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Guest Post: How I Became A Trillionaire (And Some Thoughts On Inflation)
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Some thoughts on being a trillionaire and inflation.
Reader gratitude is always appreciated here at oftwominds.com, but imagine my delight when correspondent Paul Wegzyn gifted me with $100 trillion. Wow--I'm a trillionaire! Since Paul was visiting the San Francisco Bay Area, he presented me with my $100 trillion bill in person. Paul is holding up another form of paper money, a $100 Federal Reserve note:
These photos illustrate the fundamentally arbitrary nature of fiat (paper) money. Why do we prefer the $100 greenback over the $100 trillion note issued by the Reserve Bank of Zimbabwe? The purchasing power of the Benjamin far exceeds the purchasing power of the $100 trillion bill.
But the Benjamin is not immune to inflation; the dollar has lost about 95% of its 1900 purchasing power.
Why hasn't this massive reduction in purchasing power impoverished us? All other things being equal, such a massive reduction in purchasing power means we can buy a lot less with our money.
The answer is that our incomes rose even faster than inflation. If it now takes $20,000 to buy what $1,000 bought in 1900, and we earn $30,000, despite the horrendous decline in the purchasing power of the dollar, the purchasing power of our income has gone up by 50%.
If wages rise along with inflation, then we don't experience any loss of purchasing power as zeroes are added to our fiat currency. If wages increase at a rate above that of inflation, we gain purchasing power. If wages increase at a rate below that of inflation, we lose purchasing power.
It is generally accepted that official measures of inflation do not reflect the "real" decline in purchasing power. Nonetheless, it's instructive to ponder the consequences of understated official inflation on the purchasing power of income. Let's turn to the Bureau of Labor Statistics (BLS) inflation calculator.
It now takes $1.35 to buy what $1 bought in 2000. Many wage-earners have received modest increases in their earnings over the past 12 years. Let's say someone received a cumulative wage increase of 15% since 2000. Measured in purchasing power, their income has declined by roughly 20% in a mere 12 years.
If we use alternative measures of inflation, the decline is more on the order of 30%.
Consider the rising costs of higher education and healthcare: These major lifetime expenses have skyrocketed far above the modest 35% official inflation rate since 2000.
This raises another question: what causes money to lose purchasing power? The basic answer is that all fiat money--paper, electronic, credit-money, etc.--is ultimately a claim on a real-world income stream, resource, good or service.
If we print/create ten times more money, we cannot print ten times more oil, cans of beans, concrete, etc., and so the nominal price of the real-world goods rises ten-fold.
If the money supply rises along with the increase in production of goods and services, then inflation is close to zero. This was the case for much of the 19th century in Great Britain.
If there is insufficient money in circulation to fund new enterprises and trade, the economy stagnates. The solution to this is credit: trade credit, loans, etc.
Used wisely, credit leverages productive growth in a cash-starved economy. When credit is expanded in near-infinite quantities at low interest rates, however, borrowed money flows into unproductive mal-investments. These go bust and the debtor is left with the interest payments. As a result, massive expansion of credit also leads to stagnation as more income is devoted to debt service and capital accumulation dwindles.
Since the Federal Reserve has been "printing money" by expanding its balance sheet, why aren't we experiencing higher inflation? Setting aside the possibility that the official statistics are rigged to suppress the real rate of inflation, there are several other factors at work:
1. If money is being destroyed by bankruptcies, writedowns, etc. at the same time it is being created, the money supply will only expand if the new money exceeds the money that has vanished. Indeed, if $10 trillion has disappeared from the net-asset ledger, then printing/creating $3 trillion isn't going to do anything but replace a portion of the destroyed money.
2. It depends on who gets the freshly created money. If all the new money/credit is flowing to the top 5% who already own most of the financial wealth, then it's difficult for demand from this small slice of society to create widespread inflation.
If the interest rate is near-zero, then all those owning money are losing purchasing power, as official inflation is running at 3% and their yield on savings is less than 1%.
As a result, those with money are seeking a higher yield. They are buying high-dividend stocks, rental housing, high-yield corporate bonds, etc. This generates asset bubbles in all asset classes that pay a yield above 1%.
In other words, if the new money flows to the wealthy, then all it does is inflate asset bubbles.
If the Federal Reserve created $1 trillion and distributed it in cash to 100 million households, it might increase demand for goods and services and spark inflation. But if the $1 trillion is only available to a handful of corporations and super-wealthy families, then it can't spark demand-driven inflation in anything but a handful of ultra-luxury goods.
