Chapter 06 · How money really works

Why your groceries cost more

5 min
You are joining a course midway

This chapter builds on the ones before it. You can read it now, but it will not count towards your progress until the earlier chapters are done.

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Your grocery bill has gone up. So has your rent. Your paycheck, meanwhile, is barely keeping pace. At the same time, the NASDAQ is hitting record highs and real estate is climbing into the absurd. You sense there's a link. You're right.

You thought money would stay neatly locked away in financial assets? Bad news.

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Money almost always ends up burning your fingers. This is called the Wealth Effect.⁠(opens in a new tab)
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OK. Money is flooding into the real economy. You can feel the problem coming, right?

Indeed! Over the past decade, easy credit and rock-bottom rates have massively swollen the amount of money in circulation. But has the number of loaves of bread, liters of gas, or houses grown just as fast? No.

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And that is the main engine of inflation. Milton Friedman⁠(opens in a new tab), the Nobel laureate, put it bluntly:
Inflation is always and everywhere a monetary phenomenon.
—Milton Friedman·Counter-Revolution in Monetary Theory (1970)
Makes sense, right?
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That's it. First module done. Before moving on, to make sure it all holds up.

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