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An Incomplete Theory of Inflation Made to Order for Mass Consumption.

Money is not what it used to be, so must our ways of thinking about it adapt.


The message treads across the media terrain, beating louder and louder as if to drown out the beat of the distant drummer.

Warning! The only thing the stimulus will stimulate is inflation. The people will pay as the wealthy elite invests their windfalls in financial assets. Doom and gloom set to march across the land to the beat of the distribution of stimulus funds.

In recent years as past predictions of fiscal disaster following stimulus spending failed to materialize and so the thinking about national debt and deficits has evolved, most noticeably with the development of Modern Monetary Theory.

In the fall of 2020, National Affairs published a story, Does the Debt Matter? by Peter Wehner & Ian Tufts. Peter Wehner is vice president and senior fellow at the Ethics and Public Policy Center and served in the last three Republican administrations. Ian Tufts is a recent graduate of George Mason University, from which he received his bachelor of science degree in economics.

Wehner and Tufts dig into the reasons why past stimulus funding did not result in hyperinflation and economic downturn, striking a balance between caution and optimistic innovation in thinking about the macroeconomy.

The story quotes Stephanie Kelton, author of The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, urging political leaders to “acknowledge that the deficit itself could be deployed as a potent weapon in the fights against inequality, poverty and economic stagnation.”

A Balancing Act

The Modern Monetary Theory grew out of the awareness that an economy based on fiat money functions differently than a monetary system based on the gold standard. Distributing fiat currency into an economy will always be a function of central management, requiring artful balancing and leadership of solid character. As long as the management of fiat currency continues to work, it's not going away but it needs to include metrics for managing a healthy balance in the distribution of wealth.

Fiat currency is a function of central management, a top-down system. Since the seventies, the US economy has been centrally managed through top-down wealth distribution in the form of grants, tax credits and exemptions, and stimulus programs. Until coronavirus, stimulus spending distributed wealth into the economy from the top, but the corona stimulus is different. It redistributes wealth, with no stipulations about how to spend it, to the individual, at the roots of the economy, initiating a new philosophical economic perspective.

Art, Discipline, and Balance Required! Photo by nihal-demirci-unsplash

The Federal Reserve is the central bank of the United States. Congress writes monetary policy and delegates responsibility for managing the policy to the Federal Reserve and oversees the Fed assuring that it is consistent with statutory mandates:

Monetary policy in the United States comprises the Federal Reserve’s actions and communications to promote maximum employment, stable prices, and moderate long-term interest rates — the economic goals the Congress has instructed the Federal Reserve to pursue.

The Fear

The fear of deficit spending is of hyperinflation in the near future. These fears have not materialized despite having reached record annual deficits of more than $1 trillion and a national debt of more than $20 trillion, leading Wehner and Tufts to compare the fear of deficit spending with the boy who cried wolf. The authors acknowledge that motivating the public to take the perils of deficit spending seriously, may require a clear and present danger, but it is the long-term consequences, that are proving out as“the more gradual, with an incremental erosion of prospects and opportunity for future generations” By calling wolf too many times about a false wolf, it may lull the politicians and the people into believing that there is no real wolf, but there is always a wolf and so the nature of the real wolf needs to be properly identified.

Given the concern over the effects of an expanding divide in wealth distribution, adding a mandate for balancing the distribution of wealth to the mandated duties of the Fed could be considered, though as we have seen, Congress can also play that role. Until coronavirus wealth for economic development (jobs) was distributed into the economy from the top-down, based on the trickle-down effect, that never trickled down as the wealth divide kept on expanding.

The Federal Reserve, as America’s central bank, is responsible for controlling the money supply of the U.S. dollar.

The Fed creates money through open market operations, i.e. purchasing securities in the market using new money, or by creating bank reserves issued to commercial banks.

Bank reserves are then multiplied through fractional reserve banking, where banks can lend a portion of the deposits they have on hand. Understanding How the Federal Reserve Creates Money-Investopedia

The fact that Congress, and not the Federal Reserve directed the flow of fiat money to the individual rather than only to the institutions is a good thing because Congress is an elected body, giving the people a voice in how fiat money flows into the economy. One danger in fiat currency is the manner by which it can be used to control people and in that respect, elected officials are to be desired.

The Hope


Wehner and Tufts present a comprehensive view of macroeconomics but do not examine what is happening at the roots of the economy.

This is significant not only as a factor in hedging the devaluation of the spending power of the dollar but because the wealth divide has been escalating and inflation rapidly climbing since the 1970s which is also the time when personal credit cards came into widespread use. 