3. It depends on the capacity to produce goods and services. The global economy is burdened with over-capacity: the capacity to produce steel, autos, flat-screen TVs, etc., far exceeds demand. Even if the Fed ordered 10 million new TV sets to be given away, this would not generate much inflation because existing factories could churn out the extra 10 million without even reaching full capacity.
As for services--there is an over-supply of labor in virtually every sector, even ones that have traditionally been restricted: the demand for more lawyers is low, dentists' waiting rooms are often empty, and so on. In other words, a vast over-capacity also exists in most of the service sector.
4. It depends on values and priorities. Let's say the Fed created enough money to give each household $10,000 in cash--the famed "helicopter drop" of money. If most households saved the windfall or used it to pay down existing debt, very little of it would flow into the economy as demand for goods and services. The inflationary effect of all this new money would be essentially nil.
We can use the velocity of money as a measure of this dynamic:
5. Cartels raise prices at will; this is not inflation. Cartels by definition have extinguished real competition (i.e. exposure to market discovery of price), and as a result they raise prices across their industry with impunity. In the U.S., healthcare, education, and defense (to name but three of many) are all cartels. As a result, costs in these industries never go down, they only skyrocket.
This is not inflation due to an increase in money supply, it is a transfer of purchasing power and wealth from households to the cartels that superficially looks like inflation.
If 95% of households are experiencing a loss of purchasing power and most of the new money and credit are flowing to the top 5%, you get asset bubbles, not demand-driven inflation. When 95% of the households are poorer in terms of purchasing power and financial wealth, where can demand-driven inflation arise in a global economy of massive manufacturing and labor over-capacity?
The rise in costs within industries controlled by cartels (healthcare, higher education, defense, etc.) may look like demand-driven inflation, but are actually transfers of wealth and purchasing power from households to the government-protected cartels.
Thank you, Paul, for the thrill of being a trillionaire, and for generously treating me to lunch.
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Forward! ... by now maybe fast forward!
If an inch became smaller every year, do I become taller?
Will the wife have fewer headaches?
"In the U.S., healthcare, education, and defense (to name but three of many) are all cartels"
Each of these 3 are also heavily subsidized in one way or another by the government.
I bought 4 of those 100 Trillion bills on ebay about 2 years ago for $6.00
Now they're running $5 - 6 each.
Who says Fiat money is always bad??
I bought two for $4.00.... not a bad return! I have them proudly framed. I bought two so I could get the front and back displayed.
I recently bought a ten-cent US bill and a fifteen-cent US bill and paid about $75 for both of them. I'll probably buy more.
... so much for 'inflation', 'money printing' and 'worthless fiat'!
: )
Last Saturday I bought $20 in pre-65 quarters for $400 FRNs.
Here is a Nat.Geo infomercial on the FED you can watch:
http://www.youtube.com/watch?v=XzkIHitgSpc
What I liked about the show was how they showed all the gold in the NY FED vault (25% of the world's gold) and it's worth was measured at about $400 billion (about 5 months of QE3!). Gold at $50k+ an oz will be a reality before this is all said and done.
Your wife said yes, but she wasn't talking about your height.......
he your daddy and you gota listen to daddy or he drone yo ass racist mudderfokers
drone on brudder, drone on
Cyprus banks 'may never reopen' - Wolfgang Schaeuble
http://www.belfasttelegraph.co.uk/news/world-news/cyprus-banks-may-never...
Germany warns Cyprus ‘banks might never reopen’ if terms of bailout are rejected
http://en.mercopress.com/2013/03/20/germany-warns-cyprus-banks-might-nev...
CH-S makes a good point about those being nearest the Fed spigot (corporations and uber-wealthy) getting the bulk of the benefits of money-printing.
I guess the rest of us should settle for owning gold. Which might soon be priced in the trillions of euros or dollars...
this implies that the eurozone would be willing to follow the USD up to "terminal velocity" instead of eventually braking before the cliff. As I wrote a few times here, one day we will have the second leg of this race, and then we will talk a lot about FX reserves
....and of course.... gold!
Remember all those "time value of money" calculations, from the old days there a productive investment had to return more profit than the cost of allocating capital to the project? With ZIRP, there is no time value of money, it's all a race to speculate or hedge against inflation that you know is there, but the Feds tell us it isn't.
With ZIRP, buying politicians, bribing the FDA, or having rules changed to shut down your competitors is the best use of capital.
Friends...Germany's Gambit.....They've been secretly printing and preparing to unleash "Deutchmarks"...
