Let’s talk about this.
What is economic inflation?
We hear this term thrown around constantly nowadays. What is economic inflation anyways? I am here to demystify this confusing topic and make inflation more understandable.
Definition of economic inflation
Inflation is a decrease in the purchasing power of your money, ultimately creating a general increase in the prices of goods and services in an economy. #inflation2022
As we are seeing right now, economic inflation is rising, wages are not increasing, and people cannot afford many things. (Food, housing, fuel, medicine, etc…) When you add huge taxes on top of inflation then making an honest income gets harder and harder for the lower and middle class. The prices of production are up causing an increase in everything from car parts to apples. There is a complete imbalance in the economic system and this is bad for the poor and middle class.
The very wealthy are not losing much sleep.
Here is a sampling of some famous “not quite” trillionaires (just for fun)
- Jakob Fugger – $0.4 trillion
- Rothschilds – $0.4 trillion
- Rockefeller – $0.35 trillion
- Andrew Carnegie – $0.30 trillion
- Nicholas Romanov -$0.30 trillion
- William de Warenne -$0.22 trillion
- Osman Ali Khan – $0.23 trillion
- Henry Ford -$0.20 trillion
- Gaddafi – $0.20 trillion
- Jeff Bezos – $0.17 trillion
- Elon Musk -$0.20 trillion
- Bill Gates -$0.14 trillion
- Donald Trump -$0.003 trillion
Inflation around the world (according to Trading Economics)
Have a look at these statistics! Turkey is at 79.6% inflation. Wow!
Does inflation impact the rich and poor equally?
Does inflation impact the rich? The answer is not really. When the average wage earner loses money, that lost money moves up the line. The result is that wealth continues to concentrate in the hands of fewer and fewer people. This causes inflation to hurt the lower income earners but enrich the higher income earners.
Canadian wages and inflation rates 1980-present
|Year||Avg. yearly wage (high school grad)||Inflation Rate(annual)||Cost of a 2 bedroom home(double in major cities)||Cost of avg. car||Cost of loaf of bread||Avg. litre Canadian|
|2021||$54,600||7.6% and climbing!||$713,000||$38,400||$3.00||$1.45!($5.80) and climbing!|
If you get a minute, have a look at this interesting site called Illustrative Mathematics. It shows you math in a visual context. I love nerding out on stats.
What is corporate concentration?
Corporate concentration is the term used to explain how huge companies are impacting inflation and that it is actually driven by these large monopolies. Some analyzers say 25% of inflation is caused by large corporations.
Top companies in the world that affect our economy more than they should
Since 2014, the top revenue earner in the world has been Walmart. Coming in third is Amazon. Apple holds the fifth position. You can see that the popularity of these 3 companies and their products keeps them at the top of the pyramid.
Advertisers concentrate on building “forever loyal customers” to continue their growth. If you have the IPhone 10, and the 11 comes out, you may be more likely to purchase. It makes it difficult for mom and pop businesses to compete with their own products when HUGE companies have a stronghold on the economy.
Monopolies and why they destroy small business
What is a monopoly? It isn’t just a frustrating board game. A monopoly is a business or family in complete control of a trade or service. A great example is this one- starting in 2016, China started liberalizing its nearly 2,600-year-old monopoly on table salt—this will finally open up the world’s oldest monopoly to competition. As of this writing, China National Salt Industry Corporation is the only entity allowed to sell table salt in China.
The monopolizing of an entire industry is a huge problem for smaller companies. Even if you gain favor, you will never catch up to these giants. Another huge conglomerate that manipulated the numbers to gain such a huge portion of an industry is DeBeers Diamonds. Investopedia states that In the 2004 U.S. Department of Justice vs. De Beers case, De Beers plead guilty to conspiring to fix industrial diamond prices and was ordered to pay $10 million. 10 million dollars to DeBeers is like giving up a nickel. Nothing.
The History of Money and Economic Inflation
Before money was created, goods and services were bartered. Anything that could be grown or produced was used for trade among different civilizations.
As far back as 5000 years ago, the shekel was the first known currency. It was created by the Mesopotamians.
The first metal money dates back to 118 BC to 618 AD. These coins were made from stamped pieces of valuable metal, such as bronze and copper. The yuanbao is a small metal ingot that was used in ancient China as currency. Being made out of silver or gold, the value was determined by weight in taels, which is a weight measurement, part of the Chinese system of weights and currency.
Sometime, around the year 217 BC, due to the economic problems caused by the Fourth Syrian War, the king of Egypt, Ptolemy IV (ruled 221-204 BC), devalued the currency in an attempt to recoup some of the costs of pursuing the war. Ptolemy IV changed the unit of currency in Egypt from the silver drachma to the copper drachma. The king hoped that by doing so he would be able to recover the silver coins that were currently in circulation, which he would then use to pay for the war debts.
By the middle of the third century BC, aes grave became the standard regional currency. These new coins were cast in several denominations (as, semis, triens, quadrans, and uncia), each with its own particular design and denoted with respective marks of value. The primary difference between Roman currency and that of today, is that Roman coins were literally worth their weight in silver, bronze, or copper.
These coins were not “backed” by gold reserves as has been the case in modern systems, nor did consumer confidence decide their value as it does today. In a fiscally responsible government, as was the case throughout most of Roman history, the system worked well, but once corruption set in, the system was easy to exploit. The unfortunate fall of the economy in Rome was due to the “Antonine” plague (which annihilated 5 million people and the economic structure).
Today we create paper or fiat currency that at one time was based on the gold standard. Nowadays, paper money is created (by the Federal Reserve in the US) out of thin air. There is no physical gold backing our money today. This has us in trillions of dollars of debt. We cannot keep printing money without backing it up with something tangible like gold. It truly is a mess.
The Types of Economic Inflation
Demand pull inflation : this is an imbalance in aggregate supply and demand.
Cost-push inflation: this means a decline in the supply of goods and services and demand remains unchanged or even grows, driving prices and inflation higher
Stagflation: In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment. Wikipedia
What can we (the people) do about economic inflation?
Stay invested, avoid being in cash or short-term cashable investments. More specifically, own stocks in your portfolio that have strong balance sheets, cashflow/profit growth, and pricing power. This will drive dividends and share prices to grow.
Own real estate as it can be a great hedge. if you own rental real estate, you may get rising rents in an inflationary environment. That ability to increase your future cash flow gives you an inflation hedge on your cost of living.
Lock in the price of your expenses and avoid acquiring things with disruptions to supply that are causing a temporary spike in prices. Fixing the interest rate on your liabilities is a good way to hedge because you are no longer subject to rising expenses.
Inflation has been around for a very long time and I don’t think it will be going anywhere soon. The kings, empires and corporations at the top will most definitely make sure of that. I hope I helped answer the question “What is economic inflation?” I suggest doing further research on this topic if you find it interesting. The more I researched, the more I realized that there are things we can do to buffer inflation and protect ourselves.
Our family decided that one way to protect ourselves from the rapid increase of inflation is to minimize our debt and increase our assets. We like cryptocurrency and tangible silver. It really takes balance to make sure you have adequate income from more than one source and to keep your taxes as low as possible. It’s tough but as we have seen in the past, all civilizations have dealt with the rise and fall of entire empires due to inflation. Let’s do our part to help beat it.
If we can stay above water while we go through this tumultuous time, that is all we can do. Take care friends. Shannon