 In 1968 the US Congress passed The United States Intergovernmental Cooperation Act of 1968, Public Law 90–577 , an act instituting the central management of the US economy through wealth redistribution. In 1970, the US went completely off the gold standard, personal credit cards came into widespread use, and inflation began increasing like the wall that grew high as the distribution of wealth separated into the haves and the have-nots.

What would happen to the wealth divide if Americans were to pay off their credit card debts en masse?

It is said that credit card debt is expected to increase again by fifty million.

What if it kept decreasing instead? 

What makes the difference between decreasing or increasing personal credit card debt in the United States? Based on the public response, a continued stimulus in the form of a UBI would encourage an environment in which personal credit card debt would continue to be paid down. 

A UBI would add new weight to the economy balancing scale and shift the balance of power from central management to the individual releasing a pent-up entrepreneurial spirit long kept down by central management. 

Those who make up the roots of the economy are typically portrayed as only needing to have their material needs satisfied, but not recognized for having goals, creativity, talents, or purpose. The wealth-divided culture fosters a psychological culture of low self-esteem or artificial snobbery, neither being a state of well-being. 

Buried within this morass is the desire to live a meaningful existence, to choose one's own path. Many of those whose inner directive is dismissed, when given a modicum of means to invest in their own self-sufficient income, will do so. For many long years, they have been the taxed-beast designated to capitalize the large corporations pursued by central management. Subsidizing individual opportunity is not different in concept than subsidizing large corporations, merely in scale. There are many ways to start a business on a shoestring these days. Fiat money distributed at the roots will foster new growth within a different cultural paradigm, operating by a different system of values. On a shoestring budget being bigger, richer, and more powerful than everyone else, isn’t the goal, but being middle class has an appeal and is a cultural paradigm of its own, one of less excess and more life-work balance. 

 I am not a high-finance expert able to mathematically extrapolate the effect that a mass pay-down of credit card debt would affect the sector holding the debt, but I submit that credit card debt paid off with stimulus funds does not equate with a mass default on debt. 

 In a paper published by the Cowles Foundation in 2009 titled CREDIT CARDS AND INFLATION By John Geanakoplos and Pradeep Dubey. the borrower who does not default on his debt is represented as Jeckle and the defaulting borrower is Hyde: 

 Were the Jeckylls able to jointly commit not to trade via credit cards, they could all steer clear of the Hydes and all be better off. But once all the other Jekylls are trading with credit cards, the resulting inflation has already robbed each Jekyll of some of the purchasing power of his cash endowment. When credit cards do not default, the efficiency gains in trade overcome this loss of purchasing power. But with default, the wedge between buying and selling prices is increased, and trading efficiency is diminished. …A monetary authority, alarmed by the inflation, might try to undo it by tightening the money supply. We show in Theorem 5 that the authority can indeed cut the money supply to reproduce the pre-credit card equilibrium cash prices. But at the same time it will have to reduce trade to the pre-credit card equilibrium levels. This means giving up all the efficiency gains created by the credit cards. Furthermore, this tightening does not completely undo the inflation because credit cards and money are not perfect substitutes: if the cash prices are brought back to their pre-credit card levels, trade will be back to where it was before, but the credit card prices will have to be slightly higher. Thus the average (credit card and cash) price would not be restored. This is a touch of stagflation. 

 Recent developments of paying on credit without interest can have an impact on the micro-economy, especially when combined with paying down traditional credit card debt. 

I recently purchased an item on Etsy this using an app called Klarna, which allows paying in four installments without interest. It is almost the same as paying in cash while the use of credit increases the velocity of sales and heightens trade efficiency. It is interest that decreases the purchasing power of money. 

Etsy is a venue used primarily by the micro-economy, and one of the bootstrap opportunities for roots-level entrepreneurs. The combined effect of ordinary Americans paying off their credit card debt and the use of apps like Klarna change the opportunity map. 

New instruments, existing in a monetary landscape flowing with fiat currency and cyber currency is changing our concepts of money and with that, the workings of inflation and stagnation.


“Over the past two centuries,” they wrote, “debt in excess of 90 percent has typically been associated with mean growth of 1.7 percent versus 3.7 percent when debt is low (under 30 percent of GDP), and compared with growth rates of over 3 percent for the two middle categories (debt between 30 and 90 percent of GDP).” Does the Debt Matter ? by Peter Wehner & Ian Tufts.

 It's a new horizon.


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