After European citizens run on the banks and withdraw their Euros.....Germany declares them worthless and the new European currency becomes the Deutchmark.
All europe becomes slaves to Germany.
Game Set and Match
my friend Nigel Farage has a German wife. is he then a slave, too? Oh, stupid question, forget I asked... ;-)
Yep, sounds like a good plan until the Russian bear awakens from its slumber, turns off the Natty, and freezes the Huns back into submission.
It should be a comfort to see that the purchasing power of the dollar has finally leveled off over the last few decades..........
It hasn't, the dollar purchasing power chart needs to be on a log scale. Try this chart instead:
http://2.bp.blogspot.com/-w6pHKjcrViE/T0Kd1t0P9MI/AAAAAAAABQ4/2zk0xrZl6A...
And I thought the $100 was the new $10, now it can't even be the new $5. Well, I'm looking forward t when it becomes the new $1.
"The rise in costs within industries controlled by cartels (healthcare, higher education, defense, etc.) may look like demand-driven inflation, but are actually transfers of wealth and purchasing power from households to the government-protected cartels."
Exactly why this QE isn't going to work. Instead of buying freshly minted MBS, Fed should be buying all the older troubled ones. Pay full principal and make the investors whole. Then refinance them to the point where you can break even, which ultimately will save the average homeowner a few hundred dollars a month. No point putting people on the street when the people that replace them are paying what the previous homeowner could have afforded.
For example I pay $1800/mo. If i told the bank to eff off, the home would sell at a price where $1300 would cover a zero down mortgage payment.
I understand the moral hazard thing and could understand it more if the banks had not been proven to be completely immoral all along the way.
Im getting a 50 trillion Zee note from providentmetals...5-6 bux..
A deal...
People keep pointing to that velocity chart as if it indicates anything other than ballistic inflation. When you print a lot of money very fast, velocity always drops. It is how the math works. What the velocity chart shows is that we are printing way too fast. People really need to understand the math equation that velocity comes from. If Benanke added 3 trillion to the money supply tomorrow, velocity would get cut in half.
Economic activity cannot be generated by a nation of retirees.
Inflation is a real estate agents/cnbc/gold bugs myth.
http://static.cdn-seekingalpha.com/uploads/2013/2/11/saupload_ab21b285a2cc4bb589da3802eb2b3482.png
Your chart is bullshit, and you know it.
There has not been any year since 2000 where the overall level of REAL (i.e., non-"hedoncially adjusted") price increases was not at LEAST 4%.
Stop propagating these absurd, reality-denying, bankster and government-generated lies regarding so-called "low inflation".
They don't call him the Floodmaster for nutin'
It is also symptomatic of net private-sector "deleveraging". Servicing the huge debt overhang requires massive amounts of money. Unless banks are lending back an equal amount of money into the economy (they aren't) velocity drops. Aging demographics definitely play a role also.
Simple explanation: "Monetary velocity rises on the front-end of a credit bubble and drops on the back-end."
still i don't find it meaningless at all. somehow its pattern is very similar to that of the baltic dry index. and also to my business...
The U.S. dollar is the world's reserve currency... Zimbabwe, Cyprus, Iceland... The truth is drowned in a sea of irrelevance.
There is more to money than quantity and CHS knows it.
What could you buy in 1900? A computer? How about a cell phone? Antibiotics? A cheap car? How about a flight on an airplane?
I'm not saying that these 'goods' have value or that they are in fact 'goods' at all. Things have changed in 113 years, it is impossible to make a comparison between two periods based on quantity of money alone.
As it is, the quality of money matters, what can be had for it, what money is a proxy for. In Zimbabwe, the choices were very limited due to the absence of Zimbabwean output. Meanwhile, the US dollar can buy any good made on Planet Earth ... particularly petrolem. This is indeed a 'fine thing' it is also self-destructive.
The biggest problem right now is the ability of anyone to purchase more capital as a consumer good. To effect a survivable change we either find an equitable way to ration capital ... or else we ration purchasing power across the board.
No option: we learn to do these things or we follow the Greeks into the toilet,
Stop paying taxes!
It is funny how more ZHrs are ready to pick up a gun, than to stop paying slave dues to Rothschild.
You can fight all you want, protest, bitch about things, but you're still giving them money to build more drones, hire more pigs and bail out more banks.
I quit my decent paying engineering job (~50K) in January of 2012, and have been working a cash only contractor/home remodel job for the last 15 months. Although my net take-home is less (not by much), the satisfaction I have gained in trying to starve the beast has greatly boosted my morale. Not to mention the increased health benefits from moderate to intense daily activity and not sitting at a computer or in a car for 11 hours each day.
