and what you can do about it
Inflation is now at a 40 year high in most developed countries, US and Canada in particular. The inflation rate for these countries is 8.5% and 5.7% respectively. But these are the official inflation numbers.
Unofficially, I’d say we’re fucked. Let me explain why.
The Problem with CPI
CPI is a single number that attempts to capture an average rise in the cost of “a basket of consumer goods” over a period of time. This includes iPhones, housing materials, clothing, food, cleaning products, etc.
According to a professor of economics, Connel Fullenkamp there are “an infinite number of ways of calculating CPI and none of them are perfect”.
This is just to say that how the number is calculated has some amount of subjectivity built into it. That, and the prospects of accurately capturing the price fluctuations of all goods in society in a single number is a combinatorics problem of massive proportion.
I find it to be an exercise of hubris to think that we can measure the average rise in the cost of goods and then use that number to guide our monetary policy and political decisions.
Quite frankly, it terrifies me that this is the reality.
But, let’s give our Harvard educated economic experts the benefit of the doubt and assume that this number is “correct” for a moment. What does 8.5% inflation mean?
It means that in 6 years your cash will have lost 50% of its purchasing power
It means that your bonds yielding you 5% per annum are netting you -3.5%
It means that if you’re not making 8.5% more every single year, you’re making less than the previous year
It means that in order for your savings to not be diminishing, they have to be growing at a pace greater than 8.5% per year
So even if we take a faulty calculation at face value, the picture looks pretty dismal for the average citizen of a country wherein the currency is inflating. Especially when we take a closer look at other economic phenomenon taking place.
Homes and Equity as a Store of Value
The store of value function of money is broken. This is because our money is inflationary, which brings down the purchasing power of money over time.
Since the currencies of our countries are bad stores of value, people who are “in the know” must search elsewhere to preserve their purchasing power and beat inflation. They turn to houses and equity.
So again, while the official inflation rate for the United States is 8.5%, I would argue that inflation is showing up in assets such as real estate and equity markets.
Did the value of homes really increase 18% in 2021? Or are people with money just searching for more lucrative ways of parking their cash?
Did the S&P500 companies really generate 26.9% more value for investors? Or are hedge fund managers simply seeing that there is no better place to park cash for their investors, than in the stock market?
Assets aren’t going up solely because these companies are creating more value. They are going up as a side effect of there being more money with which those assets can be valued.
A higher valuation is a side effect of there being more money in circulation.
You see, the valuation of equities and homes are not included in the calculation of CPI. If it were, then we would likely see a more accurate representation of inflation in our society.
Inflation might be 8.5%, and people might be lucky enough to beat it. But for young people trying to buy their first home, they have to increase their buying power by more than 18%-20% in order buy a house.
The other way that people can buy a home is by securing a lower interest rate from the bank in light of higher prices.
Interest Rates & Inflation
For the last two years, the interest rate in America and Canada has been 0.25%. It is now raising to 0.5% and 1% respectively.
First time home buyers that bought a house in the last two years can expect their interest payments on the house to increase in the near to medium term.
If they have a fixed-rate mortgage, then the interest payment is locked in. But when it comes time to renegotiate the interest rate on the mortgage, home buyers may be in for a surprise.
Flexible rate mortgage owners might have a bumpy road ahead. Interest rates just increased by a substantial amount (0.5%-0.75% is historically a lot).
The interest rate conundrum
Let me describe the pickle that we’re currently in.
Central banks have to raise interest rates when inflation is high. This is the mechanism through which they keep inflation “under control”.
If they don’t raise interest rates, then it could lead to decreased trust in the currency and an out of control hyper inflationary event. But raising interest rates means making people’s mortgages and debt payments more expensive.
For some amount of people, this means that they will no longer be able to afford their mortgage.
The government has three options as a result of increasing interest rates.
Bail out home owners (by printing more money, thus reducing the interest rate and increasing inflation)
Let people default on their debts —> causing the banks to foreclose on home owners —> causing the banks to fail —> which will prompt the government to bail out the banks (by printing more money, thus reducing the interest rate and increasing inflation)
Let the home owners default on their debts. Let the banks default on their debts. Let the economy crash into a depression. (historically people pile into hard money in events like this).
