Introduction to discussion Expresses the writer's opinions.
Do you know what I'm tired of? I'm tired of today's Norwegian politicians and orthodox economists lying, intentionally or unintentionally, about what causes prices for goods and services to rise.
I hope this post will be a small contribution to getting the actual reason for price hikes on the agenda.
Blame Beyoncé
In recent years, we've seen the prices of everything become significantly more expensive. The main explanation for this price increase is that The money supply increased from January 2020 to January 2023 With approximately 33 percent.
This means that in January 2023 there was 33 percent more Norwegian krone than in January 2020.
You won't find any politician or economist citing the massive increase in the money supply as the main explanation for the rising prices that Norwegians feel on their bodies.
They are instead busy blaming rising prices on, among other things, greedy corporations War in Ukraine To Beyoncé and Taylor Swift concerts.
Not only are these statements incorrect, but they also help mislead the reader and viewer. This contributes greatly to creating a poorly informed society on a topic that most people know very little to begin with.
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In fact, things don't get more expensive
As more money is created, existing money loses its purchasing power because it makes up a smaller and smaller percentage of the total money supply.
We feel that the prices of goods and services are rising, but in reality it is your money that is buying you less and less, because over time more and more money is created.
This is so important that it bears repeating: it's not actually that things are getting more expensive, it's that your money is becoming less valuable. The purchasing power of the money you spend collapses.
Historically, the Norwegian krone money supply has increased on average by about eight percent each year for more than 50 years.
Even if the state, central bank and banks produce 8% more money on average each year, this does not mean that there are suddenly more goods and services in the economy.
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It loses purchasing power every year
The result of increasing the money supply is that there is more and more money chasing virtually the same goods and services in the market.
Thus we get a general increase in the prices of goods and services. With an annual increase of eight percent in the money supply, the money supply will double every nine years. In other words, the value of each monetary unit halves in these nine years, because generally at the end of this period there are twice as many monetary units.
You can't get more beer into the glass by pouring too much water when it starts to run out, you'll end up with diluted beer.
Exactly the same thing happens to the purchasing power of your money when the money supply increases. You don't create wealth by “printing” new money out of thin air, you destroy it.
An increase in the money supply has several significant negative consequences for individuals and businesses, among others. One of the biggest negative consequences for people is that the vast majority of individuals over time end up losing purchasing power every year.
Why? Because the vast majority of individuals fail to double their income every nine years.
Over time, your income is unable to keep up with the annual percentage increase in the money supply, and so you end up losing purchasing power over time.
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Lose more with more taxes
Because even if you nominally increase your salary by four percent a year, there is still a negative difference of – four percent if the amount of money in the same year increases by eight percent. These figures have also taken into account that general tax levels in this period are likely to rise.
If you pay more taxes, you will lose more purchasing power during this period.
The same point also applies to companies, because almost no company manages to increase its operating profit by eight percent each year over time. Therefore, in real terms, firms will be left with a smaller and smaller profit each year when profit is adjusted for the increase in the money supply.
Economists don't seem to understand this
Traditional economists will frown and say that it is wrong to use the money supply M² to adjust real value. They usually use the Consumer Price Index (CPI) when adjusting for price increases.
Here I can get ahead of the critics and explain what most traditional economists today do not understand.
As the name suggests, the CPI measures price growth on an index of consumer goods. Consumer goods are often goods and services whose prices rise less because they have a low marginal cost, making it cheaper and easier to produce more units of these goods.
This means that the CPI is actually a measure of the increase in prices for goods whose prices are rising the least. Therefore, the CPI is not a true measure of the actual increase in prices for goods and services.
For everyone who cares about their purchasing power (i.e. all people) It would be economically illiterate to use the CPI as a measure of price growth. The reason for this is that not all goods that you really want to own are included in the CPI and their prices rise much more than what is measured by the CPI.
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Money out of nothing
The natural question to ask is How could the money supply increase by eight percent per year on average over such a long period?
The reason for this is the paper money system that Norway and the world has used since 1971 when President Nixon took the United States completely off the gold standard. According to Wikipedia, paper money is money that has no intrinsic value. It is money that is declared to be money, but where the source has no cover (for example, gold reserves) To recover them in real values.
In a monetarist system, governments, central banks, and banks can create new monetary units from literally nothing with the push of a button.
Since the Norwegian krone we use today could be created from scratch, there are theoretically an infinite number of new units of the Norwegian krone. In a fiat money system, it is very easy to increase the money supply.
This is in stark contrast to previous monetary systems, for example, such as the gold standard, where the amount of money was tied to the size of gold holding. It required mining for new gold, so the money supply increased more slowly.
This explains why the prices of goods and services never rose at all when the world used them The gold standard from 1870 to 1914 Gold prices rose much less than they do today under the gold exchange standard, which lasted until 1971.
The biggest problem today
Even the US dollar, which has been and remains for a long time the strongest currency in the world, cannot maintain its purchasing power over time. Over the course of 100 years, it lost approximately 95% of its purchasing power on consumer goods and more than 99% of its purchasing power on assets that one would really like to own, such as a home.
All other fiat currencies during this period lost a lot against the dollar or collapsed and their value went to zero.
Paper money is perhaps the biggest problem people face today, but the great irony is that almost no one realizes they have this problem. There is a collective knowledge gap that exists in society.
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The explanation is the money supply
Before we conclude, it must also be noted that at the general level there are other factors that affect changes in the prices of goods and services, but only the increase in the money supply explains why there is a general increase in the prices of goods and services over time.
For example, technological development will over time make goods and services cheaper, by increasing the productivity of everyone who uses the technology and making the production of goods cheaper, among other things.
The reason you don't often see prices for goods and services getting cheaper is because the money supply increases more than the productivity increase we get from technological development.
Changes in supply and demand are a factor that can mean that individual goods or particular services can rise and fall in price, but this does not explain that we have a general increase in the prices of “all” goods and services.
Supply and demand will also, at the general level, be relatively stable over the long term, and the competition aspect between competitors on the “supply side” of the equation should generally lead to lower prices.
The reason you don't see anything in the prices of what you want to buy falling is that the effect of an increase in the money supply is much greater than the effect of competition on price changes.
The next time you hear, for example, a politician cite reasons for price growth other than an increase in the money supply, fortunately you now know better than to believe what he or she is saying.
The increase in the money supply is the main explanation for why everything becomes more expensive, and it is the paper money we use today that makes this increase in the money supply possible.
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