The Bullet No.11 Saving like a Squirrel
TL;DR Inflation is killing your ability to get ahead, but there is hope.
This time of year, my back garden is always full of potholes where squirrels dig to store their nuts away for the winter. Like them, many of us are striving to store away money for a rainy day, a major purchase, or retirement. However, any value we put away, if held in cash, loses purchasing power over time via inflation. Everywhere I go recently I see similar headlines like “inflation hits highest figure in almost a decade”, design to evoke emotion, usually negative. Consequently, everyone worries about inflation, their cost of living, how they will pay their bills, and how they can protect any savings. But not everyone has a good understanding of why it happens or what to do about it. It’s not a core part of the school curriculum, despite it being a major part of our lives and only if you seek out information via self-education or higher education can you learn more about it. As always, there is a strong link with crypto here, so a bullet worthy target for this week:
1. What is inflation currently
The latest inflation numbers are out and they’re high, very high. Governments around the world first said that inflation wouldn’t happen, remember UK politician Jacob Reese Mogg saying the price of key goods would go down by up to 20% post Brexit? Then they said it was transitory, and now they’re saying it could continue for a while. Either way, even if inflation returns to target levels (around 2% depending on which country), it won’t undo the 6%+ cost increase that has already occurred for US citizens. So, if you’re not getting a rise in your income by the same amount to compensate, then your standard of living is only going one way, down.
2. Inflation numbers aren’t real.
More concerning is that it’s likely inflation is under-reported and higher than what official figures show. The institutions that calculate these numbers are not independent and have skewed objectives beyond simply reporting the real value. In addition, the methodology often hasn’t been updated in years, so that they can maintain some form of comparability, therefore it’s hard to discern the real level. Some estimates say that we could be running almost twice as high as the official figures suggest. There is so much more data available now beyond what we’re being told, but whatever data you use it’s all pointing upwards. You don’t need me to tell you that though, you feel it everyday in the things you buy.
3. Inflation isn’t equal
Whatever the official rate of inflation is, it’s not equal for everyone. We all have an individual rate of inflation based on what we spend our money on. For instance, if I’m a university student, then my rate of inflation is likely higher than those that aren’t, due to the fact that university fees have increased by a much higher rate than other goods and services over the last decade. The chart below shows the cost increase of different types of goods and services in the US, notice how the essential and often government run items, are getting much more expensive versus others. That means that if you’re low income and your expenses are mainly for those essential services, your individual rate of inflation is higher than those who have more wealth.
4. Why does inflation happen?
The short answer is that the system is designed that way. Every central bank in the world is targeted to keep prices stable but with around 2% inflation each year, which they try to achieve by controlling the money supply and interest rates. Therefore, no matter what happens, even if the production of goods and services gets cheaper each year through greater productivity or use of technology, the benefit is not passed onto us, because the system is set up to try and make prices go up rather than down, whatever happens. Interest rates have already been reduced to rock bottom and have been for a long time, so the only lever left is the money supply. 40% of all dollars in existence were created between June 2020 and May 2021, and you can pull out similar stats for the Euro of the British Pound, which I believe is a key driver of the inflation we’re seeing now. Covid and supply chain disruption are being used as an excuse for increasing the money supply, in order to pay benefits like furlough, but whatever the reason, the consequence of that action is what we’re seeing now in higher prices.
5. Most new money goes to those that are already wealthy
Stock prices the world over are at all time highs, despite one of the largest falls in economic activity we’ve ever seen, brought on by Covid19 lockdowns. Across the world, 50% of all people own stocks, so the half of the population that already have wealth, have seen it increase, while those that don’t have stood still, therefore widening inequality. How can stock prices be so high, when the world economy shrank by 3% in 2020? It’s pretty simple, cheap money, provided by central banks, stays in the financial system and benefits those in it (the already wealthy), instead of being passed down to those most in need. As a result, those that don’t hold assets or hold their savings in cash are getting destroyed.
6. Where crypto can help
Bitcoin is designed with a transparent and predictable schedule of supply written into the code that cannot be changed. Totally opposite to what we have now where unelected heads of central banks can get up one morning and simply decide to change it, with the resulting impact on us all. Many other crypto currencies are designed in a similar way with a more transparent supply schedule, although debateable about whether it can be changed by a small group or not. Crypto is the antithesis of the current system and seeks to pass on the benefit of advancing technology that reduces costs and will improve everyone’s standard of living.
Back to the squirrels, they put away their precious nuts in a safe place, for use at a later date. Bitcoin is the safest place to save wealth for the long term and avoid the pitfalls of currency depreciation, lower purchasing power and inflation. Currently we all trade our time in return for a currency that someone can make at will, out of nothing. More and more people are realising this and instead choosing to trade that time for something more tangible, albeit digital, that can’t be debased, and long term should hold or grow in purchasing power. In short, if squirrels could work a computer, they’d save in Bitcoin.
Peace, love and Bitcoin.
Rob