On Inflation

Why are prices rising so much recently?

Unless you’ve been living under a rock, you will have felt the pressure of constantly rising prices in most parts of the world recently - Inflation.

You might be aware that inflation is happening, but what do you think is the cause?

Well, Governments and Central Banks love to blame inflation on greedy consumers and businesses - for “demanding higher wages and raising prices”.

But the secret is - people only demand higher wages, and businesses only need to charge more in RESPONSE to Inflation - they aren’t a cause of it.

• If you look in a modern dictionary, inflation is simply defined as an increase in nominal prices, the “sticker price”.

• But if you look in a dictionary from 100 years ago, you’ll see that the original definition of inflation was “Expansion of the money supply”, and that’s what inflation really is

Expansion of the money supply is in the remit of Governments and Central Banks, but rather than taking responsibility for Inflation (which is the EFFECT of increasing the money supply) Governments and Central banks would rather blame you and your small business.

In fact, businesses are actually a shield against inflation - no business wants to lose customers, so businesses tend to try and avoid raising their prices to customers as long as possible - but when Inflation is caused by monetary expansion and the cost of time and materials go up, then businesses get squeezed, making smaller and smaller margins, and then raising prices is often the last resort when all other options have been exhausted.

So why are we seeing so much inflation now? Well, Governments and Central Banks around the world during COVID generally made the decision to “print money” and pay people to stay home with wage subsidies and the likes, rather than have people resist staying home. It was a treat with a poison core.

The problem is, Governments and Central Banks don’t actually have any money - they’re all broke - they only have what they take from one man and give to another, and Inflation is simply a way of re-distributing wealth - that none of us voted for.

if you have a fixed amount of “stuff”, then if you double money supply, eventually everything will cost twice as much. But no value has actually been created.

And…the problem is that Governments tend to do a terrible job of re-distributing wealth, and often line the pockets of the politicians while they are at it

In New Zealand, our National debt went from about $60 Billion to $180 Billion under Labour in the 3 years over Covid. The trouble is that only $20 Billion was ever paid out in Subsidies. So $120 Billion of money was created, $100 Billion disappeared somewhere, but Kiwis only received $20 Billion in their hand.

Unfortunately all this debt, and the money created, will be a burden on New Zealand for a decade or more, and I suspect most of the money was spent unwisely. Ordinary kiwis will have to pay for the stimulus, but didn’t receive much benefit from it.

Now, Interest rates are different from Inflation and expansion of the money supply, however they do go hand-in-hand.

Central banks around the world lowered interest rates during COVID to make it easier for everyone, but how they are reversing course, and massively increasing interest rates to pay for all the additional debt and money that was created. And as I’ve said, Governments tend to do a terrible job with re-distributing wealth, and often into the pockets of Politicians in power at the time.

Personally, I think that interest rates should have been kept steady all through COVID, rather than the population getting drunk on cheap money, and then bankrupted in the aftermath.

Often times, the people that do the best when Interest rates swing wildly are the super-rich, as they can buy up assets when interest rates go up (and asset prices fall as people get squeezed), and then they can make money when interest rates come down again.

Inflation is not a benefit to the common man. Banks have a “target rate” of 2% Inflation, but that’s not good for the average man, that just allows a central bank to take 100% of the value of your money every 50 years, and it’s about the amount of inflation that people won’t notice.

When the US was founded, Money was literally defined as “Pieces of Gold and Silver”. and 1 US dollar equalled 1 Ounce of Silver (a Silver Dollar), and 20 Dollars was one once of gold. The USA had zero inflation from its founding in 1776 until 1913 when the Federal Reserve was created. And the fastest rate of economic growth for the USA was in that period. In fact, a growing economy causes price deflation - things getting cheaper! which is GOOD for consumers - in the same way that a Flat-Screen plasma TV used to cost $25,000 when they first came out, economic growth and progress means that those TV’s are now less than $500.

Of course, when Central Banks and Governments tinker too much, sometimes they create a problem that can’t be solved, and this is where you can end up with HYPER Inflation, where the public loses all faith in the monetary system, and then prices continue to go up and up out of control.

In fact, Hyper Inflation has happened to pretty much every Fiat (non gold backed) currency on a long enough time-frame.

Since the creation of the Federal Reserve in 1913, the US dollar has lost 99% of it’s purchasing power, and over the next few years, may well lose another 99% more.

Governments don’t actually have any money, and they can only get money from the people via three ways:

1. Taxes

2. Debt

3. Causing Inflation

Governments generally love option 3 the most as it’s a “stealth tax” that the people don’t understand and usually don’t protest against. Unfortunately for New Zealand (and the USA) things are now so bad that we’re looking at higher taxes, huge government debt and inflation all at the same time.

With money printing out of control all around the world, I personally think New Zealand (where I live), could do really well by returning to sound money - gold backed currency - and I believe that this would usher in a new age of economic stability and prosperity for the country. However, politicians won’t like it as then they’d actually have to balance their books and control spending for real, the way the rest of us do.