An easy way to get the hang of what is happening and has been happening to us.

Not written by me and all due credit to this post I found it here.

In the system we have a total of 3 dollars, equally divided between John, Peter and Michael. The total of goods and services in that economy is three apples. Therefore according to the price regulation system each apple would be worth 1 dollar, and this is the purchasing power of John, Peter and Michael.

Now we are going to print money as the good communists like, we print 3 extra dollars and we distribute them equally among John, Peter and Michael:

Since productivity has not increased sufficiently and there are still three apples in the set of goods and services, each apple is now worth two dollars. Well, this is bullshit, printing money is worthless.

O no dear friend, now comes the precious Cantillon effect¹.

I, as a good communist, distribute the 3 dollars that I have created out of nothing to my friend John, leaving the system as follows:

Wonderful, Peter and Michael now understand the effects of inflation, before they could buy 1 apple and now only half an apple. On the other hand, John, the bankers' friend, can now buy 2 apples without having done anything at all. John the banker will not buy apples. He will buy apple stocks. Because John, your friend is not interested in basic food (measured by the cpi²) he is interested in assets.

So the first thing John does is buying apple stocks. Because John knows that eventually the price of apples will increase. He has some knowledge about how the banking system works. He knows that fiat currency can be created out of nothing and will eventually lead to increase of prices.

But then a Corona virus hits the world. And the government tells everybody to stay at home. So the production of new apples drops significantly. But the government says, don't worry. We will send you all a stimulus check. There production of apples drops to 1 apple per year. As there are no people producing apples any more.

But the government sends stimulus check for 36 dollars in stimulus check to everybody. The money supply has grown with 600%.

And there is only one apple in production. There are still apple stocks.

Every body is happy. Peter, Michael are so happy with the helicopter money sent to them. They also think the government needs to implement an UBI, a Universal Basic Income, for the whole world. Everybody free money. Because if you have more money you are wealthier. Peter and Michael believe that because there is 6 times more money there is also 6 times more wealth in the world.

John knows that it is time to buy a scarce asset. He heard there is something called Bitcoin, where you only have 21 million. Better than gold. John dives into learning about Bitcoin and grabs everything he can learn about Bitcoin. He follows his friends on social media talking about Bitcoin, but as he is afraid that those accounts might be blocked in the future, John gets an account of Stacker News, Nostr among others. Because he wants to keep learning about Bitcoin.

John also knows something about MV = PY. Something friend who studied economics told him. John recalls his economist friend told him that M is the money supply, V is the velocity of money, P is the price and Y is the total income/production in the economy.

So John starts plugging these data into this simple equation that is always true, because he sees the FED (the ones printing money) has increased the money supply to 36 dollars (6 times more than before). John is trying to understand where the story goes.

If M = 36 (Money supply is 36 instead of 6 before) Y = 1 (the economy only produces 1 apple instead of 3 before the formula is like 36V = P1

So John feels he is on something. He starts thinking about how much transactions the people would do per year. He thinks due to the Corona Crisis that people only transact little so he assumes that the velocity is 1.

Now John tries his best algebra knowledge and figures out that

P = 36*1. So P = 36.

John starts buying Bitcoin like crazy. Because John knows that the inflation is not going to be transitory. The inflation is going to be permanent. Whatever the FED says. And John starts to think further. What would happen when the Corona Crisis ends? People will transact more. Buying more apples or trying to make apple pies out of that one apple of production. So V will go up.

What if people transact twice more.? So V goes to 2?

John puts the price into the equation again. P = 36 * 2 = 72.

This scares the heck out of John.

He buys more Bitcoin.