their dwindling bank accounts.

Source Data: Federal Reserve Economic Data (FRED)

From the peak, deposits have declined by over $1 trillion. As a rebuttal, a "professional" economist would tell you that the broad money supply (M2, which includes all checking & savings deposits) is still higher than it was at the beginning of 2020, the benchmark from which I've compared inflation (beginning of 2020 to today). It is in fact and significantly so–the broad money supply was $15.4 trillion at the beginning of 2020 vs. $20.75 trillion today, an increase of more than $5 trillion (or ~33%). This is what's creating the inflation: the creation of money out of thin air causes inflation. But now recall from above, 58% of all Americans today are living paycheck to paycheck. So today, bank accounts are getting squeezed across the board, price levels remain at elevated levels and price levels continue to rise from elevated levels, while most Americans have virtually no savings.

This is what Krugman (and the like) either refuse to admit, fail to understand or simply ignore. The consequence is that the consumer is going into more and more debt to try to keep up. Credit card debt (and other revolving credit) is at an all-time high, exceeding $1 trillion for the first time and 18% higher than the beginning of 2020 (+$154 billion), which was the prior record. People are going into debt because inflation is suffocating their standard of living. Only the uber wealthy are not feeling it (maybe).  

Source Data: Federal Reserve Economic Data H.8 Report

Krugman would like everyone to focus on the month-over-month decline in a statistic that no one can measure in their daily life because that's what "historically" he believes people have cared about in the past.

Bitcoin is the Only Way Out

This theme and thread is undoubtedly related to the underlying reason the song Rich Men North of Richmond, went from zero to the most popular song in America overnight. Your dollar ain't shit and it's taxed to no end. It's true, and it struck a chord with people all over the country. I believe it did so because it connected the reality that people are suffocating economically in America to political crookedness and corruption. Whether people connected it to the Fed or just elected politicians, it was about the broken system in aggregate. Not Democrats or Republicans. Not Jerome Powell any more than Janet Yellen or Ben Bernanke. The system is broken, and the idea that the cost of living is going in the wrong direction is the psychologically damning part.    

The other reality is a song cannot change anyone's lot in life. When people wake up Monday morning, a song is not going to fix anything. It might be cathartic to know everyone around the country is feeling a similar angst, but all it can do is describe the current condition accurately. It cannot remove politicians from power, it cannot magically end the Fed, or prevent academics like Paul Krugman from saying ignorant, tone-deaf things. The economic structure is broken, and it all starts with the centralization of the money supply. Bitcoin is the only way out because it fixes the root problem that caused the current economic system to break. It fixes the money. The centralization of the money supply, and the power to create money out of thin air is the problem. It is the source of inflation and worse, it causes the entire economic structure to fracture.

And to be clear, I'm not talking about "crypto." Crypto is a scam. Crypto is worse than snake oil and it is peddled by charlatans–many of whom are Silicon Valley venture capitalists. Only bitcoin can fix the problem of inflation and the broken economic structure. Just bitcoin, period. Bitcoin is a form of money that cannot be printed. No one controls it. There is no CEO, company or government in charge. It is simply a form of money that exists outside the control of all companies, governments and central banks–most important is that it has a fixed supply and no one can print more. But like the song, bitcoin cannot magically end the Fed, remove corrupt politicians from power or prevent the Krugmans of the world from saying stupid shit. Bitcoin is just a tool. If you close your eyes and think about bitcoin long enough, it won't make dollar inflation or its impacts go away either.

But despite bitcoin just being a tool, it's the only tool that people can use to fix the root cause of the inflation problem. See, the Fed can continue to print dollars, but they can't print my money–the Fed cannot print bitcoin. Congress can continue to spend dollars it doesn't have (principally because the Fed creates more dollars out of thin air), but it cannot spend bitcoin it does not have. A new car can fix the problem of a broken car. A new home can help fix the problem of a run-down home. A gym can help fix the problem of being out of shape (kind of). But only a better form of money can fix the problem of a broken money.

Educate your friends and family. The problem is not going to fix itself. The only path out is through the storm (not around it). Just because there is no easy fix nor is the actual fix obvious to most people, it doesn't mean that the solution is not perfectly logical. Inflation is created by printing money. Taking the fly out of the ointment means removing the ability for anyone to create more units of money. That is bitcoin. The broader solution (and a more stable economic structure) is rooted in each individual decision to opt out and the cumulative effect of everyone figuring it out one by one. Each individual has an incentive to solve the problem of inflation for themselves, and there will be no one else to blame for failing to act.

Inflation is not 3.2%. It is not declining. The Fed has increased the base money supply by 9-10x (+$8 trillion) since 2008. The broad money supply (M2) has tripled over the same period (+$14 trillion). Inflation in the price of goods is just starting to catching up to the historical increases in the money supply. In response to rising inflation, the Fed drastically, rapidly and artificially increased interest rates (beginning about March 2022). The Fed's actions directly caused a wave of bank failures earlier this year, and the same problems continue to exist and bubble underneath the surface. But more fundamentally, rising interest rates will not make food and energy more abundant or cheaper–in reality, it's the opposite. There will be another shoe to drop, and it will inevitably result in even more money being printed and more inflation–the money printing epidemic will logically and ultimately end in hyperinflation of the currency.  

But hyperinflation is not the end of the world. Hyperinflation of fiat currencies is the rational and logical human response to governments and central banks creating money out of nothing. Bitcoin is the other side of the same coin. It is the light at the end of the tunnel. Yes, there is a five-alarm fire but the solution to permanently putting it out is in hand. It will not cure all ills in the world. But fixing the money will fix the foundation of the economic structure. With each incremental person that figures it out, the world is that much closer to an economy with greater stability and balance.


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Final Thought: If you are a bitcoiner, start asking to be paid in bitcoin or at least give your customers the option to pay you in bitcoin. If you are not, read The Bitcoin Standard or my soon-to-be-released book, Gradually, Then Suddenly.