Some important facts to remember about our current inflation

So I have talked about it on my blog and it is the next boogie man to present itself which is great news for institutional media. They have to have something to scare you with, Trump is gone, Covid is clearing up (WATCH OUT FOR VAIRANTS!!!!!) and there are no wars so we get inflation. Should you be concerned about inflation? Yes, on a scale of 1-10? 3 -4. Inflation kills economies over the long term if (a big if) wages stagnate. If inflation is 3% annual and wages increase 2.5% annual your net to consumer is .5%. In one year that’s survivable. Over 10 years? That’s a problem.

Here are a couple of quick facts to remember about the current inflation situation in the U.S.

  1. The Economy was forced to slow down: We can argue why Walmart was open but local store X wasn’t, or why healthy people were precluded from doing what they want. We can’t argue that government closures and shutdowns due to covid had an adverse effect on production.
  2. Production decreased due to Item 1: Less cars were made, saw mills didn’t produce boards, ammunition production was decreased. And on and on…. The shutdown created a negative production situation as demand did not decrease concurrently due to government stimulus.
  3. Money still flowed: Yes, many people lost their jobs, but government printed money to subsidize those losses. So you had some money, or the same (maybe you worked from home) but you had less places to spend that money.
Maybe Bitcoin is the answer?

So what you have is companies forced to close and the economy slowed. This wasn’t part of the natural business cycle. As a result, less goods were produced, and people lost work, and government printed more money to get to those people. It’s the perfect scenario for short term inflation. Want another example? More people are on the roads now that things have opened up, gas prices go up. Why? Because refining gas was slowed during the pandemic because people weren’t traveling.

Again these are all short to mid-term issues which should begin to clear in the “new normal” my guess is by the start of the 4th qtr. (10.1.21) at the latest. Now anything can happen from now until then. A war, another pandemic, a massive oil spill, political upheaval so there are no guarantees. That said the underlying driver of capitalism is still very powerful, supply and demand. I want something, you have it we make a deal.

Inflation is the new boogey man, many of my younger readers have never experienced it or have read about it in the abstract in places like Venezuela or Liberia. It’s highly unlikely that, that kind of long term sustained inflation hits western economies because of supply and demand inherent in capitalism. Could it happen? Yes, if one of the 3 items on my list continues to happen, even in small doses. Don’t be pulled into the fear mongering, it is a click driver and most rational people can see that. Inflation is here yes, is the world ending because of it? No

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Stimulus & Economics: Some basics & things to ponder

Yes, we are doing a finance piece today. As with every finance piece I try and do a disclaimer. This blog and this post are my opinions based on years of working in the finance industry. These are not meant to be financial advice but rather a perspective on what is happening in the finance world. Before making any financial decision consult several sources to make an informed decision.

We know that there is another round of stimulus on the way if you live in the U.S. “Trillions” a number that is thrown around a lot. Going to let you in on a little secret, there isn’t a warehouse full of trillions of dollars waiting to back up the stimulus. For lack of a better term, all of these transactions are “numbers on a screen”. As an example, you may have 10K in your checking account. The bank does not have 10K cash sitting in their vault with your name on it.

Cold Brew Ice Coffee, A great stimulus!

What does stimulus do? It provides money so people can spend it and stimulate the economy. You buy a happy meal at McDonald’s. Someone has to get it ready for you, someone has to make the ingredients, someone has to make the container for the fries… you get the point. That is stimulus at its heart. It’s not just giving you money, it’s the residual effect of what happens when you spend that money and how many people are affected by it.

The down side? The value of money decreases. Its simple supply and demand right? The government through stimulus is increasing supply. At some point there will be so much money floating around that it takes more to buy a product. If everyone has more money, why would someone who produces a product not raise the price? Not only that but the cost to obtain money, interest rates, have been very low for years (decades). So what does this mean? It means that the more money that goes into the economy (even electronically) the less valuable it is.

Why are antiques worth so much? Because there are fewer and fewer of them every year. Did you try and get a new gaming console this year? Hard to find right? And the price if you did find one, oof. Want a ticket to a football game? Not cheap right. You get the point, the less of something there is the more valuable it becomes due to demand.

What does this mean for us? First the short term effect is positive people get cash and can spend it now and then give that money to someone else. That is the best outcome of stimulus and it absolutely works. Sustained stimulus (2,3,4 checks) this is problematic because its necessary due to an artificial condition. Demand is there, but supply of goods and services are reduced due to the pandemic. So more money pours into the economy to keep people afloat.

What happens when things get back to the new normal and people are vaccinated? The money doesn’t go away it’s still out there, so you get inflation. For many of you under 30 you’ve never really experienced severe inflation. Prices go up, income stays the same. It’s very simple, the more of something that exists (material items) the less valuable it becomes, that includes money.

Always be mindful of your personal economy. 30 mins a week minimum you should invest in your budget, savings, investments, spending habits. Become an expert in your personal economy, make sure you are financially educated in how you handle money. The world will carry on, the economy will wax and wane. Things have been good for a while now, even with a pandemic and decades of government spending inflation remains at bay for now.

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