The Root Causes of Inflation

David Galbraith
11 min readDec 7, 2022

The Return of Inflation

It’s widely believed that the return of inflation, after more than a decade of deflationary pressure, isn’t transitory. The causes are variously claimed to be: easy monetary policy, the COVID pandemic, and the war in Ukraine.

These are all symptoms of counter-reactions to deeper underlying structural shifts, and they will continue to create dramatic inflationary spikes and short-term pullbacks — for example, the current potential overreaction of a monetary policy response to supply-side created inflation may lead to a recession and lower prices. Spikes will occur against a background of less severe, medium-term increases, culminating in an eventual pendulum swing back to a new steady state of low-level inflation.

The root causes of secular deflation and subsequent inflation, I believe, can be found in the interplay of technology and investment.

The structural shifts causing secular deflation were grounded inefficiency gains to the flows of information and capital, primarily due to the internet and globalization, and the subsequent trade and knowledge transfer gains. Today’s inflationary forces are, as a result of counter-reactions, reducing these efficiencies, in the form of misinformation and security vulnerabilities in the internet, and the de-globalization caused by rising nationalism and ongoing supply chain disruptions.

The biggest changes to information and capital flows in 600 years

The last two decades have seen the biggest structural changes in the flows of information and capital since the invention of the printing press and the discovery of the New World. The modern equivalents of these two changes are the internet and the resurgence of China during a period of rapid globalization.

Increased efficiency and reduced prices (deflation)

Both factors initially made capital and information flow more easily; they increased communication and trade efficiency, increasing supply and liquidity and reducing the prices of goods and services. Since these flows include many things against which we measure inflation, the internet and globalization were initially deflationary, despite rapid increases in asset prices.

Last time it did the opposite

This is the opposite of what happened with the printing press and discovery of the New World, however, since other effects masked the immediate efficiency gains of that period of transition.

Without an answer to why the pre-Reformation was inflationary, no thesis can adequately explain why our current period was previously deflationary, but is now experiencing an inflationary whiplash.

The printing press changed communication flows, which ultimately triggered the Enlightenment, but it first created cultural conflict, culminating in the Reformation and decades of war, till society settled into a new stable pattern of identities and communication between them.

Conflict reduces trade and efficient information flows, while destroying assets at a greater rate than it increases production, making it inflationary in nature. Wars increase GDP but destroy balance sheets while creating tremendous suffering.

The primary economic impact from the discovery of the New World was not increased trade, since what was discovered was literally money (silver), and it wasn’t traded but taken. It was more akin to the discovery of a central bank with a large printing press than a new trading partner.

Overnight, the Old World’s money supply increased triggering long-term inflation. Coupled with rising populations after recovery from the Plague, this new money ultimately increased demand, further exacerbating inflationary trends.

This time it’s the counter-reaction creating inflation

Unlike the pre-Reformation, recent changes to flows of information and capital have been highly deflationary, due to increased and more efficient flows of trade and information. The rise of the internet coincided with utopian visions of increased communication and understanding.

The resurgence of China also marked a period of increased global trade and cooperation from East to West. ASEAN economies followed, and Europe benefited from the internal flows across cost differences between the newly absorbed former Soviet states of Eastern Europe.

Capital tends to flow across differences in real cost or perceived value, and as it flows, differences such as costs of production and wages even out.

This inevitable evening-out has reduced deflationary pressures over time — for example, labor costs in Eastern Europe or China have crept closer to parity with Western labor costs, reducing production cost arbitrage. However, recent trends have kicked off a complete reversal of the deflationary effects of the past two decades, as ‘equal and opposite reactions’ to previous changes kick in to produce outright inflation.

Counterreactions to internet communication and globalization

Reactions to globalization have typically taken the form of nationalism, and the reaction to the internet’s communication efficiency gains have emerged in the form of friction, noise, and vulnerabilities to misinformation, culture wars, and cyberattacks. In the physical world, rapid economic growth and urbanization, in areas that benefited most from globalization, was likely a root cause of the COVID pandemic, and also fuels the biggest structural issue of them all — climate change.

Partial deglobalization (nationalism)

Nationalism gave rise to populist politicians such as Trump and decisions such as Brexit.

Nationalist leaders of varying degrees now include Modi in India, Orban in Hungary, Erdogan in Turkey, Bolsonaro in Brazil and, most importantly, Putin in Russia and Xi Jinping in China. Right-wing extremists have also recently won elections in Sweden and Italy.

This nationalism represents a disappearance of the industrial-era equilibrium between Right (power via capital) and Left (power via mass labor), with the emergence of city-states that operate on a global rather than national level, neglecting their traditional hinterland and allowing for populist nationalism to emerge in the vacuum for those left behind by globalization.

