Everyone is realizing that the cost of living is becoming more expensive.
Rapidly more expensive to be more honest.
We first think how can we "save" money on certain things. Monthly services: mobile phone plans, cable vs internet, what streaming services do I need or not need, how many subscription services do I actually use, my grocery bill each week, utilities payments. The list goes on..
Simply put trying to lower or limit the amount of currency ("money") you spend on any of these things is an empty hole. You could cut back a little, off of the top, to save a few extra bucks but that will only last you so long. It is a zero sum game for a majority of people because we are never taught what the real issues are.
Government has NO limit to the amount of money they can send out into circulation.
What is really causing all of these goods and services I purchase to cost so much more? Why are some things way more expensive then others?
Inflation is a tax, a hidden tax more precisely. Everyone in the country is paying it one way or anther.
As government robs people of their purchasing power. They are able to pay down debt obligations with more dollars that have less value.
The inflation tax disproportionately effects the lower and middle income earners over more wealthier individuals.
Everybody has a set income that they bring in every week/month in which to live off of. For the middle/lower class the bulk of that income is used for basic necessities. Housing, food, medical, energy (heating/cooling, gas), utilities, insurance and very basic services (phones, tv, internet).
For wealthier people necessities do not make up the bulk of their income. For them earning more gives them access to more purchasing power. A bigger house, better car, more leisure and travel. At the end of the day they are still paying more for all those things just like everyone else. Only difference is they have more income or purchasing power to fill the gap.
That greater income could be in the form of higher wages but when speaking about the wealthiest that’s not likely the number one source. Gains in the value of assets which they have accumulated over time allows wealthier people to tap into extra equity creating extra purchasing power.
Overall this dynamic isn't a terrible thing until government intervention steps in. Asset prices in a normal environment could expect around a 10% rate of return per year. That ten percent return does carry some risk though. Also in a normal environment people not willing to take on that same risk could expect around a 5% to 7% return from a high yielding savings account or government bonds.
We arguably haven’t had a normal environment since before 2000.
Money supply has an indirect relation between the value of assets and other things throughout the economy.
Government has a monopoly on the currency ("money") supply of the economy. Both domestically and globally to an extent. Government monetary and fiscal policy are the two main drivers that currently cause currency to enter or leave circulation.
If more currency is circulating around in the real economy but there are fewer goods and services available to purchase with said currency. Naturally prices of the goods and services will rise in order to meet or get demand under control. Once the supply of goods and services catches back up to the amount of currency then prices will naturally begin to fall. In a free market capitalist system these processes will always play out and resolve itself.
Things recovering naturally may be quick and easy. Also at the same time they could be long and hard. Regardless a natural process will allow for a reversion to the mean.
The price of money is simply the expression of value one has towards a specific good, service, resource or asset.
If something has a higher cost associated to it, naturally people believe it to have more value. Value though is subjective to each individual person. One may subscribe more or less value to certain things depending on their needs for it. Markets are complex systems that allow the price of things to reach a more objective value in terms of a broader range of people.
Sadly America does not exist in a true free market, capitalist, system anymore. We are much closer to that of a centrally planned economy controlled by big government. Who dishes out funds to big corporations and programs to fulfill their will or agenda.
With the help of The Federal Reserve Bank the government doesn't truly have any spending limits. The government can spend and whatever is not collected in taxes and the Fed will "print" to make up the difference. This dynamic creates a system that can quickly become over indebted.
Heavy amounts of debt can only be sustained through low interest rates. Naturally in a free market interest rates rise as an economy strengthens in order to meet the supply/demand fundamentals of goods and services but also currency. Rising rates also helps cleanse the system of all the junk that is unproductive because those entities cannot meet the cost of service on debt.
If there is no true limit to spending then in theory there is no true limit to debt. This idea is a fallacy because debt always has a burden attached to it.
A true free market works in mysterious ways that ultimately lead to maximum prosperity for everyone.
