Your future economic well-being depends on hearing clearly the message today’s inflation rate has for you. Let us decode it for you in simple terms.
Throughout naval history, the blockade has been an effective means of warfare and subjugation. By keeping food and goods out, you apply pressure to those within. In 1774, for example, King George III deployed the world’s greatest navy to prevent “landing and discharging, loading or shipping, of goods, wares, and merchandise” in Boston. For months, other American colonies had to send food and goods to simply keep Bostonians alive. Britain used a similar tactic to try and starve the soldiers of Austria-Hungary during the First World War, then Germany got back at them with a blockade of their own in the next World War. There are, of course, hundreds of other examples one can cite.
Were you to stare out from the ports of Los Angeles or Long Beach right now–or at almost any time in recent months–you might have seen a sight not unlike the great blockades of military history.
At ports in California and around the world, long and towering ships have been lining up along coastlines like armadas. Like blockades, they have led to shortages for ordinary people.
The difference is that these ships are trying to get us our food and goods. They just can’t.
And it’s part of the reason why everything is getting so expensive right now.
What Causes Inflation
Delayed supply chains cause shortages. As everyone competes for fewer goods, the prices those goods command goes up.
According to the Bureau of Labor Statistics, prices have been rising at a rate of 5%+ annually for the last seven months. Maybe that doesn’t sound like much to you, but that’s a 5% price increase for everything–food, gas, holiday gifts, etc.
And the problem is only getting worse. The longer that prices keep rising, the more significant that rise will be, due to the simple effect of compounding. As an example, consider a $100 item that inflates 5% over five years:
After 1 year: $105
2 years: $110.25
3 years: $115.76
4 years: $121.55
5 years: $127.63
5 years, 28% more expensive.
The blockades of Los Angeles and Long Beach are merely one physical manifestation of why prices are rising. They’re one link in a long chain of macroeconomic factors, including but far from limited to:
- COVID shutdowns of mines, factories and government services in 2020
- Slow and uneven vaccination rollouts
- A severe shortage of truck drivers, longshoremen, and workers in general
- Record spending power among consumers
And then there’s the worst part of all.
What Exacerbates Inflation
When things get more expensive, you’d expect people to buy less of those things.
Often, the exact opposite is true.
Consider America’s worst ever inflation event, which occurred in and around the 1970s. It’s now referred to as “The Great Inflation.” At the peak of the crisis–from 1979 to 1981–prices were rising more than 10%–at one point, almost 15%–every year. Like today’s supply chain shortages, there were all kinds of troublesome macroeconomic factors contributing to The Great Inflation. But the factor that trumped all others was that, after a decade of high and rising prices, people started to expect more of it.
Just imagine yourself in 1979, for a moment. Every year, everything’s getting more expensive. What should you do? The answer is simple: buy whatever you can as soon as possible. But if everybody thinks like this, what happens? More and more people compete to buy more things than they otherwise would, and so the prices of those things rise even faster than they were already. It’s a self-fulfilling prophecy. Inflation on top of inflation.
And while the Great Inflation may be history, the phenomenon that drove it is rearing its head all over again. Perhaps you’ve experienced a bit of it yourself.
Since the beginning of the Coronavirus pandemic, housing prices in the United States haven’t risen by just a few percentage points, or even the 10%+ we saw during The Great Inflation. From March 2020 to today, they’re up around 25%.
To be clear, that’s not 25% in parts of America–not 25% in just New York, L.A. or Miami. According to the National Association of Realtors, prices are up in 99% of the country, with double digit inflation in 78% of all markets.
Like the supply chain shortages, and The Great Inflation, the current housing crisis is a result of many macroeconomic factors coming together. But a lot of the problem is that people expect home prices to keep rising. Major corporations think they can turn a profit in this environment, and so they’ve been buying up the available supply of homes and driving up prices. Prospective homeowners are watching their dream homes slip away, and so they’re incentivized to buy sooner and pay more than they might otherwise. As one New York Times reporter recently wrote: “In a housing market riddled with speculators, the only way [new homebuyers] can break in and compete is by acting like speculators themselves.”
This is inflation before your very eyes. It’s hard to imagine it ending well.
Can We Control Inflation?
As you can see, the inflation rate can rise very quickly, without warning, for reasons beyond anyone’s control.
But there are also causes of inflation that are perfectly controllable–intentional, even.
Whatever paper money you have in your wallet was distributed by a central bank. Like any organization that produces anything, that bank has control over how much product–money–they release onto the market. They might choose to create more of it, so that people have more of it to use, or less of it, to restrict how much people have. These are conscious decisions made by regular people during eight regularly scheduled meetings.
Often, the policies instituted by these bodies help to keep the inflation rate at healthy levels. But not always.
Take, for instance, what happened in March, 2020. As COVID-19 developed into a bona fide, worldwide pandemic, factories and stores shut down in all corners of the globe, causing economic activity to slow to a crawl. For central banks, the imperative was clear: get everything moving again.
In the United States, the Federal Reserve took two major actions to spur economic activity. First, they pursued aggressive quantitative easing. Between March and June, they manufactured three trillion dollars out of thin air, and used it to buy safe government bonds. The goal was to drive up the price of safe bonds, thereby encouraging investors to put their money into riskier stocks, and spurring bank lending with those lowering interest rates.
The second major action the Fed took was to reduce the reserve requirement for U.S. banks to zero. That meant that banks were allowed to completely empty out their vaults–like, every penny in your checking account, lended out to someone else. The motive of this policy was to encourage more lending and borrowing, to get businesses going again.
The result of these policies was significant. The economy began a recovery, and the stock market went from this…
With surging share prices and lower interest rates, businesses re-hired and even began expanding again. Unemployment declined, and, with their new jobs, Americans went out spending again. Wealthier Americans who hadn’t lost their jobs enjoyed returns on their stock and real estate holdings. In all, the money we’d been holding up during the worst of the pandemic was now flowing to restaurants, gifts and vacations. (NBC called it “revenge spending,” with the average person buying over $750 more this past summer than in the summer of 2020.)
And so, with more money chasing the same number of goods, prices started to tick up…
And it’s worth mentioning one more thing:
In the grand scheme of things, a 5% inflation rate is a small price to pay. The consequences of no intervention, during the worst economic shutdown in centuries, would’ve been far more dire.
But a 5% inflation rate affects different people differently, and some significantly. While wealthier Americans have enjoyed big gains for their businesses, investment portfolios, and home prices, Americans with lower-level jobs, who can only afford to rent and don’t have money to invest, haven’t experienced the same boost. Furthermore, because richer people tend to have more of their wealth tied up in assets (homes, investments, etc, which actually grow in value when prices rise) they’re less exposed to the declining value of money than poorer people.
Central banks can influence inflation to a great degree. Whether they should, and how, is up for debate.
The Bottom Line
So you see the problem. On one hand, money can become less valuable over time due to major, uncontrollable factors like pandemics and global supply chain disruptions. That’s just a distraction from the key message today’s inflation rate is telegraphing.
What you must capture, what today’s inflation rate is telling you is that, money loses its value due to entirely controllable, intentional decisions made by central bankers, for better or for worse.
It’s this second part–deliberately-induced inflation–that we’re going to focus on in this series. And, let’s call it what it is – currency debasement. Because, while it may seem inescapable that money is destined to devalue over time, that’s not necessarily true. There’s at least one currency that can’t experience runaway inflation, no matter what you do to it.
Continue reading here.