Internet backlash (communication breakdown)

The downsides to ubiquitous internet connectivity only started to become apparent in hindsight. From road-rage-like interactions on social media, to misinformation via bots, to phishing from scam artists or attacks on real infrastructure, there now appears to be a clear trade-off between the benefit of connectivity and vulnerability to cyberattack.

Just as the printing press changed the way religious beliefs were spread, producing societal rifts such as the Lutheran Reformation, the imperfect topology of the internet’s current layout has been proven to exacerbate discord, as well as being vulnerable to attack.

Specifically, this is a result of its current topology being overconnected and not a small world network. What does this mean? Let’s explore…

The internet’s current structure creates discord

A small-world network is one in which the links between clusters of high connectivity (which create identity and community but reinforce groupthink) are weak, allowing for diversity.

It’s a Goldilocks kind of network, with trade-offs between communication efficiency (through connectivity) and overall network resilience (weak links require multiple messages before a signal is strong enough to percolate between clusters).

How this structure creates discord

One effect of a small-world network is it favors the truth.

Since new information needs to be sent multiple times to propagate, small-world networks favor nuance and predictive ability. In the internet’s current hyperconnected topology, all messages are equal, so lies stand an equal chance of propagation as the truth.

However, because there are an infinite number of lies and a finite number of truths, the current internet favors lies. More importantly, because there are a potentially infinite number of seductive lies, the current internet favors the propagation of conspiracy, superstition, or deliberate misinformation. This reduces the efficiency of knowledge transfer, and is therefore ultimately inflationary.

We should not underestimate the potential social and economic impact of culture wars, conspiracy theories, and information warfare. They are potentially more disruptive than the Reformation, as changes to the way people communicate (from few-to-many to many-to-many) are more of a step change than the incremental changes of the Reformation due to the printing press (one-to-few to one-to-more). The number of people involved is over 60 times greater today — the current global internet-connected population is roughly 5 billion, compared to a European population in 1450 of 80 million.

Beyond the root causes of inflation and deflation

Until now, the structural efficiency gains from the internet and globalization, to flows of information and capital, were inherently deflationary. But, like any big action, there is a counter-reaction. In this case, the counter-reaction takes the form of partial de-globalization through nationalism, and less communication efficiency through noise, misinformation, and cyberattacks.

Reactions to these root causes of secular deflation will continue to produce secular inflation until society reaches a new stable equilibrium — hopefully without conflict.

Being aware of these changes, which act like an invisible ‘hand of the devil’ — subconsciously driven by the environment we live in rather than originating with malicious intent from people — could help us mitigate the risk of conflict.

Symptoms and secondary causes (COVID pandemic and Ukraine)

tThe pandemic and its inflationary pressures from renewed demand and stimulus, or its resultant supply reductions through supply chain disruptions, and the war in Ukraine (and its effect on food and energy supplies), are all secondary causes or symptoms of the underlying issue.

The pandemic is a result of rapid growth and urbanization producing vulnerable systems, from either improperly secured labs or encroachment on wildlife. The war in Ukraine is a straightforward consequence of nationalism.

Inflationary spikes against secular background trends

The results of both events could be relatively short-term, creating spikes and overshoots of inflation and deflation, with net inflation as the ultimate outcome.

But because they are symptoms, and because the underlying causes still remain, there will be more spikes that are net inflationary, which will contribute to a background rate of secular inflation (albeit possibly more moderate).

Wrong treatment in tackling inflation

Both the pandemic and the Ukraine conflict have disrupted supply chains, which is why current inflation is largely supply-driven, and why central bank intervention (through suppressing demand with higher interest rates) has not been effective. Monetarist responses don’t work against supply-driven inflation.

Longer-term cures

The cure for our current situation is to build systems resilient to both supply and demand shocks, as well as to attack or discord — in other words, we must build resilience, not through rigidity, but with redundancy and flexibility.

Supply chains and information systems that balance resiliency and efficiency will achieve the steady state represented by the emergent post-Reformation status quo, which replaced medieval structures with industrial-era ones.

Globalization resilience in supply chains

Our modern globalized supply chains are efficient, but have no resilience through adaptability to change, as we’ve witnessed through and after the COVID pandemic-caused supply shocks. This efficiency was ultimately deflationary through increased flows, until it wasn’t, when those flows were interrupted.

Building resilience and adaptability into the world’s supply chains to prevent this kind of dramatic inflationary shock from reoccurring will require a degree of redundancy or inefficiency, which is by nature inflationary. With resiliency, we will have swapped inflationary spikes for an end to secular deflation.

Globalization resilience via internal political stability

Disruptions to globalization aren’t limited to supply chains. They also arise from social and political conflicts. Polarization between countries will diminish only when nationalism is tempered by a reduction in internal political polarization between global metropolitan areas and their rural or secondary urban hinterlands.

