Transitory Inflation And Useless Ingredients

by Keith Weiner of Monetary-Metals

Can you remember back to when you were two or three years old? Toddlers often think that there are little people inside the TV (or maybe this was only true when the TV was about as deep as it was wide—and maybe kids today don’t think this when looking at a 60-inch flatscreen…)

Anyways, it’s normal to grow out of this naïve view of television. No one believes it past the age of eight, much less into adulthood.

Purchasing Power and Intrinsicism

This is a simple instance of the philosophic concept of intrinsicism. To think of external characteristics as if they are inside or an integral part of an object. Actors are not inside the TV, nor are video production studios. Not even the content is inside the TV. The TV is nothing more than a medium to render video.

You may be wondering what this has to do with money. The connection is via the notion of purchasing power. Milton Friedman famously said that “inflation is everywhere and always a monetary phenomenon.”

This naturally leads people to think that whatever goods a dollar can purchase are intrinsic to the dollar itself. Indeed, if the quantity of dollars is the only cause of prices to rise, then the logical corollary is that the goods—and the people who produce them—are inside the dollar somehow.

Of course, no one thinks this explicitly. It’s just one of the contradictions of the Quantity Theory of Money that one must gloss over.

Living Inside the Dollar

The people who produce food, cars, and mobile phone service are not little elves (in the Santa Claus sense, not the Tolkien sense) living in the dollar which resides in your wallet. Once one is aware of this fact, then one can begin asking questions such as: what motivates these people, what would drive their cost up or down, and what inhibits them from producing and thus decreases supply, and hence cause genuine scarcity, and hence rising prices. And even questions such as: the deeper they go into debt, does this make them more, or less, aggressive to produce goods to dump on the market? And: if the interest rate ticks down, is this a greater incentive to borrow more to add production capacity?

The goods themselves are also not in the dollar. The dollar (or gold) is not a store of goods or the purchasing power to buy the goods. The value of the dollar is whatever those who produce goods will bid for it. And there are many, many factors that induce them to bid more, or to bid less.

What is the Cause of the Energy Crisis in the UK?

Now let’s look at the dire situation in the UK, with skyrocketing prices for energy that will soon impact food and other markets. If Friedman were correct, we could just point to growth in the quantity of pounds—M0 has grown about 8% in the last year. Then perhaps we would mutter “Cantillon Effect” or “leads and lags”, and chalk this up to inflation.

However, this doesn’t tell the full story. The way “daddy, there are people inside the TV” does not tell the full story of how Ted Lasso plays on your flatscreen. There is something else going on.


The UK, like all the other de-industrializing countries, has enacted a bevy of anti-energy policies. One of them prohibits fracking to produce natural gas. Another policy has forced power plants and industry to switch from oil and coal, to natural gas. In other words, they decided that all natural gas used in the country shall be imported, and that a greater fraction of total energy consumption will be concentrated in natural gas.

This would not necessarily cause the price of energy to rise (though natural gas may be more expensive than oil or coal). However, it does make energy-intensive industries more vulnerable. In a free market, business managers seek to reduce risk by diversifying their supply chains. Feel-good diktats, like those in the UK, push all supply chains to depend increasingly (or solely) on one single point of failure. This forces managers to act against their better judgment, to concentrate their risks, and to hope that a disruptive event does not come along.

Lockdowns and Just-in-Time Supply Chains

Unfortunately, global lockdown came along.

Lockdown first shut down global shipping and logistics. Ships and containers were stranded in all the wrong places. Now that economies are reopening, a lot of demand that was held back has been released. However, manufacturing and distribution has long been in a trend to move towards just-in-time (the driver of this is monetary: the falling interest rate). Nobody has the capacity to produce and distribute all at once the goods that would have been purchased in a year. Much less after lockdown destroyed capacity at the margin. Unlockdown causes a kind of whiplash.

Nationalism and Trade Wars

Also, rising Nationalist policies all around the world in the wake of US President Trump’s “trade wars are good and easy to win” came along.

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Nationalism and tariffs introduce more friction, and forces firms to secure sources of all manner of inputs—including natural gas—domestically. They are impelled to this approach, even if it’s less efficient and more expensive.

When you add up Anti-fracking + anti-coal-and-oil + trade war + lockdown whiplash = perfect storm for UK energy consumers.