Currency is normally created by small/medium size (commercial banks) banks lending money into the economy. Whether it be mortgages or business loans when dollars are lent out new currency enters circulation. As loans/debt is paid back that supply of currency is brought back down.
In a healthy economy normalized interest rates helps keep this dynamic in check. If there is too much unproductive debt, rates rise to pay down that debt. If productivity isn't expanding enough rates may lower slightly to spur more expansion.
Fluctuating rates allows currency to have a price to it so it can be constrained when to much excess comes into existence. If the cost of capital is always cheap reasons for taking on debt can become more speculative and nefarious. Misallocated capital or resources will always end up hampering real growth potential over time.
An over indebted system can only be sustained through artificially low interest rates, which we've had since 2008. Low rates allow businesses and corporations to take out loans for the price of nothing. When the price of currency carries little barrowing risk the net result of the loans doesn't help increase productivity or the amounts of goods and services being produced. Most often these loans get recycled back into companies in the form of share buybacks or new stock offerings.
Financialization of the economy becomes the net result. We buy goods and services at cheap prices from other countries and export our dollars in exchange. Those countries and companies use those dollars to buy shares/equity in companies, financial markets or reinvest capital into their own economies.
Strengthening their net asset positions and economies at the expense of our own.
Foreigners buying up more assets comes at the expense of lower and middle income earners domestically. As capital flows in from outside sources prices go up. Real wages, however, for average income earners don't rise to meet the higher prices/valuations. Now average people are priced out of those same assets.
With government running ever increasing budget deficits, while giving UBI a spin in 2020.
Check out my post regarding Test Driving Universal Basic Income:
The amount of currency being throw into circulation has grown parabolically!
M1 shows the total currency supply as represented by currency or assets that are easily convertible to cash, most liquid. In 2020 we went parabolic, from around 4 trillion to 20 trillion dollars. That’s an increase of nearly 400%!
During which time interest rates were begged back to ZERO making currency essentially free.
Since 2020 have you had access to more goods and services? Have the quality of those things gone up in value? For me it is a hard NO.. I'm guessing most of you would agree with me.
The dollar has lost an immense amount of purchasing power since 2020. Even more over the last 120 years as government has gotten more involved in our economy.
Creating unnecessary rules and regulations, adding more social programs that are not fully funded, and slowly outsourcing our productive capacity to other countries. All these things have led to a decreasing standard of living as the dollar loses purchasing power.
CPI inflation, which measures the prices of goods/services that consumers are paying. As well as the literal definition of inflation which is the expansion of the "money" (currency) supply.
Both are being seen clearly now in 2022. Felt even more in everyday Americans wallets as they are able to buy less stuff for the same amount of dollars compared to in the past.
This is inflation!
Money must have costs associated with it. We are at a time in history when that cost is near zero. Investments in necessary parts of our economy has been neglected as a result.
Debt always has a cost to it which must be repaid. By taking on more debt in the near term you are only making the burden of paying it off in the future more painful.
Our political situation in the west will make it hard for governments to "default" on their debt obligations. Meaning currencies will continue to be devalued so interest payments on debt can be paid back with more currency that is worth less.
Rising inflation has created a problem in which a ZERO interest rate environment has become hard to manage. Consumers hate rising prices. If the FED raises interest rates to fight inflation then our debt burden becomes a bigger problem.
No one knows for sure what the end result will be. The probabilites are increasing that the dollar will be sacrificed in order to meet debt obligations.
Protecting one’s purchasing power is the single most important thing to be thinking about right now!
Watch what other Central Banks around the world are doing to protect themselves. What are they buying? What are they selling? Russia and China are both decreasing their holdings of U.S. Treasury Securities in exchange for gold.
Big players are betting on gold to provide a hedge. Historically precious metals have been a tremendous hedge against devaluation of currency. I believe this time will play out no different.
The time to prepare is now!
I am not a licensed financial advisor. Do not take anything I say or recommend as financial advice. These things are my opinions and represent how I am positioning myself. Always do your own due diligence and contact a licensed financial advisor before making investment decisions.