by Doug Casey, International Man:
Traditionally, inflation has been defined as “an increase in the amount of currency in circulation.” Such an increase almost always causes an increase in the cost of goods and services, since, more plentiful currency units lowers their rarity, as compared to the supply of goods and services, which remains roughly the same. Therefore, it shouldn’t be surprising if a 20% increase in the amount of currency units translates into a 20% increase in the price of goods and services.
Unfortunately, in recent decades, even dictionaries have been offering a revised definition of inflation, as “an increase in the price of goods and services.” This is a pity, as it makes an already confusing subject even more difficult to understand.
This is especially true for the average guy who has a minimal understanding of economics, but does realise that, even if his wages increase (which he regards as a good thing), he never seems to get ahead. In the end, he always seems to be worse off.
So, let’s see how simply we can break this down. And, let’s do it from the layman’s personal point of view.
Let’s say that you’re paid $4000 per month. You budget for housing, food, clothing, transportation, etc. Let’s say that that adds up to $3800 per month, and you’re hoping to put $200 per month into savings. Often that doesn’t happen, as unplanned expenses “pop up,” and must be paid for. So, in the end, you save little or nothing.
In the meantime, you’re daydreaming about buying a new car, but it can’t be bought, because you don’t have any money to allocate to it.
Then, your boss says that the recent prosperity has resulted in a big new contract for the company that allows him to give you a raise of $200 a month.
This is your big chance. You go to the car dealership, buy the car, and arrange for time payments of $200 per month to pay for it.
However, what’s rarely understood is that the theoretical “prosperity” is the result of governmentally induced inflation. What appears to be prosperity is merely a rise in costs and, along with it, a rise in your wages.
You appear to be “getting ahead,” but here’s what really happens…
The inflation that resulted in your pay rise also raises the prices on most or all other goods and services. So, instead of spending $3800 on expenses every month, your costs have risen to, say, $4200.
So, only months after your pay rise, you become aware that, not only are all your expenses higher (which you didn’t figure on when you bought the car), you now have the extra monthly obligation of the $200 car payment.
A year later, you look back and say to yourself, “Just when I was finally getting ahead, just when I was realizing my dream to have a new car, all those greedy businesspeople raised their prices because they just want to be rich, and I ended up a loser.”
Not so. The businesspeople raised their prices for the same reason everyone does during inflation—because their costs are also higher and they must either raise prices or go out of business.
So, in effect… no one got ahead.
But, worse, you got behind. Because, now, in addition to your monthly expenses, you have debt obligations, and buying on time is always more costly than paying as you go.