Inflation is the loss of purchasing power of a currency, often seen in the form of higher prices of goods and services. Different functions in an economy can have inflationary pressures (decreasing purchasing power) or deflationary pressures (increasing purchasing power). For example, when a government prints money, increasing the supply, it exudes an inflationary pressure, decreasing purchasing power and pushing prices higher. Alternatively, technological innovations that improve production processes are an example of a deflationary pressures, increasing purchasing power and pushing prices lower. In an economy like the United States (US), which aims for 2% annual inflation, this can seem trivial from year to year. However, when looking at a wider time period, it can appear drastic to realize the dollar has lost +96% of its purchasing power from 1913 to 2019.
Note, this 96% drop is recorded before 2020, when the US expanded its monetary supply by +23%. Expanding the monetary supply won’t create inflation if the economy grows (a deflationary pressure) equivalently to handle the larger supply. However, instead of the growing, it has been challenged with lockdowns and unprecedented business closures due to the government response to the COVID-19 pandemic. Below, I want to break down how this destruction in purchasing power affects both sides of the socio-economic ladder.
Experiencing Inflation When You’re Poor
First, let’s outline how we’re generalizing poor for the sake of this article:
- Works for minimum wage and/or doesn’t receive cost of living raises
- Spends significant portions of their income on food and utilities
- Holds all, if any, savings in cash
The poor are working for low wages, year after year, with no guaranteed raises. Meanwhile, the purchasing power of their stagnant wages are deteriorating 2% a year according to the government’s chosen inflation metric, the Consumer Price Index (CPI). The CPI is a basket of consumer goods whose prices are tracked to measure the annual change. One issue with the CPI is that the basket of consumer goods does not include food and energy (think heating bills), two volatile goods. Since grocery and utility bills are larger portions of their budget, as they spend more on these necessities and less on luxuries, the 2% inflation described by the CPI becomes less of a reliable measure. One project, the Chapwood Index, attempts to measure inflation with a more accurate basket of goods and breaks them down by city. As seen below, the Chapwood Index measures New York City as inflating an average of 11.9% over the last 5 years.
Hence, the poor potentially have stagnant wages, while expenses are increasing almost 12% a year. If they’re able to somehow combat this systemic obstacle and build some savings, it is entirely in cash, which is, along with their wages, depreciating in purchasing power 12% every year (and earning a despicable 0.01% interest rate).
Experiencing Inflation When You’re Rich
Once again, below is how we’ll generalize rich:
- Receives income adjusted for cost of living increases
- Spends less significant portions of their budget on food and utilities
- Holds vast majority of savings in assets, little in cash
The rich have wage contracts that receive annual cost of living raises that compensate for the 2% CPI loss of purchasing power. This may also be in the form of % sales compensation that rises along with the price of goods they sell or even a rise in revenues from goods and services in their business(es). The rich also spend less significant portions of their expenses on necessities like food and utility bills. Therefore, the low-inflation CPI metric is potentially more accurate to them, at least more than for the poor. Most notably, the rich don’t hold a lot of cash, but are invested in assets which appreciate faster than inflation. These assets can be stocks (shares of a company), real estate (homes), precious metals (gold), and even bitcoin. Assets are relatively scarce compared to the dollar. For example, if the amount of dollars magically doubled, the lack of doubling of the supply of homes would naturally push the dollar value of homes higher. Reference the aforementioned 23% increase in the US monetary supply this year, did companies issue 23% more shares in their companies? Did we build 23% more houses? Did we mine 23% more gold out of the ground? Did 23% more bitcoin (a disinflationary, fixed supply asset) appear in people’s digital wallets? Of course not, instead, the increased amount of dollars chased the same amount of assets, causing the price of those assets to rise. Thus, instead of losing the purchasing power of their wages and savings, the rich are actually building immense wealth through holding assets. Some have even related this phenomenon of governments printing money, pushing asset prices higher, as universal basic income for the rich. That is why it’s no surprise that the world’s billionaires have gotten $1.9 trillion richer in 2020.
Widening Wealth Inequality — What Can You Do?
Whether the US government expanding its monetary supply, rapidly increasing inflationary pressures, is healthy for an economy or not isn’t what this article is about. If interested, I recommend entertaining The Price of Tomorrow and The Bitcoin Standard. Rather, I’d like to acknowledge that inflation is occurring to some degree and the current macroeconomic backdrop of record increases in our money supply is going to exacerbate it. Additionally, as inflation increases, wealth is siphoned from the poor in terms of purchasing power and given to the rich in terms of increased asset prices.
I can not give you financial or otherwise professional advice, but here are some easier-said-than-done steps that I am taking to survive the inflation trap:
- Spend less than I make. Whether it is working hard for a raise, picking up a side hustle, or cutting expenses and being more resourceful, it is imperative to spend less than you make.
- Build a cash cushion. With the difference between what I make and what I spend, I built a cash cushion equal to three months worth of expenses. This is to be used in an emergency like having lost my job so that I can still pay my bills and not have to sell any assets at an unfortunate time.
- Get out of the dollar. I will never be able to get ahead financially if I hold all my wealth in dollars. I am taking comfort in my cash cushion and using any other dollar I earn to invest (buy and hold, ideally forever) in assets.
Bitcoin is the Best Way to Get Out of the Dollar.
I have spent the last two years studying all things finance and come to the conclusion that there is no better means to protect yourself against inflation, build wealth, and have hope for a prosperous future than buying and holding bitcoin. I can assure you that every fallacy advertised in the first few minutes of headline browsing will be dispelled in a more thorough analysis. At least, that’s how my conviction about bitcoin grew: by comprehensively defeating every argument I could think to make against it.
If you do decide to purchase bitcoin, there are many ways to do so. When comparing different options, the three most important things to look for are reliability/security (don’t purchase from a sketchy platform), low purchase fees (0.5% or below) and minimal transfer fees (equal to network fee), and most importantly is having the ability to withdraw your bitcoin when needed. If I had to recommend a single one to every reader, it would be Strike. Feel free to message me on Twitter with any questions.