Printing money exacerbates inequality

Most people don’t realize the extent to which money printing impacts our lives. It’s happening a lot lately, so it’s worthwhile to investigate the impacts. Here are 5 ways that money printing specifically contributes to something that is often cited as a problem: wealth inequality.

Way 1: inflation creates declining real wages

You might think of your wages as $20 per hour or $50 per hour, but that is meaningless unless you know how much each dollar is worth. So to know what you’re really earning, you need to know:

  • What is your nominal wage (e.g. $20)
  • What is the total amount of money in the world
  • What is the total amount of goods in the economy

What you really care about is the amount of stuff you can buy with your wages. In other words, you care about the share of the total goods in the economy that your wage represents. But we have this pesky money thing making the calculation more difficult. So let’s break it down, starting with the share of the global pie of money you earn each hour:

\text{pie wage} = \frac{\text{nominal wage}}{\text{total money in the world}}

For example, if you make $20 and the total amount of money is, $37 trillion then your share of the money is:

\frac{\$20}{\$37,000,000,000,000} = .00000000000054

or .000000000054% of the world’s wealth that you earn each hour.

Now we can use this fraction to determine how much real stuff you are getting paid per hour:

\text{real wage} = \text{pie wage} \times \text{total amount of stuff in the world}

So let’s just say, for example, that the entire world’s wealth consisted of 1.3 billion cars, 3 billion TVs, and 85 million tons of apples. Your $20 wage would earn you 0.0007 cars, 0.0016 TVs, and 0.2 apples. (In reality, there’s a lot more wealth in the world than that, so your wage earns more than that).

Now let’s say that the total amount of money goes up from $37 trillion to $48 trillion. Now your wage is only earning you 0.0005 cars and 0.15 apples. Even though you’re still making $20 per hour, you’re earning less stuff. This is you losing purchasing power with your wages. In order to keep up with the new money, you need to negotiate for higher wages.

Natural deflation

But wait, it seems like prices are mostly stable. Are you really losing out when the total amount of money is increased?

In order to understand the complex system here, you have to consider the counterbalancing effects of natural deflation. Let’s go back to our example above. The world’s wealth consisted of 1.3 billion cars, 3 billion TVs, and 85 million tons of apples. But now let’s suppose that technology improves, or somebody builds a better factory, and they are able to pump out twice as many TVs with the same effort. Originally your $20 wage earned you 0.0016 TVs, but now it earns you 0.0032 TVs! One way to look at it is the cost of TVs went down. The other way to look at it is the value of your $20 wage went up.

As technology and productivity improves, the cost of things goes down. If the amount of money were to stay constant, then the price of things would go down too, and your real wages would be going up. Natural deflation is pushing the value of money up. Sounds great right? This is the natural state of things, and it’s the world we should, could, and eventually will be living in.

Unfortunately, the central bank has a policy of maintaining a steady and positive rate of inflation, which means they will not let this happen. Let’s just assume that they have good reasons for this. So they expand the total amount of money until prices are steady.

The thing is, the productivity improvements are real, and they create real wealth. The problem is that if you are earning wages denominated in an inflationary currency such as the USD, you aren’t sharing in that wealth creation. Instead, all of the gains from the more efficient economy accrue to those who are already wealthy. Why? Because most wealthy people derive wealth from assets, not wages.

Way 2: rich people are protected

Here’s the formula for rich people. By rich people, I mean people who have assets like real estate and stocks, and who aren’t relying on wages to get by.

\text{pie wealth} = \frac{\text{my assets}}{\text{all the assets in the world}}

Let’s say the world consists of 5 billion houses, and I have 4 houses. My pie wealth is

\frac{4}{5,000,000,000} = .0000000008

Or .00000008%.

Notice how the formula doesn’t include money at all. It doesn’t matter what happens to the total amount of money, I always have the same fraction of the world’s wealth.

If there is more money in the world, that doesn’t impact the number of houses in the world, so all that happens is the price of houses goes up. On balance, you would expect that if the amount of money is doubled, then the price of houses would double.

So when the total amount of money is increased, the wealth of the rich is protected, but the wages of the middle class are diminished. But it gets worse.

Way 3: rich people reap the gains

Remember how there is real productivity growth, and prices would naturally be going down if not for the expansion of the total amount of money? Where is that real productivity growth going?

Let’s go back to our example of the world of 1.3 billion cars, 3 billion TVs, and 85 million tons of apples. Remember your wage share is 0.0007 cars, 0.0016 TVs, and 0.2 apples. Now let’s say there are three companies CarCo, TvCo, and AppleCo. They are public companies whose stock is distributed around the population. Who owns the stock? Who do you think?

Let’s say over time, with productivity growth and improved technologies, these companies are able to produce twice as much for the same cost. They don’t have to fire any workers or reduce wages at all, but now they sell twice as many goods and therefore earn twice as much profit.

