An easy way to solve inflation would be to reduce the amount of money circulating in the economy by the same proportion as there is excess inflation. If inflation is 5% per year and we want it at 2% then we need to reduce the amount of circulating money in the economy by 3%. This should also try to be done in a way that is proportionally matched to those areas of the economy which are experiencing the highest rates of price increases.
This is why the federal reserve tries to slow the economy with higher interest rates and why some economists think we need a recession to curb inflation. They are trying to lower demand (circulating money). The problem with this is that by damaging the economy they also hurt production, which offsets some or all of the gains from reduced inflation via reducing the overall amount of circulating money. Then we are in stagflation, where inflation is still fixed at whatever high rate it was already at and any new gains in reducing inflation by X% are offset because the production of new economic value is also declining by roughly the same X% anyway due to the stagnating economy and high interest rates coupled with the still-higher prices that have yet to fall.
It is key to understand that inflation =/= rising prices. Rising prices are a symptom of inflation. Inflation itself means the money supply is inflated relative to the amount of new economic value being created. It’s all fine and good for the money supply to expand over time but this needs to be in proportion to the amount of new economic value created. Economic value can be created in one of three ways: 1) take more valuable stuff from the earth/nature/environment/world outside of the current space of your domestic economy (mining gold and precious gems, extracting metals, harversting trees for wood, pulling up water from the ground, extracting oil, etc), 2) create new desirable goods/services either by feeding non-intrinsically valuable raw resources into existing productive processes and/or by human work-effort creating something new of value that didn’t exist before, or 3) refining the efficiency of existing productive processes. There’s no other way to create economic value. Sure, you can steal it from someone else, but technically that falls under (1).
And no, printing more currency =/= creating new economic value. Currency/money is nothing but a symbolic manifestation for actual economic value already created. It’s a stand-in, an image that represents something else. Money =/= value, this is something a lot of people seem to misunderstand. Printing more money directly increases demand, not the supply of actual value in the economy (small Keynesianism effects notwithstanding).
Now that you know what money is and what economic value is and how it is made, back to inflation: inflation = the increase in the supply of currency/money over time-span t and over and above the amount of new economic value being created in that same time-span t. How to solve this? Well the government is not going to slow down the rate at which they print money or borrow money, so that’s not an option. Realistically there is only one good option that doesn’t involve deliberately crashing the economy: a new “tax”, but I put tax in “” because it isn’t really a tax. Let me explain.
Let’s assume government numbers on inflation are reliable (they aren’t) and inflation is at, oh let’s say 5% per year. We need to reduce it by 3% per year to hit our goal of 2% inflation per year. What is the real problem with inflation anyway, since inflation =/= increases in prices? Well it is the fact that inflation leads to increases in prices via the mechanism of unnaturally increasing demand over supply. I say unnaturally because the excess circulating currencies/money causes people to be able to spend more, which increases demand, yet this excess in circulating currency/money did not arise at the behest of a commensurate increase in economic value produced. So it’s a sham. This is why prices increase. More demand chasing an artificially reduced supply. Basic economics 101, this will cause prices to go up.
In our example, how do we get people to cut back on their demand/purchasing by 3% per year, so we can achieve an inflation rate (or rather, a rate of increase in prices) of just 2% yer year? Realistically there are two options: 1) you highly incentivize people to save 3% of their money each year and not spend it, or 2) you take 3% of their money each year via a new tax and make sure you (the government) doesn’t spend any of it.
I’ve found the sweet spot in the middle of those two options: a Productive Investment and Foreign Purchases account funded by a new tax. The new tax is whatever the current rate of annual inflation is minus our target goal for inflation, so in the example above, the new tax is 3% per year. The government takes 3% of everyone’s money each year and puts it in a locked account with their name and SSN. No one can touch it, no one can spend it on anything or even invest it. It just sits there, outside the economy, not circulating. And bam, you have just controlled inflation.
But what about that money, won’t the loss cause economic damage and make people pissed off? It would, except you aren’t actually taking their money from them. What you are doing is moving 3% of their money (technically their income, although this would be more accurate if you instead taxed the total wealth a person has which wealth is either liquid already or becomes liquid over the next 12 months) into a personal locked account for them to spend at a later date. How much later? Not that long, only 1-2 years down the road. See, once you move this money out of circulation you immediately begin to curb inflation back towards your target. You can therefore achieve your “target” very quickly this way, assuming you compensate for lost economic production (which is precisely what this idea does, although offset a bit into the future).
Note how I said “target” above, in quotes. You can achieve your target using this method but it won’t be the same numerical target as the actual target. This means if your target is 2% you might actually reduce inflation to 3% instead, and call this victory. Why? Because at this point you begin to allow people to start spending their locked-away funds from the new tax but only on one of two things: either by investing in stable and reliable productive processes with a relatively high rate of return, or by purchasing goods and services directly from foreign-owned sources (not mediated through domestic ownership or sales). In this way the consumers who were taxed an extra 3%, which did slow the economy a bit at the time but not as much as it would have if there were a full economic recession due to increasing interest rates and allowing monetary inflation to remain at high levels (thus stagflation was avoided) are now able to spend that money but only in ways that directly increase the amount of economic value produced. Thus they can either choose to invest in reliable productive processes, such as gold mines, reputable housing construction companies, big tech, stuff like that (the government will compile a list of options you can choose from, and that list might change based on what other people are choosing from it) or you can use the money to buy things directly from foreign economies. Why not from sources domestically in your own economy? Because if you were to use the money to buy from sources in your own economy this would lead to increase in demand which would counteract the increase in overall economic value-production that we are aiming for. The key is you want people to spend this money in a way that increases overall economic value in your economy without causing an increase in demand within your same economy. Thus the second option is preferable, but the first is still good because it causes a boost to your own domestic economic value-production.
All that’s left is to calculate all of this down to a reasonable timeline. Something like enacting the new anti-inflation tax of 3% in year 1, re-measuring inflation at the end of that year and adjusting the anti-inflation tax down to say 1.5% in year 2 as overall inflation begins to fall toward your target; meanwhile the newly taxed money is not entering the economy in any way and thus not stimulating new demand; then in year 3 or 4 you begin to allow people to spend that money which was taken from them by the new tax but you control the ways in which they can spend it to make sure it is spend in such a way as to both increase direct economic value in your domestic economy without a corresponding increase in demand which would negate that increase in economic value. You would want to spread this out over a few years to balance the curve back toward normal and not cause too jagged or jarring shifts. So maybe people can spend up to 20% of their previously ani-inflation-taxed funds in their personal locked account per year, again only on the pre-selected options available to them. After 5 years these accounts are largely depleted and the money has flowed back into the economy but in such a way as did not lead to direct increases in demand, only indirect increases which were ameliorated by extending them over time and counteracting said indirect increases in demand by directed increases to the overall amount of economic value being created.
