The second passed on Decemfor $900 billion of so-called stimulus spending on top of the omnibus spending bill. The first so-called stimulus bill of the Covid era passed on March 27, 2020-right around the inflection point on the money supply graph. The empirical evidence on inflation supports the simple logic and math-just as it repeatedly has for Laffer. The US economy is more complex than that, of course. Government is now, as it is wont to do, pointing the finger in all directions-except at itself. If it prints additional money, above the growth, then prices will rise. Thus, the island government could match the growth in the economy by printing money such that the money supply kept up with the supply of goods. If the money supply increased from $100 to $200, then coconuts would still be worth $5. Then, by some miracle of nature, there were 40 coconuts. Let’s suppose there were originally 20 coconuts. What if, though, we increase the supply of coconuts. Since there are twice as many dollars in circulation, each dollar can buy half as much as it used to. If on Tuesday the island government prints another $100, and nothing else happens, then the price of a coconut will be $10. On Monday coconuts are selling for $5 each. The total amount of money among the people is $100. As an example, a few people are stuck on an island where the only goods in the economy are coconuts. If the denominator is increased, then the value of X, relative to the amount of money in the system, is less. The numerator can represent almost anything. The denominator is the total supply of money. The intuitive and elegant equation for the remaining space on the napkin involves a fraction. That is right around when the federal government ramped up the printing press, and lo and behold, inflation has run rampant since then. It is no coincidence that the inflection point is March 2020. When money is printed, prices in an economy rise.įor the inflation napkin, we could start by drawing a historical graph of the money supply. IĪt the outset, we need to realize that inflation is, above all else, a monetary phenomenon. The double whammy, of course, is that not only did the government print money, causing inflation, they did it in the midst of an economy-crushing pandemic. In order for napkin math to be applicable, the explanation must be intuitively obvious, empirically obvious, and, of course, the math is demonstrable on a napkin (or, the corollary to the Napkin Math Rule-a 900-word FEE piece).
![economics coconuts capital island economics coconuts capital island](https://i.pinimg.com/236x/2e/9c/1c/2e9c1c4eaa91cb759d7bd7240990eb0d--cash-crop-saturated-fat.jpg)
![economics coconuts capital island economics coconuts capital island](https://www.worldatlas.com/r/w1200-h701-c1200x701/upload/a6/10/c4/shutterstock-1393520135.jpg)
For some economic issues, though, only a napkin is required. Sure, we could write books, academic papers, hold town hall meetings and debate endlessly. With all the recent consternation about inflation, it is long overdue we take the napkin approach to show a simple truth: printing money is the root cause of inflation.
ECONOMICS COCONUTS CAPITAL ISLAND FREE
Similarly simple demonstrations could be done to show that increasing the minimum wage reduces employment, or that free trade benefits both parties. (Laffer’s Curve was used to demonstrate that in some cases slashing tax rates can actually increase tax revenue.) And the important converse: lower taxes increase economic growth. He concluded the napkin with, “the consequences are obvious!” In that particular case, it was that when you tax something more, you get less of it. Legend has it that back in 1974 Arthur Laffer explained supply side economics on a napkin and the Laffer Curve was born.