Collateral Damage from the UK Energy Crisis

This storm is centered on the natural gas market. But its impact quickly spreads to other markets. For example, fertilizer is made from natural gas. Fertilizer manufacturing plants are shutting down, as the price farmers are willing to pay for fertilizer does not afford them a profit at the price they must pay for natural gas. It gets worse. A byproduct of natural gas fertilizer production is carbon dioxide. CO2 is used in other parts of the food chain, including meat production and distribution of frozen food.

Let’s drill into this one for a moment. When a commodity becomes scare, its price increases. The rising price causes the marginal consumer to substitute another good or stop consuming altogether. The price keeps rising, until enough marginal consumers stop, that demand matches supply.

The marginal consumer is farmers, meat packers, and frozen food distributors. Food producers are the marginal consumers!

As an aside—mostly, we want to focus on the monetary economics point, but this is too important to pass without comment—the stated premise of the environmental movement is to drive up the price of fossil fuels to reduce CO2 emissions (unrelated to CO2 used in food production). This is what that looks like in practice. If petrol goes up a few pennies per liter, that does not fundamentally transform the economy into a carbon-free utopia. Prices would have to go so high, that desperate impoverished people cannot afford energy. Energy would have to become so expensive, that people will be forced to abandon their cars, and suburban houses, and pile into small flats in the city and onto mass transit.

The UK has now had a warning shot across the bow.

Milton Friedman Was Wrong

Friedman was wrong. There is a great nonmonetary force that pushes prices up. We call it useless ingredients, when government regulators or taxinators force producers to add things that consumers do not value (and often do not even know are included). For example, forcing petrol refiners to add ethanol. Ethanol adds cost, but not value (indeed it reduces the vehicle’s mileage).

The situation with natural gas is another case of useless ingredients. We described several instances of it above, some pretty straightforward and some less obvious. If an electric plant is forced to switch from coal to natgas, then this may increase the price by, say, 1p per kilowatt hour or about 6%. The coal-natgas difference is a useless ingredient, that electricity customers must pay for whether they want it or not. The result is that this drives the marginal producer out of the market (typically those who are most vocally generous with such good-sounding proposals are not the marginal industries who are forced out of business).

The result is not that the pound sterling buys less than before. Natural gas may be more expensive due to increased use of labor and/or capital. But the currency is buying just as much as before, though now some of what it is buying is labor or capital wasted on non-value-adding steps.

People who don’t think about this useless ingredient in electricity, just call it inflation and mutter that “the purchasing power of the pound is going down”.

Increased Risk as a Useless Ingredient

Energy consumers were also forced to add a different kind of useless ingredient, one that is perhaps more abstract. They were forced to concentrate all their eggs in one natgas basket. This increased their risk, in a way that is made clear in this perfect storm. Increased risk is a useless ingredient.

And now, some prices are likely to skyrocket all out of proportion, including fertilizer and maybe food. The cause of this great foodflation is not monetary, but the added useless ingredient of supply chain risk due to green regulations, trade war, and lockdown whiplash.

Real People Suffer as a Result

We shall have to wait to see how the government responds, but we can be sure of one thing. They cannot create new natgas supplies quickly enough to provide the people with heat this winter, and feed them next summer. We assume that, even if they deregulate fracking tomorrow, this move would not bring new natgas to market in under a year. They might subsidize fertilizer manufacturers, but this would just force a different industry to do without natgas.

Prices of everything—from electricity, to goods manufactured in electricity-intensive processes, to food, to petrol and transportation—could rise out of reach of the average Briton.

What to do?

So what is the point? Why do we keep insisting that this is not a monetary phenomenon? Aside from the pursuit of truth, which is proper in itself, there are two reasons. One, on the practical level, this understanding will help you navigate the markets. For example, are these price hikes temporary or will they lead only to more and faster increases in prices? It depends, not on the quantity of pound sterling, but on whether the government repeals some of the bad laws that caused this problem, or whether it doubles down and forces everyone deeper into energy poverty.

The other is a point we cannot emphasize enough. The global regime of irredeemable currency is failing. The signs—such as negative interest rates—are myriad and obvious. If there is a chance to raise awareness, for the people to demand a solution, then it will only come if our criticisms of the system are on point. If we blame the currency for nonmonetary problems, we dilute the message, sow confusion, and we will only add to the noise level. And of course, if we want to help the UK resolve its natgas shortage, we would not serve them well by wrongly attributing it to the money supply.


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