Macro 101

Immigration and inflation have been in the news nearly every day for the past three years. However, surprisingly, there never is a link between the two. In fact, there has been a complete lack of a serious discussion on what is going on in the economy from a macroeconomic perspective. The vacuum of discourse on the topic is not limited to just the popular news. Last summer, a former macro head at a major hedge fund dismissed any linkages between immigration and inflation at a prestigious institutional investor conference. (Incidentally, the same person was completely wrong about her inflation forecasts.) In short, no one is talking about what (to me) is an obvious link “connecting the dots”: inflation and immigration go hand in hand, and this is what this note is about.

Inflation reflects the relative change in purchasing power. In simple terms, inflation is stating how much more one has to spend on comparable goods this year than last year. Usually measured year-on-year or month-to-month, the inflation captures the weighted-average change in prices on various goods.

The population growth is measured as the annual change in population due to births, deaths and immigration. The population growth is often taken as given: there is only so much the economists can do to convince people to, say, have more children or abstain from dying. When the number of workers increases, so does production and the competition among producers, keeping inflation steady.

Every beginner macroeconomic book will tell you that (potentially, the only) effective way to control inflation is to manage it relative to the population growth. In a steady-state economy, the inflation simply mirrors the year-to-year population increase. In Canada, for example, the natural population growth has been considered to be around 2%, and the target inflation is usually set to that number. The Canadian Fed, known as the Central Bank, then sets interest rates that encourage movement to this target inflation rate through buying and selling bonds. Federal bonds are debt obligations that shift the relative value of money away from the present and into the future. By selling more or fewer bonds with different maturities, the Fed fiddles with short-term and long-term interest rates, changing today’s inflation profile.

However, through controlled bond operations, the Fed (or a Central Bank) can only do so much to influence inflation. A 0.1% here, a 0.25% there, is really all there is under the central bankers influence. And the success of a bond selling operation heavily depends on the presence of a bond buyer. For years, the Chinese government was a huge buyer of the U.S. bonds, but as of late, the Chinese interests have shifted to gold, leaving the U.S. Fed operations in a more of a precarious position.

Where am I going with all of this? In the wake of COVID, then President Trump has printed money to buoy the tanking economy. That move worked: the markets stabilized. (That move worked wonders for crypto, as many folks put their stimulus cash straight into the speculative investments, resulting in 1000% appreciation in BTC and ETH, save this for another day). The excess money, however, was bound to cause a hyper-inflationary environment. Toward the end of Trump’s term, we indeed noticed that the economy was beginning to falter, which likely cost Trump the election.

Enter President Biden, whose first moves were to print even more money with even more inflation coming. How to combat the near certain ruin of the U.S. markets? Why, with the population growth! Opening the borders invited a flood of workers and consumers to enter the United States. The population exploded, the markets stabilized and inflation was brought under relative control.

Anecdotally, most of the new arrivals came from Latin American countries. These folks left their homes, reducing the population growth in their home countries. The results speak for themselves: an insane inflation in Latin America. Chile alone registered 2022 inflation rate of 11.65%, a 7.12% increase from 2021, and a 10% increase from 2010. Inflation in Argentina hit 25% in December 2023.

Are the Biden-term policies unique? In the 1980s, the U.S. was battling another hyper-inflationary environment. In 1980, the U.S. inflation rate reached 22%. Then President Reagan implemented a series of immigration reforms (and amnesties) that cooled off inflation and restored financial markets.

In summary, immigration has been a macro-economic tool for the United States for quite some time. Its effects can be quite powerful and need to be taken into account vis-a-vis long-term inflation forecasts.