Last week’s Fortune & Freedom generated a thread of reader mail which it didn’t ask for. By which I mean that many of you responded with the same thoughts about inflation, even though I hadn’t prompted you. That’s the sort of thing that gets reported to Nigel Farage and our publisher Paolo Cabrelli, because it tells us what we should be writing about. And now, I’m letting those subscribers who wrote in to report to you too…
One of the great challenges when warning about inflation is explaining how it matters. I mean, if prices go up, what does that really do? Is it necessarily bad?
The economists’ answer is that it interferes with economic calculation and imposes things called “menu costs”. Which is typically vague.
Economic calculation is the idea that, to invest in a project, and make similar financial decisions, people need information about the future. Uncertainty about the value of money reduces the reliability of that information, and so less economic activity happens.
Blackboards with prices written in chalk are how butchers used to minimise menu costs – the costs of dealing with constantly changing prices.
Anyway, the point is that our readers did a better job than economists (and financial newsletter writers) ever could of explaining how inflation mucks up our lives…
Your pieces this week have been interesting and have “fleshed out the bones” of my own thoughts – thoughts that have been influenced by the likes of yourself, John Butler, Eoin Tracey and in the wider Southbank World, Bill Bonner and his team.
To understand the impact of inflation, like Bill and John, I believe one needs to correlate the fiat price of goods with their weight in gold. This simple check shows how the average person has not grown any wealthier in decades (they might have accumulated items like houses and cars but their earnings have failed to keep pace with inflation).
Someone – probably in the Southbank Stable – recently posted a statement that the British £ is now worth less that 1% of it’s value when The Bank Of England was created (done to finance British wars).
My experience shows this is very credible as I was born in the first half of the last century and, when I first started buying petrol (1965) it cost less than £0.25 per gallon – or just over 5p per litre. Today’s price for a lower octane rating fuel is around £1.50 per litre, a 28-fold increase.
My first house, bought in 1972, cost £4,200. The same house was for sale in November last at £245,000 – a 58x increase.
Obviously some of those increases are down to the inexorable rise in taxation and our burgeoning population (56m in 1972, 67M today, causing a hike in land prices), but much is down to currency devaluation vs the US$ by political edict (Wilson, Callaghan), BoE money printing and the devaluation of the US$ following Nixon’s move away from The Gold Standard (oil being priced in US$) before he was impeached. Gold in 1970 was around $290, today it is $1826 per ounce. 1 GBP£ bought US$ 2.24 in 1970, today, it buys $1.21.
Who would (should, could) trust a politician? It seems to me common sense to follow the advice of John and Bill’s team and hold your assets in a way that limits all governments’ propensity to steal and devalue your savings – gold or silver.
I deliberately excluded Cryptos as, although I own some, I see CBDC’s as a way to ultimately block such alternatives and yes, I know a certain US President made holding gold illegal around 100 years back!
The greater sadness for me is the impact of all these financial shenanigans on my grandchildren. What sort of a world are we (and our leaders) creating for them to inherit?
Ironically, inheritances suffer disproportionately from inflation, especially in the UK, where they are taxed.
The genius of inflation is that the young don’t perceive it until it’s in their interest to perpetuate it – when they have a mortgage. It’s only later in life that you realise just how devalued money has become with comparisons like T.D.’s.
Enjoy your column as you do understand what you are talking about.
Here is a thought for you which you have my permission to use.
In 1966 I was broke and living in a caravan with my mother. My desire was to be well off instead as I did not enjoy being skint. I have worked long, hard and taken risks over many years and totting up my assets I am around a millionaire.
Then the realisation that Governments of all colours have depreciated my currency and in reality my wealth is an illusion as £1,000,000 is now worth approximately £10,000.
Perhaps I should have stayed in my council house when I had one and not bothered.
J.H. presents the choice as a dichotomy. The question is how much less people are working because their wealth is diluted. How much less do they invest because their returns will be taxed without considering inflation? And so on…
This reader points out how important inflation assumptions are to investment decisions:
I am a freelance oil and gas project economist and international oil and gas tax regime reviewer/designer.
In connection with oil and gas economic modelling I advise a client consultancy on the long-term US inflation rate they should use.
For a long time I have advocated 2.5% p.a., based on the long term geometrical (compound interest-style) average of annual increases in the US GDP deflator. I just did a single calculation, based I think on the earliest and latest data points in the series.