This can only happen when new social pacts replace industrial-era ones, such as through decentralized cantonal and communal governments to represent people and communities of all types, and fiscal responses that mitigate the most devastating effects of economic shocks.

Digital resilience in communications

The problems of misinformation, social antagonism, online addiction, and vulnerability to cyberattack can only be addressed at the root level when existing networks and interactions sit on top of small-world networks, in which links between clusters are weak.

This implies an inevitable Balkanisation of platforms, separation between information stores and devices, hierarchies of moderation, and trade-offs between anonymity and lack of secrecy. The end result will be a more functional and diverse online society, but one wherein different groups interact less than in the original utopian dream of the internet, with less theoretical efficiency but more actual productivity.

Resilience through new types of organization and financing

The new stable structure and topology of networks, from the internet to supply chains, will be complemented by new types of organizations that connect them.

Again, this mirrors what happened the last time we saw such widespread structural changes to information and capital flows, where new types of organizations and financing emerged as medieval trade fairs and guilds were replaced by joint-stock corporations and capital markets, initially conceived to fund high-risk exploration.

Guilds were replaced first in cities closest to changes to information flows and capital

There’s a direct correlation between locations where guilds and trade fairs were replaced and their proximity to printing presses (Mainz) and Atlantic trade, reinforcing the hypothesis that these were the root causes of organizational change.

Lubeck and Hamburg are 30 miles apart and equidistant from Mainz, but Lubeck’s trade was on the Baltic rather than the Atlantic. As such, Lubeck retained its trade fairs and guilds. Similarly, Seville, an inland port linked to the Atlantic but far from Mainz, retained its guilds until much later.

Industrial-era organizations are being replaced in modern globalized information-economy cities

Today’s equivalent to modernized cities of the post-medieval era, like Hamburg, are global information-age cities like London, New York, and San Francisco.

Like Hamburg, they’ve become diverse and tolerant, but have neglected national connections in favor of global ties, and pursue social stability via internal coalitions between vulnerable groups rather than among the masses, which has led to political polarization between metropolitan and non-metropolitan areas.

Venture capital and startups are prototypical information-era organizations

Information-age cities have arguably also already created new types of organizational structure and financing, and we (as venture capitalists) play a direct part in their emergence.

Today’s venture-backed technology companies are quasi-cooperative in terms of their option-pool equity incentives, which differ from traditional, industrial company worker benefits.

Stock options and aligned incentives have replaced unions and defined-benefit pensions, which are more common in industrial-era organizations tracing their lineages to the replacement of professional guilds.

In terms of funding, these companies are very different from traditional loan-backed companies as they represent high-risk speculative ventures during periods of rapid change and innovation. The initial financing for most of the biggest companies to emerge in the last two decades has come from equity-based venture capital investment, which aligns upside and downside interests of those controlling capital with workers.

We may not think of venture capital and option pools as being as significant a societal change as the transformation from guilds and trade fairs to the industrial era model, and venture capital itself remains a tiny asset class, but the organizations created in this period have already transformed the world, replacing the world’s largest organizations with even larger ones based on this new model.


Increasing flows of information and capital make the global economy more efficient and lower prices — they are deflationary. However, just as any action has a reaction, vulnerabilities in both our information and trade networks have appeared and they are inflationary.

Many people have identified deglobalization as inflationary but nobody has suggested that emergent vulnerabilities of the internet also are, to create a comprehensive theory of current inflationary forces.

Historians have linked inflationary forces to the last time the world experienced simultaneous changes to flows of information and capital with the discovery of the New World and the invention of the printing press. However, these caused the opposite effect of immediate inflation with no preceding period of deflation. The reason for this difference was it wasn’t trade that was increased but the money supply and it wasn’t so much supply of goods that was increased but demand, with a rising population in Europe, recovering from the plague.

The current disruptions to trade and capital flows have been both natural (the pandemic as a reaction to urban connectedness) and socio-political (nationalism as a reaction to globalization) and disruptions to information networks have been both technological (vulnerability of networks to cyber attacks and over complexity) and social (misinformation from spam to culture wars, reducing the signal to noise ratio of the internet).

In contrast to these underlying causes, the war in Ukraine and its inflationary disruption of food and energy costs is a specific consequence of actions of a nationalist leader in Russia and the coronavirus pandemic is a specific example of the consequence of natural vulnerabilities due to economic connectedness and urbanization). They have produced inflationary spikes that will recede, but there will be more.

Secular deflation is over and so is the era of loose monetary policy that it enabled. The pendulum has swung back towards inflation and how governments and central banks respond will determine how it reaches a stable equilibrium again. In parallel, the societal transformation that happened the last time these simultaneous changes to information and capital flows occurred could repeat.

Last time it created both modern capital markets and corporations, triggered the Reformation and subsequent widespread conflict, followed by the Enlightenment.