Biting the hand that feeds (steals) tastes pretty good!
When the fact that we hold currency for very short periods of time is considered then the loss of value in holding currency is trivial. The problem comes when we hold paper derivatives of the paper currency for long periods of time. Then we learn that paper is not 'as good as gold'. If gold were not available in paper form (which always decreases it's value/price) it would make a good long term savings vehicle....since it really is as good as gold.
If Benny will gladly forward me $100,000, I promise to only invest it and not create inflation by spending it.
"...but are actually transfers of wealth and purchasing power from households to the government-protected cartels...."
damned fucking right!!!!!!! i have said that countless times here and glad there is a backup chorus...
It woulod be hard to beat the great job by the Federal Reserve to ruin the currency. This is disgraceful!
One place inflation is also "missed" by pundits and eCONomists - is in rents. Esepecially in "Creative Class" cities like Boston (where I live)...where the idea of central planning would cure all! And it would be through art!
Not so fast, my friend.......
The failure of the concept is that you can control or direct the growth in specific areas. As the "creative class" in Boston went from the South End,to Jamaica Plain, to Somerville, to South Boston, to wherever else the developers want to speculate in.
The one thing in common was that once these areas became known and gentrified, the real "creative class" could now no longer afford to live there. So they migrated to areas of lower rents and identifying specifically what neighborhood would be next became nothing more than a guessing game for developers and investors. Look at East Boston, Allston/Brighton, and Chelsea.....where speculation boomed before the organic growth occurred and the anticipated gentrification petered out.
The support and infrastructure investment need to follow community needs. As neighborhoods change, that growth should be supported but I doubt very much that it can directed into a community to foster change that is not occurring organically.
To occur organically it has to have that one vital ingredient, affordable housing (and ergo, affordable living).
Living is becoming less and less affordable under the"QE Era". There is a reason this is not told to you by TPTB.
This would be the case only if one believes the ridiculously lowballed CPI statistics from the BLS.
Why does the author repeat this specious bullshit? Everyone here (except for JimmyJames and Orly) knows that the overall price level, cost of living, call it what you will, has increased FAR more than 35% in the last 13 years. My best estimate, taking into account the rise in the prices of basic goods, services and utilities, would be on the order of 75%.
The item that was $1.35 just last year can't be bought for that price today. Too many people use bogus government numbers that gets them bogus assumptions.
Not only has the cost of college tuition risen, over time curriculums have been padded with useless courses. So, the price of the real education has been inflated even more than in dollars.
Let's not get into entire curriculums that are useless.
That bilingual class in third world handicapped mexican lesbian art history is above price considerations. It helps me be politically correct and understanding of ugly broads.
"This raises another question: what causes money to lose purchasing power? The basic answer is that all fiat money--paper, electronic, credit-money, etc.--is ultimately a claim on a real-world income stream, resource, good or service.
If we print/create ten times more money, we cannot print ten times more oil, cans of beans, concrete, etc., and so the nominal price of the real-world goods rises ten-fold."
Uh, no. Look at the two top items: college and healthcare. These things have inflated the way they have because they are essentially government protected monopolies. And there are others. Cable TV for example. So, absolutely, positively, no.
Hurrah!
Finally someone on ZH talks about monetary velocity and how this rarely mentioned variable has an exactly equal effect on inflation as printing money.
NB: Currently monetary velocity is slowing, which is deflationary.
Charles,
Where did you shoot the image? Ghirardelli Square? I still miss Ghirardelli's Wine Cellar, closed decades ago, Live Oak playing guitar, he and his lovely wife singing sweet harmonies...and the good old Spaghetti Factory on Green St...all you can eat for cheap, Anchor Steam beer at the bar...
i wish i had a trillion... i would definitely inflate the hell out this economy FO SHO
@"...Why hasn't this massive reduction in purchasing power impoverished us? All other things being equal, such a massive reduction in purchasing power means we can buy a lot less with our money.
The answer is that our incomes rose even faster than inflation.
.." c.h.s.
also because, after w.w.II, people spent much more "credit", the tendency was to
replace purchasing power from savings or earnings with the
capacity to leverage, by the average person, their future economic
circumstance. all values were renounced for the sake of the survival
of the "deflation proof" and manipulated money system with catastrophic
repercussions to production, markets and inflation(unseen). so the
masters of shame and war game the end and steal the presses.
.
chs, great!
"credit"... delusional wishful expectations required to prop up the
poorly conceived, in theft and usury, money system.