The scenario that is most likely is #2 because this is exactly what happened in 2008.
But the scenario that is inevitable regardless of what we do in the short term is #3.
Inflation as a Result of Central Planning
The economists running our central banks believe that they can plan and control the economy. I think this is a bad thing for the administrators of a financial system to convince themselves.
In every scenario wherein the government and/or central banks of a country have tried to centrally plan and control the money supply, they’ve failed.
I see absolutely no reason why the monetary systems of today would be an exception to this historical rule.
We must not trick ourselves into thinking that we are enlightened masters of our economies in the year 2022. We are still subject to faults, failure, greed, and manipulation of the money supply for personal gain.
I see the historical precedent as evidence that the economic paradigm that we’re all living inside of will one day come to an end.
Inflation is not something central planning can control.
Inflation is a result of central planning.
What to do about inflation?
If you’re invested in assets then you’re already doing the right thing.
If you’re invested in gold then you’re probably better off than someone with assets.
If you’re buying bitcoin, then I think that you will come out on top after this crash takes place.
At this point and time, there is really nothing that can be done to reverse the course. The best thing you can do to prepare for the future is to figure out the best way to get through whatever this crash might look like.
I’ve said this before and I’ll say it again. It is not if it will happen, it is when. I surmise that we will endure several more episodes of significant quantitive easing as a result of would-be economic disasters.
Despite what a modern monetary theorist (people running our economy) might tell you, there is a limit to how much money a government can print. Ten minutes in a historical economic textbook will tell you this.
What I am doing about inflation
I’ve decided to take a number of actions that I think will best prepare me and my family for the coming hardships.
I’m not buying a house. If anything, I will try to build one in the next few years.
I am investing in emergency food supplies as economic collapse can often result in significantly disrupted supply chains (which we’re already seeing today).
I am buying bitcoin every day as I hypothesize that it will receive a massive amount of attention as people/investors/money managers search for the hardest asset to store value when the crash begins.
I will continue to take on more debt as I don’t see there being a day where I’ll actually need to pay it back. In the event that the economy actually crashes, it could result in an all-out debt jubilee. The more debt I have today and the more I build up infrastructure and assets, the better off I will be later.
A Note on Debt
By taking a $50,000 loan today, the interest payment might be 8%. But the value of the money/debt is decreasing rapidly. It is easier for me to pay down a $50k loan 1 year from now than paying it all back today.
Considering a 8.5% interest rate, I’ll only need $49,750 worth of money/time/effort to pay back my $50,000 loan. In other words the real interest rate of a loan at 8% is within an environment of 8.5% inflation, which is -0.5%. I’ll happily take on more debt.
A Note on Bitcoin
The way to beat inflation is by buying the hardest asset in the world; Bitcoin.
There are other things you can buy that’ll likely set you up equally as well; land or real estate are two of them. I would argue that these are already hyper-inflated as the public is already using them as their primary stores of value.
Most of the world has not caught on to using bitcoin as a store of value which leads me to believe that Bitcoin is significantly undervalued at $40k USD per BTC.
Once the world begins to understand that Bitcoin is harder than equites, gold, land, and real estate there could be a FOMO induced run up in the price of bitcoin the likes of which the world has never seen.
A Note on Responsibility
I feel a deep sense of responsibility for both
Spreading this information in the hopes that my readers are able to prepare themselves better for the future
Giving my readers a leg up in the aftermath of economic hardship so that they can help others
I hypothesize that bitcoiners will be amongst the wealthiest individuals living on the planet after the world establishes a new economic order.
I would argue that with this wealth comes a massive amount of responsibility to do good in the world. While not true across the board, I would argue that a certain percentage of the class of wealthy individuals are squandering their position of financial privilege.
It is my intention to do the same if this situation is to come true. I expect me, my friends, my family, and you to hold me accountable to my words.