Posted On 10 Jan 2012
Inflation is a derivative of currency that is declining in monetary value (cf. Robert T Kiyosaki, Rich Dad’s Conspiracy of the Rich, p. 88). It’s a product of fiat currencies such as the U.S. dollar.
What’s causing it? Is it getting worse?
Government leaders fear deflation, which is its opposite. Since the way to dilute the value of the currency is debt, government leaders use debt to create inflation to forestall deflation.
Baby boomers like me have become so used to the incessant dilution of the dollar that it seems normal. In 2011 the dollar declined 10% in value measured against gold. That’s neither good nor normal. Let’s begin by understanding why.
Let’s suppose that both you and your neighbor are business owners. (Actually, since your household is a business, that’s probably true.)
Let’s also suppose that your neighbor has a very profitable business and that your own business is ailing. Might you not be attracted to begin doing whatever it is your neighbor is doing? Of course. Why not emulate those who are making a greater profit than you?
In simple terms, this explains why profits always tend to fall in capitalist (market) economies. Marx pointed this out a century and a half ago: it’s impossible in the long run for a business to perpetuate its profits much above its costs. This is why good business owners are relentlessly focused on growing their businesses.
Here’s an important analogy: a country’s economy is like a business in this respect. If it isn’t growing, it isn’t healthy.
It’s puzzled me for half a century why government leaders are not much more concerned about population growth. We’re at 7 billion and human population growth is expected to continue until at least 2065. I find this alarming! Why don’t they? The answer is that they have a fundamentally different perspective than I have. For example, I’ve already read economic thinkers who see the predicted population plateau later this century as a “monumental” problem because the number of potential consumers won’t always keep increasing! That’s how relentlessly (and absurdly!) focused on growth they are.
The problems with capitalist economies that Marx diagnosed remain with us today. The most important of those problems is how economic values pervert all other values. The relentless focus on growing (gaining, expanding) is a premier value of Becoming that obstructs Being.
Let’s, though, stay focused here on inflation.
Since inflation is incessantly eroding the value of our currency, either we must content ourselves with growing poorer or keep focusing on gaining more cash. If, like me, you don’t really like either option, you might want to eliminate inflation.
However, if you ran the U.S. government, you, too, might not want to eliminate (a modest level of) inflation because it fosters (a modest level of) economic growth.
It does foster economic growth, but there are a number of reasons why economic growth won’t continue.
Here’s a sufficient one. The economy is fueled by demand. (If you are not sure that’s true, I recommend Braudel’s great Civilization and Capitalism, 15th – 18th Century.) Why has the overall economy been booming for the past quarter century?
Two facts explain it. First, 70% of the demand in the U.S. economy comes from consumers. Second, that demand has been unusually high recently. Specifically, it’s come from us baby boomers, the 75+ million who make up the “generation” born between 1946 and about 1961, who were in their peak spending years.
However, not only are baby boomers beginning to retire, which would naturally create less economic demand, but also “homeowner equity values have dropped dramatically in the last 10 years” and, having been under pressure for over thirty years, “[a]djusted for inflation, income has been flat for over a decade” [Dent & Johnson, The Great Crash Ahead, pp. 187-190].
Wanting to sustain our styles of living despite unpleasant economic realities like these, we baby boomers have been taking on massive amounts of debt to support our consumption habits. Uh oh!
Now we boomers are, finally, reducing our rate of consumption. In fact, we are frantically trying to downsize and pay off debt in order to prepare for retirement. It’s good for us as individuals to decrease debt and to increase investments, but it’s not good for the economy because it diminishes growth.
That lowered demand means less spending, which means a slow but long-lived crisis for the economy as, year after year, more and more boomers cut back. All things being equal, if the largest group of citizens is paying off debt instead of consuming, the money supply will shrink. Less money in circulation means less growth. The next generation (GenX) isn’t large enough or affluent enough to make up the lost demand.
The addict, the economy, has gone into debt withdrawal. Deflation has begun. For example, home prices have recently declined by about one-third.
