Recently, I have gradually come to understand how the economy works. That overall picture showed me that the current inflation would last for a while. Let’s discuss the logic.
Will inflation continue in the future?
Sometimes, we want to predict the future.
Predicting the future change enables us to prepare and make a profit. Even if it is not accurate in the short term, understanding the long-term trend reassures us.
A broader, historical perspective makes it easier to foresee the long-term changes.
However, we sometimes don’t know what the future holds. That makes us uneasy.
One typical worry is inflation. Prices have been rising in recent years. How long will it continue?
In my opinion, it will continue for a while—perhaps more than 5 years—until the central banks raise interest rates significantly. In other words, now is the time to value concrete goods more than information. Today, I will explain the logic behind it. This perspective might calm you and allow you to prepare for the future.
The system of the economy
In my opinion, the inflation—rising prices of goods—will remain for a while.
To explain the logic, let’s look at the fundamentals of the economy.
The economy is a whole system of exchanging things between humans. In society, each person has a specialty and a role to play. That allows for greater community efficiency. Exchanging things is the fundamental activity of collaboration.
Money made it easier to exchange. It freed us from barter.
However, money has a problem. There are times when there is not enough money. That often caused inefficiency in exchanging.
Suppose there are two communities: traditional areas and a frontier. Many people live in the traditional areas. In such a time, a new frontier was discovered and developed. For example, the Roman Empire conquered and developed the surrounding areas. Britain began trading with India. European people started settling in America. They are the frontier at each time.
Now, internet technology and the AI industries are the new frontier.
Money for the frontier
In those situations, a lot of money is spent on development in new areas. Since the frontier is full of shortages, people in those areas need more production and trade. That is why the economy tends to become active in new frontiers.
However, as the economy of the frontier becomes more active, the traditional areas face a predicament. Capital increasingly flows from traditional areas into these new regions. As a result, the total amount of money left in traditional areas decreases if the overall money supply remains constant.
That causes a decline in the exchange of things in traditional areas. In other words, a lack of money causes recessions.
That was why a country that grows rapidly will end up struggling with a lack of money.
To solve those problems, the government printed more money. The Roman Empire began mixing copper into its gold money. In modern times, the U.S. stopped redeeming currency for gold and printed more and more money. Many countries followed that. It was a natural, reasonable solution in a growing economy.
This state is called inflation during growth. Traditionally, inflation means the government creating more money, not rising prices. It is a state where no sudden problems occur. That is why all governments seek to maintain this state.
How a terrifying recession occurs
There will be no problem if pioneering new frontiers continues to grow.
However, growth in a new frontier doesn’t last forever. As investment fever rises, excess money accumulates in the new frontier. Investors are gradually beginning to predict that there are limits to developing new frontiers. Forward-thinking investors start to retreat from those areas.
In this situation, the enormous amount of money created by the government gradually returns to the traditional areas. That money starts to buy items in those areas. Since people in those areas cannot improve their production efficiency, a shortage of goods starts. Prices naturally go up.
That is the inflation during the recession. That often destroys the lives of people in the traditional areas in the short or medium term.
Although it hurts, it also eliminates inefficient methods and unnecessary technologies. In other words, it is a natural and necessary process in the economy. Ignoring that fact and denying the necessary pain makes governments try to avoid this type of recession. That causes the more crucial economic plunges.
How to prepare for the future
There are two countermeasures that the modern government—which contains the central bank—can take. They are as follows:
- Collect excessive money by raising interest rates
- Create more money intentionally, eliminate the value of money, create a new currency, and restore the stability of money’s value
Both are rational means. The difference is whether to maintain with less impact or to rebuild from scratch with a big shock. In my opinion, several governments with severe financial deficits will choose the latter.
That is why I predict that the inflation will remain for a while. Now is the time to value concrete goods more than information. The new frontier of internet technology and AI seems to have already reached its limits. If you invest in the financial market, be careful of the impact.
Securing a local production business is also one rational option for creative people.
Conclusion
That is why rising prices will continue for a while.
Now is the time to value concrete goods more than information.
This perspective might show you the direction of the future and allow you to prepare for it.
Thank you for reading this article. I hope to see you in the next one.
