SBF on Inflation — Inflation from increasing money supply is neutral; it's the uneven distribution, the "Cantillon Effect," that causes恶性 inflation
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SBF on Inflation — Inflation from increasing money supply is neutral; it's the uneven distribution, the "Cantillon Effect," that causes恶性 inflation
The distorted production structure caused by monetary expansion cannot be restored or remedied, and ultimately everyone will have to pay the price.
Navigating Web3 tides with focused insightsIn March, the U.S. Department of Labor reported that the annual Consumer Price Index (CPI) rose by 8.5%, the largest increase in 40 years. The CPI is a key indicator for monitoring inflation. There are various explanations for worsening inflation, and SBF, founder of FTX, has also shared his views on the matter.
Is inflation necessarily bad? — SBF posed this question in a tweet. Intuitively, inflation seems clearly negative. SBF explained that if the total value of money in the world is $x and the price of bread is $y, then as y rises, the distributable wealth x effectively diminishes—a straightforward logic.
But what if the total amount of $x increases?
SBF argues that it depends on how the increased amount is distributed. He gives an example: suppose you convert one cent into one dollar, increasing the total dollar supply by 100 times. As a result, the price of bread ($y) would also rise 100-fold, leaving everyone able to buy just as much bread as before.
"Now consider what's actually happening—prices of goods are rising. In terms of total money supply, x has grown by about 40% over recent periods, while y has increased by roughly 15%. Does that mean there are now 25% more loaves of bread in the world?"
Of course not. SBF points out that the actual global bread supply may have decreased by around 5% recently—due partly to supply chain disruptions, and also because of the Russia-Ukraine war, with both countries being major exporters of wheat, a key ingredient in bread.
So if the world’s money supply has increased by 40%, but bread supply has fallen by 5%, why has the price of bread only gone up by 15%?
"Because most of the newly printed dollars went to the wealthy, who can only eat so much bread. Thus, much of the increase in x did not translate into higher demand for y (bread)."
Even though bread demand didn’t rise, assuming supply dropped 5%, prices should have risen only 5%—so why did they go up 15%?
"On the other hand, the increased dollars held by the rich boosted demand for other goods, leading to greater demand for critical raw materials such as energy. This rise in input costs in turn drove up the cost and price of bread."
SBF notes that real-world inflation indices reflect overlapping effects:恶性 inflation caused by war and pandemic; and inflation from monetary expansion, which requires analysis of where the new money flows. He breaks inflation down into four scenarios:
a. War and pandemic cause a 5% loss in total bread supply → +5% inflation, which is恶性 inflation.
b. Printing 5% more money and distributing it equally to everyone → +5% inflation, but this kind of inflation simply means everyone is nominally richer.
c. Printing 17.5% more money and giving it to the rich, who invest it in $SPY and $BTC → no direct inflation. (But their spending leads to scenario d.)
d. Printing another 17.5% more money for the rich, who spend it on energy and other raw materials, making bread more expensive → +5% inflation, which is "bad" inflation.
People often conflate increased money supply with inflation, but monetary expansion and changes in money distribution are different phenomena, and it's important to distinguish between them.
"Changes in money supply and money distribution are easily confused. Increased money supply isn't strongly correlated with (bad) inflation, but money distribution is highly correlated.
However, the inflation discussed here is not the same as pure, evenly distributed monetary inflation."
The Cantillon Effect
Zi Bian, one of the editors of the economics Facebook page "Bastiat's Candle Workshop", noted that SBF's view on how money supply affects prices closely aligns with the Cantillon Effect.
The Cantillon Effect refers to the phenomenon where newly issued money enters the economy through specific channels and gradually spreads across society. This process takes time, meaning the economic impact of monetary expansion is uneven.
Zi Bian explained that changes in money supply first affect the existing structure of production, causing some goods' prices to rise or fall earlier than others.
"Put differently, the production structure becomes distorted, resulting in a flawed and irreversible production framework.
The distorted production structure caused by monetary changes cannot be undone or corrected, and ultimately, everyone ends up bearing the cost."
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