Inflation, Deflation, Theft, and Aristocracy

Maybe inflation isn't the catastrophe we've all been taught it is.

Your humble correspondent has been suffering considerable angst as of late, wondering why, despite making what seems like a pretty good wage, nevertheless we are not living anything like the Lifestyles of the Rich and Famous.  What's worse, decades of experience suggests that we might not ever arrive at this goal regardless of striving.

Has the American Dream died, at least insofar as it affects us and our friends?  In untangling this conundrum, Your Tax Dollars have provided a surprisingly useful tool: the Inflation Calculator, which is exceedingly enlightening for anyone curious about economic history.

Consider someone who makes $100,000 a year.  For most of us in our peak earning years, that feels like it ought to be a pretty good upper-middle-class income.  But type it into the Inflation Calculator, adjust for the 1980s when we were young and forming our internal ideas of what's "a lot of money," and suddenly that yuuuuge salary becomes a rather smaller $35,000.

One of our acquaintances has had a career which started off very well and then mostly stagnated; he made $80,000 when he started in 1970, and makes $130,000 today.  He nearly doubled his income, which sounds pretty good, but that's reckoning without inflation.  That 80 grand, back then, was equivalent to nearly a modern half-million bucks today!  No wonder he feels a lot poorer now than he did then.

What's worse, because he is making more dollars and has fewer deductions, he is in a higher tax bracket than when he had a real income which was almost four times larger.  In terms of purchasing power - real stuff he can actually buy - his compensation has fallen steadily ever since he started work.

The concept of inflation is a familiar one, yet its effects are strangely hard to understand.  Inflation has been called "the silent thief," because quietly and invisibly, it shrinks your earnings when the numbers stay the same, or even when they increase markedly.

Cash: Not the King Anymore

As one of our recent presidential candidates might say, "At this point, what difference does it make?"  Aside from the very bottom entry-level people who earn minimum wage and can't increase their value much beyond that, nearly every steady worker gets a small raise every year.  The raise is usually just enough to cover the inflation and keep you where you were before; the company can't afford to give you more than that unless you are able to increase your value to the company.  Inflation doesn't really steal from our earnings, at least most of the time.

If you keep a large amount of cash lying around, inflation definitely steals from that.  A hundred years ago, that might have made a difference.

Today, though, how much cash do you personally have lying around right now?  In my house, I could maybe scrape up a few hundred bucks, if that; my bank account holds perhaps a paycheck or two in anticipation of the next credit card and mortgage payments.

Does that make me poor?  No - like most Americans, my other assets are not cash.  A home has value; cars have value; 401ks, life insurance, stock accounts, and small businesses are non-cash financial assets which also have value.

We've all read about the hyperinflation of the Weimar Republic in 1920s Germany, which is credited with destroying the middle class and ushering in Hitler.  Maybe you've seen photos of the wheelbarrow-loads of cash needed to buy a loaf of bread.

That couldn't happen today, for two reasons.  First, none of us keep much cash lying around, and second, what cash we receive can be instantly, automatically, and electronically converted into something else.  If the American dollar was suffering from hyperinflation, say, it would be easy enough to arrange with your bank to instantly exchange any dollars that arrived for, say, Canadian dollars.

But - your salary is fixed in dollars too, so your pay wouldn't be worth anything?  In the real world, that would never happen, because if your pay is worthless, you'll just stay home in bed.  Any employer that wants work done would obviously arrange an ever-increasing salary scale just to get employees to come back tomorrow.  In order to do that, they'd have to arrange that the prices they charged their customers would increase on the same scale and hope they keep paying.

Actually, we'd probably switch over as a society to some other currency, as many countries in the world have given up on having their own currencies and now use the American dollar instead.  Maybe the Bitcoin would make a comeback.

So inflation has no effect on a modern economy?  No: it definitely affects contracts that are denominated in the currency.

Imagine the effects of hyperinflation on your mortgage, which is set in dollars.  A wheelbarrow of currency might buy a loaf of bread, but a handful of bills could pay off your house.  Even under normal inflation we see this effect a little - you start your 30-year mortgage with dollars worth a whole lot more than the dollars you pay it off with decades later.

Obviously, hyperinflation would destroy the banks and anyone else holding debt - corporate bonds, say - but that's not the middle class, for the most part.  It's the rich and powerful who would be most hammered by hyperinflation nowadays, which is why we don't need to worry that they'll let it happen.

