SBF talks about inflation: Increasing the money supply is neutral; it is the "Cantillon Effect" of uneven distribution that leads to malignant inflation.

In March, the year-on-year Consumer Price Index (CPI) rose by 8.5%, marking the largest increase in 40 years. The CPI is a key indicator for monitoring inflation. There are various opinions on the reasons for the worsening inflation, and FTX founder SBF has also expressed some of his own views on inflation.

The Cause and Effect of Inflation

"Is inflation a bad thing?" SBF posed this question in a tweet. At first glance, inflation certainly seems negative. SBF explained that if the total value of the world's currency is $x and the price of bread is $y, if y increases, the distributable wealth x decreases. It's a simple logic.

What if the total value of $x increases?

SBF believes it depends on how the increase in total value is distributed. He gave an example by hypothetically converting 1 cent to 1 dollar, which would increase the total amount of dollars by 100 times. As a result, the price of bread, $y, would also increase by 100 times, but everyone would still have the same amount of bread.

"So what happens when product prices rise in terms of the total currency supply? Over a period of time, x has grown by 40%, y has increased by about 15%, so has the world's bread increased by 25%?"

Of course not. SBF pointed out that the total supply of bread in the world may have decreased by 5% recently. This is due to supply chain issues and the war in Ukraine, major exporters of wheat for bread.

Therefore, if the world's currency supply increases by 40% and the bread supply decreases by 5%, why has the price of bread only increased by 15%?

"Because most of the newly printed dollars flow to the rich, but they can only consume so much bread. This means that the increase in x did not lead to an increase in the demand for y, bread."

Even though the demand has not increased, assuming a 5% decrease in supply, the price should have increased by 5%. Why then has the price increased by 15%?

"On the other hand, the increase in dollars held by the rich has increased the demand for other goods, leading to higher demand for essential raw materials such as energy. The increase in these raw materials, in turn, led to higher costs for bread and higher prices."

Types of Inflation

SBF stated that real-world inflation indices are influenced by various factors, with war and pandemics causing malignant inflation; however, the inflation caused by an increase in the total money supply requires an analysis of the flow of money. He categorizes inflation into the following four types:

1. War and pandemics result in a 5% loss in the total bread supply, leading to +5% inflation. This is malignant inflation.
2. Printing 5% of money evenly to everyone results in +5% inflation, but this inflation simply makes everyone wealthier.
3. Printing 17.5% of money for the rich, who invest in $SPY and $BTC, causing no inflation. The resulting demand leads to the fourth point.
4. Printing another 17.5% for the rich, who spend money on energy and other raw materials, making bread more expensive. This results in a +5% inflation, which is considered "bad" inflation.

Currently, there seems to be confusion between an increase in money supply and inflation, but it is essential to differentiate between money issuance and changes in money distribution.

"An increase in money supply and 'bad' inflation are not directly related. Money supply increase and distribution are highly correlated. However, the inflation discussed here is not the same as the inflation caused by purely equal money issuance."

1) Inflation is in the eye of the beholder

— SBF (@SBF_FTX) April 18, 2022

The Cantillon Effect

One of the editors from the economics page "Bastia's Candle Workshop" stated that SBF's idea of how money affects prices is akin to the "Cantillon Effect."

The Cantillon Effect refers to the gradual distribution of new currency by the government, which needs an outlet before gradually flowing into society. This process takes time, resulting in an uneven economic impact of money issuance.

The editor mentioned that changes in money supply will first affect the existing production structure in society, causing price changes in some goods to appear before others.

"In other words, the production structure is distorted, creating an irreversible error in the structure that cannot be corrected. The erroneous production structure caused by changes in money supply is irreversible and irreparable, ultimately to be borne by everyone collectively."