Why Inflation Is a Runaway Freight Train

The comments below are an edited and abridged synopsis of an article by Charles Hugh Smith

Inflation, deflation, stagflation—they’ve all got proponents. Who will be right? Supply and demand are dynamic, so there are always things going up in price that haven’t changed materially, and other things dropping in price even though they haven’t changed materially.

Why Inflation Is a Runaway Freight Train - BullionBuzz - Nick's Top Six
commercial illustrator – freight train concept/inflation

Proponents of inflation and deflation can always offer examples supporting their case. The stagflationist camp is delighted to offer a compromise case: Yes, there are both deflationary and inflationary dynamics, and what we have is the worst of both worlds (stagnant growth and declining purchasing power).

There are two glaring omissions in the back-and-forth on inflation and deflation: Price is set on the margins, and enterprises cannot lose money for long or else they close down.

Smith discusses the dynamics of supply and demand; price is set on the margins; the biggest expense in many enterprises and agencies is labour (and not just the wage being paid, but the labour overhead).

Put them together—diminishing supply of labour and labour being priced on the margins—and you get a runaway freight train of higher labour costs. Add in increases in labour overhead and you’ve got a runaway freight train.

Deflationists make one fatally unrealistic assumption: that enterprises facing sharply higher costs for labour, components, shipping, taxes, etc. will continue making big-screen TVs etc. even as the price the products and services fetch plummets below the costs of producing them.

The wholesale price of the TV can’t drop below production and shipping costs for long. The manufacturers close down production and the over-abundance of TVs goes away. Nation-states can subsidize production of some things for a time, but selling at a loss is not a long-term winning strategy.

The only thing that will still be abundant as demand plummets is phantom-wealth investments, i.e. scams, bubbles and frauds. The value of these follies will go to zero once margin calls and other bits of reality drastically reduce demand.

Real-world costs: Much higher. Speculative gambles: Much lower. As in zero.

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