Deflation Doesn't Matter Either

So what about deflation, the opposite of inflation?  As inflation happens when your currency becomes worth less and less because prices go up, so deflation causes your currency to become worth more and more so prices go down.

Causing inflation is quite easy: simply print more money and spend it, something governments are inclined to do anyway.  Deflation is harder to create because for currency to increase in value, there has to be less of it in proportion to the economy.

Indeed, deflation is one of the arguments against the gold standard.  If your currency is linked to gold, then by definition, the amount of it available has nothing to do with the size of the economy, but rather, how much gold miners manage to dig out of the ground.

Not having enough cash to go around causes serious problems - yes, even here in America.  During Colonial days, America was supposed to use the British currency of our colonial masters, but the Brits didn't want to supply us as much as we needed because it was backed by silver they didn't want to lose.

The Crown prohibited exportation of its coin because in addition to subscribing to the mercantilist idea that colonies should send wealth to their mother country, not vice versa, the English economy experienced periods of inadequate coin.

As a result, the colonials used an awkward combination of whatever minted money from any other country happened by, and common standard commodities like tobacco hogsheads or bushels of wheat.  Many of them were trapped in complex shifting webs of debt, which may have encouraged people's willingness to join in a revolution that might eliminate at least some of their liabilities.

Today, outside of the omni-incompetent third world, a currency shortage is almost unimaginable because no major economy is linked to either gold or silver, but Japan has been suffering deflation for years.  It's generally thought this is because Japan's economy is shrinking, which in turn caused by the fact that its population is shrinking because too many Japanese women have decided not to have babies.

Interestingly, Japan is one of the few places of the world where people use huge amounts of cash in their daily lives: it's not uncommon in Japan to pay for a car, or even a house, entirely in cash.  Try that in America and you're likely to get your cash confiscated.

So just as inflation doesn't really hurt most normal Americans but actually benefits them a hair, Japanese deflation doesn't cause pain for ordinary Japanese in any way they can feel.  Possibly it harms the wider economy, but that's a far more complex issue which is difficult for anyone to understand much less prove.

The Rich Get Richer

So why do we fret so over inflation and deflation?  It's hard not to wonder whether it's all part of yet another plot to distract us from the real issues.

Throughout history, aristocrats have traditionally believed that wealth was represented entirely by property and jewelry which were supposed never to be sold.  The rich had only enough cash lying around to pay the butcher and the rest of the staff.  If your wealth is in long-term property, particularly farmland, then neither inflation nor deflation will have any direct effect on you at all; nor do your gems care how many zeros are behind their paper value.

Today, most of the wealth of the superrich is in corporate shareholdings, though real estate still features heavily as you'd expect.  Donald Trump no doubt has more cash in the bank than you do, but proportionately to his wealth, it's probably about the same or even less.

Extremes of inflation and deflation would certainly have an effect on corporate bondholdings, but would have an equal and opposite effect on the company whose bonds they were; for the superrich, who own both, they'd probably mostly cancel out.

Instead of wanting to actually fix inflation or deflation, which wouldn't really affect either them or us in our modern economic systems, perhaps they are using unjustified fears to distract from the real damage they are inflicting that does truly benefit them - importing third world foreigners to keep wages depressed due to excess competition?  And sure enough, average wages, adjusted for inflation, have stagnated since the 1970s.

As we see it, the real issue for working people is neither inflation nor deflation; it's the constant downward pressure on our wages due to large businesses, Democrats, and establishment Republicans conspiring to bring in as many foreigners as they can.  Foreigners' competition keeps our wages down, which makes businesses happy, and their votes devalue working class votes, which makes Democrats happy.

One reason for Mr. Trump's electoral victory is that we thought he would think of something to make working people happy.  The Democrats and the swamp are trying to stop him, but through the smoke and fog, it seems like he's at least trying to move in some potentially good directions.

Reader Comments

That's very insightful stuff Petrarch! First, the mention of some willingness to fight in the revolution may have been supported by an idea of debt cancellations is brilliant. Second, you hit the wages nail on the head - direct hit so: "You Sank My Battleship!" The banks have owned everything since WWI, so why not plan to ruin Mexico's economy, fill it with corruption and entice the youth to cross the border to work in the USA? Then make a slew of laws that protect them and their families who stay here and eat out our sustenance.

August 3, 2017 12:48 PM
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