However, all things are not equal. Government leaders (especially the Fed) have been very busy pumping massive amounts of currency into the economy by printing more fiat currency and buying bonds. Why? They have been trying to create inflation.
Again, government leaders fear deflation. Since it will mean a massive decrease in affluence for millions and millions of people, they don’t want it. Since, in addition to words, their only important tool to fight deflation is inflation, they are using inflation to fight deflation.
They also fear too much inflation or hyperinflation. They want modest inflation, perhaps about 2 or 2 ½%. So their economic goals are (1) to avoid deflation and (2) to have some—but not too much—inflation.
The immediate crisis began in 2007. How’s the war against deflation going 5 years on?
Not well. The additional currency did inflate the prices of commodities, stocks, and junk bonds to rise at the cost of undermining the dollar and postponing the reckoning that is coming with respect to the impending private debt implosion (not to mention over one hundred trillion dollars in unfunded liabilities for popular government programs like Social Security and Medicare/Medicaid).
It is impossible to postpone deflation indefinitely without ruining the currency. That war cannot be won.
We are in a financial mess that is going to get a lot worse before it gets better.
(It’s our own fault. Who elected the government leaders? We did. My interest here is not making political points. It’s easy to blame both Republican and Democratic politicians. Instead of pointing at them, turn your finger around. We elected them.)
Forget assigning blame. There’s plenty to go around. That’s a losing strategy.
Instead, start thinking really hard about how to get out of this financial mess. Stop insisting that others fix whatever is wrong with your life; instead, think “if it is to be, it’s up to me.”
Ask: “What can I do?”
My answer: “Get your own balance sheet in order and then help others to do the same.”
How well does it work to tell someone else how to lose weight if you yourself are fat? Take care of yourself first, which will automatically show others what to do.
If you are middle class, it’s likely that your balance sheet is melting faster than Greenland’s ice. Since the middle class is disappearing, you need to choose to be relatively rich or poor.
Since I don’t want to be poor, I’m trying to educate myself with respect to money matters. (Writing these posts helps me to clarify my own thinking as well as, I hope, stimulate yours.)
A good place to begin is to start dealing more effectively with inflation. To do that, it helps to put inflation fighting in context:
There are five types of investments: businesses, [income producing] real estate, paper assets [stocks, mutual funds, bonds, savings, annuities, insurance], commodities, and gold & silver [traditional money].
It’s possible to stay ahead of inflation in any of the five. Why not pick one and master it? Then, since multiple streams of income are preferable to one, why not pick another and master it? If you have two significant revenue streams that are both staying ahead of inflation, you won’t be poor.
How? How do you beat inflation using these ways?
Simple: employ your greatest asset, which is your mind. (Ultimately, money is an idea anyway!)
Simple, though, is not easy. Furthermore, I don’t know what you should do.
What I can report are my initial steps.
First, I won’t make things worse by taking on any more consumer debt. If I want a better car or television and cannot afford a new one, either I’ll purchase a used one or save up to buy a new one.
Second, I’ve paid off my credit cards. When I’m tempted to use them in the future, I’ll refrain from using them unless I’m sure that I can pay them off completely at the end of the month.
Third, I’d like to eliminate all financial debt. I don’t have a second mortgage or line of credit on my house or a mortgage on a second house. Even though it has a low interest, long term, fixed rate note that is more than paid for by rents from the apartment building on the property, I’m working to retire the mortgage on my property. Once it’s retired, I’ll have shelter for the rest of my life as long as I keep up on the taxes, insurance, and maintenance (and the rental income will more than offset that).
Fourth, I’m continuing my financial education and planning additional investments. I’ve never paid much attention to money, and, since I don’t want to be impoverished, it’s better to learn now than after I start drooling.
If those steps makes sense to you and you are not already implementing them, you now have an initial plan. If you work your plan, your plan will work for you.
As always, I encourage your feedback and suggestions in the comment section below.