My client recently asked me to review my advice. I could not find any data more than 3 years old on the US GDP deflator so used US CPI instead and came up with the attached analysis. This looks at calendar decades, multi-decade periods and some periods also including the last 3 years.
The impact of the OPEC quadrupling and doubling of the oil price in 1973 and 1980 respectively are clear to see, but not the impact of oil price collapses in 1986, 1990 and 2014. Stickiness there.
There is only one decade in which the Federal Reserve achieved (or should I say was hit by?) inflation of less than 2% p.a.
I advised my client that 2.5% p.a. remained the best long term assumption.
Budgeting for 2.5% inflation and then facing severalfold that amount in practice, and double that amount again in terms of producer price inflation, completely undermines the economic case for many investments. Especially those that have huge upfront costs which must be financed.
I wonder what those might be…? You’ll find out soon, as part of our upcoming series on energy. As will the prime minister…
Of course, the real cause behind all this inflation is the curse of fiat money. And so I give you, the Ode to Fiat Money by kind and talented subscriber Rob:
The bell is tolling the end of a financial era
The writing it is clearly on the wall
Our systems end is ever coming nearer
Great instruments and institutions they will fall
Peace has reigned for three quarters of a century
But have the western rulers lost their sense of reason?
Can you abandon prudence and borrow with impunity?
Will it not all end with a reckoning season?
Banking giants they were ever in two streams
The cautious stream was for the man in the street
The speculation leg it served investment dreams
But the Governments said ‘let these two streams meet!’
So merge they did and one they soon became
The smart investment bankers seized their chance
Ah now the everyday man we can now tame
And soon all enjoyed a property investment avalanche
A housing bubble soon was on its way
The populace they invested gleefully
Clever bankers they had finally made their day
Don’t worry – rising prices they will pay, silly!
But as we know these bubbles always burst
And burst it did not unexpectedly
Governments extended a protected arm of trust
But only to the bankers, inevitably
So Governments they avoided making a correction
The banks they failed to put the matter straight
Money printing; yes that is the right direction
The man in the street? He’d just have to wait
The money printing for Governments didn’t matter
Whilst the value of the pound did steadily fall
Interest rates? You must be mad you hatter?
Can’t you see that there is no return at all
To some extent their was some compensations
Foreign goods they were brought in by the score
So stuff stopped being made within these western nations
Stop worrying, stop worrying don’t be a bore!
Cheap, it’s cheap so fill your pockets
Buy it, chuck it or sell it on ebay
The tips are full of lots of castaway products
And the rubbish it is sent to places far away
So on we went with the debt becoming larger
The nations of the world they were in debt
Go quick, go quick, print the money faster
Us Governments and bankers we’ve made a clever bet
Then along came a pestilence it had to be controlled
Lock down, lock down, keep the plague at bay
Don’t worry about your wages you’re all bankrolled
We’ll run the money printing presses and so fulfil your pay
And so the debt it ballooned to even larger
But surely this was ever justified
Tell me what other kind of wager
Would keep the population satisfied?
Now the leader of a proud nation he had become aggrieved
The shrinking of his Empire he wouldn’t contemplate
He threatened outright conquest unless he was appeased
So he marched his armies into the neighbouring state
And so began a dangerous war with deaths on either side
Fuel supplies, grain and more became in short supply
The dependent nations had to trade far and wide
Of course with short supplies high prices did soon apply
But don’t worry, don’t worry people of the nations
Your Governments have your backs, you knave
They will hurry quickly to the money printing stations
And the people will be grateful because the leaders gave
So here we are in the fiat money system
It’s fiat money, it’s free, it’s no longer tied to gold
Just print the money – nothing’s going to bust them
Faster, faster don’t let that ink get cold
Monopoly is a well known game of fame
You musn’t overspend – proceed with caution
Run out of money and you will lose the game
It’s logical and tactical you rarely lose by notion
But if in Monopoly we all changed the rules
Don’t worry just spend with gay abandon
Look – an unlimited supply of money now you fools
So just print new money and spend into oblivion
So print and print – but we’re running out of paper!
And we just can’t grow the paper fast enough
But digital currencies will do us all a favour
Now they’ve really got you in the buff!
Now it’s digital they see whose swimming naked!
Your broke they’re not interested in you
But they also see all those of you with assets
Don’t worry you’ll soon be naked too
Editor, Fortune & Freedom