Inflation – The Hole in the Bucket

In one of the past posts I said we’d address the problem of inflation. Somehow, every time we looked for solutions to different problems, we kept running into the problem of money. We said we can’t grow incomes fast enough, because productivity can’t be grown fast enough either.

So how do we address the money problem? Well, another way to visualize the situation is to imagine a big bucket of water, and inflation is a small hole in that bucket. Normally the hole is just big enough to let you lose about 2 to 3% of the total water in the bucket per year. At least that’s the target of central banks. They apparently consider that losing 2 euros a year for every 100 euros you hold is an acceptable rate. I don’t! I think it’s daylight robbery, but hey, who takes me into account?

This hole in the bucket has more fundamental problems that need to be understood individually before we even try to solve the bigger issue. First of all, even though the hole allows a 2% loss per year under optimal conditions, most of the time we’re not dealing with optimal conditions, and there are periods, like right now, where inflation runs 3 to 5%.

So right off the bat, the yearly loss is variable, and most of the time it’s unfavorably variable. Most of the time governments target 2% inflation and end up with 4% real inflation. When was the last time someone announced a 2% inflation target and suddenly woke up to 0.5% inflation, completely caught off guard?

Right?

And if that were possible, let’s imagine what would happen. Governments would go through a phase of cutting costs and reducing spending, and the moment they saw hyper-efficiency, they’d think they’d cut too much, and immediately change course and increase spending again.

The problem with this extra money spent by governments is that it’s rarely felt by, or in the interest of, the population. It can very easily be spent in a completely stupid direction. Just look at the American economy right now because of Trump. The pointless spending that’s happening, which instantly fuels inflation. And what’s the purpose of that inflation? To feed into another inflation caused by an oil crisis. So American inflation trying to trigger global inflation. Trump really is the Bankrupter in Chief! It’s so obvious he doesn’t have the faintest idea about business, it’s clear why he went bankrupt with everything he ever had, and the only way he knows how to make money is through shady means. Just look at how he’s trying to pay damages to himself.

If future generations want to learn something about finance and business, Trump is the perfect negative role model. From him you can learn a lot about how not to run a business. After all, we need positive examples and negative examples too.

Back to inflation…

So we see that one problem is the variability we can’t control. The second problem is the visualization I used. If you imagine a 10-liter bucket with a hole in it, the tendency is to think that if we scale the bucket up 10 times, we’d use the same hole diameter. But because the loss is percentage-based, the hole scales up 10 times too.

Let’s use concrete examples. Let’s imagine someone manages to save 15,000 euros a year for 10 years to buy a house, and someone else manages to save 50,000 euros a year over the same period. During this time, we’d have a target inflation of 2% per year.

In both examples, the loss in purchasing power is about 8.4%, so roughly 12,000 euros in the first case, or 42,000 euros in the second.

That’s the amount stolen by governments through inflation. For every 10 years of productivity, they steal 1 year from you. 1 year worked for nothing. Since on average we all work 40-50 years until retirement, that means 4 to 5 years get stolen from us, and that’s under optimal conditions. But what if inflation is 5-6%? Then 15 years get stolen from us!! How the hell are we supposed to afford housing when the government’s policies force us, over 50 years, to work 10-15 of them for free! And it’s not even just for free, because all the expenses I’m counting here will actually be covered outside that time frame too. So I work 10 years taking losses, and the next 10 years just to cover the rent and food I already consumed.

Are you still following the thread here?

Energy inflation, thanks to Rear Rear Admiral Trump, is at 30%. Where do we need energy? Everywhere!! So every single expense is going to go up.

In today’s post I wanted to explain why, in my opinion, inflation isn’t some natural economic phenomenon or an incurable plague, but rather daytime robbery. It’s really important to understand this, and not just understand it, but to be able to visualize how much of your life is being stolen from you through inflation.

In a following post, we’ll look at the ways inflation actually happens, and we’ll discuss each one individually.

Until then, think about this: how many years have you worked so far? Imagine you lost 3% of them to inflation. How much time did you work without any real income? And how much time did you need just to cover the debts you took on during that period? Isn’t inflation a bitch?