Remember, if the total amount of money didn’t increase, then your wages would buy twice as much stuff, which would look like this:

$20 = 0.0014 cars, 0.0032 TVs, and 0.4 apples

Which would be a great outcome for you. But you know what that looks like to policy makers? Falling prices. And remember, that isn’t allowed by the central bank. So what they will do, as best they can, is double the amount of money. The end result of that doubling puts your wage right back where it started:

$20 = 0.0007 cars, 0.0016 TVs, and 0.2 apples

And what happened to the stock of the companies? Well, now they are twice as profitable, so the stock price doubles. But then it doubles again because there’s twice as much money. So the wealthy who own the vast majority of stocks have doubled their real wealth, and in nominal terms they have gone up 4x. As for the wage earners, they have exactly what they started with. Which explains why the moment the USD was converted to an inflationary currency, productivity growth stopped being shared by wage earners:

The red arrow is when the U.S. dropped the gold standard and moved into an era of an inflationary monetary policy.

Well, better to not be stuck in the rat race then! If you can’t beat ’em join ’em right? Get me some of them assets. Let’s see how that goes.

Way 4: impaired savings and social mobility

In order to move up the economic ladder, you need to start owning assets (i.e. do what the rich people do). Most people do this by buying a house. Buying a house generally requires a period of saving up for the down payment. But the price of houses goes up every time the total amount of money is increased. And wages don’t.

For example:

Let’s say I make $20 per hour, and I’m able to save 20% of my wages. For simplicity, let’s forget taxes. In 1 year, I can save about $8000. Now let’s say a house costs $400,000, the down payment is $40,000, and the central bank is printing 5% new money per year. After five years I’ve saved the $40,000, but by that time the price of a house is $510,000. So I have to save for an additional two years, and during those years the price keeps going up! Finally after seven years of saving, I have $56,000 and the price of the house is $563,000 and I can afford the payment.

If the central bank is printing 10% or more (as it did in 2020), then house prices actually accelerate faster than I can save, and will literally never be able to afford the down payment unless I manage to start earning more.

The central bank is responsible for keeping inflation from getting too high. However, housing prices are not part of Consumer Price Inflation (CPI) metrics that the central bank monitors, because they are considered “capital” rather than consumer goods. In other words, assets that rich people own are allowed to increase in price forever—there is no check. Meanwhile wage earners get further and further from being able to own assets.

Way 5: cronyism and corporatism

Ok, I know this sounds unbelievable but this story is not quite finished. We talked about what happens to wage earners when new money is created—real wages decline, but the effect is masked by natural deflation. We talked about what happens to rich people’s assets when new money is created—they go up, and they also get all the gains from productivity growth. What we didn’t talk about is what actually happens to the new money that is created.

Way back in the first example, we took the total amount of money from $37 to $48 trillion in our hypothetical example. That means the central bank creates (hypothetically) $11 trillion in new money. What happens to this hypothetical new money?

In general, the central bank is creating money in order to finance government spending. So basically, the new money goes wherever the federal government spends it. In theory, in a democracy, that’s towards promoting the general welfare. It’s a pretty politically-loaded question as to how well it’s spent, but in at least some of the major categories (think defense contractors or health care spending), a lot of it is working its way into corporate coffers and thus eventually to shareholders.

how much of this is ending up in your pocket? source: (data from fiscal year 2019)

In conclusion

The economy is working, it’s just not working for everyone. New wealth and new money are being created, it’s just that the lion’s share of those benefits are accruing to the wealthy. New wealth is created in the form of productivity growth, technological advancement, and capital investment, but that wealth is only accruing to the wealthiest portion of society because real wages are constantly suppressed by inflation. Furthermore, the savings of wage earners are also constantly devalued, making it harder to join the wealthy class. Finally, the new money that is created is not distributed equally to all members of society; but is spent by the federal government on programs, some of which may be fairly democratic, but some of which enrich stockholders and those who are well-connected politically.

The only credible solution is bitcoin

Realistically, policy makers and central bankers are not likely to stray from the current path. A full analysis of why they won’t is beyond the scope of this article, but suffice it to say that deflation is scary given current debt loads and federal deficits. They have to keep inflating, and they probably will, even if they understand that inflation is exacerbating wealth inequality.

Prior to 1971, we had a gold standard and wealth inequality was not nearly as extreme as it is now. But to go back to a gold standard would require the policy makers and central bankers to believe that that is best for the economy, which they don’t and probably won’t.

Bitcoin represents a way to opt out of this regressive paradigm. We can take a step away from the existing financial infrastructure, while leaving it intact, and begin transacting in a parallel economy. In this new economy, the benefits of productivity and technology growth are shared by everybody, not just those at the top. Wage earners can save money in a currency that brings house prices down every year, not up. And once wages become denominated in bitcoin, they will see their real wages increase over time as a fixed amount of money is chasing an ever increasing amount of goods. The productivity gains of the economy will no longer accrue only to the wealthy, but once again benefit society at large.

Leave a Reply

Your email address will not be published. Required fields are marked *