Inflation Is Happening After All

Yesterday, I stumbled upon a video on YouTube, see below, that talks about the rise in inflation with the potential for hyperinflation. The video highlights corporate reports and other sources that indicate the the costs of production have been increasing. Some companies have passed some of that cost to the customer in creative ways, like reducing the size of packaging or reducing the amount of product while maintaining the same price.

https://www.youtube.com/watch?v=02ywTS3ciFY&t=693s

This is a bit surprising as we have long been subject to deflationary pressure thanks to technology. I think it is safe to say that there are countercurrents in inflationary and deflationary pressures. On the one hand, technology is making the world more efficient. Some market products are being eliminated. Those that can't be eliminated are made less costly. Banking, for example, has long been a yoke on the neck of society, generating wealth on the backs of depositors. Cryptocurrencies are changing that dynamic. People are becoming their own banks. Cable television is not where it used to be. Consumers are preferring to stream their entertainment rather than pay for a bunch of channels they don't need for the sake of a couple of channels they prefer. There are numerous examples of deflation.

On the other hand, raw goods and unfinished products have limits to how efficient they can be extracted and marketed. Trees only grow at a given rate to produce lumber and paper products. Steel can only be produced at a rate constrained by the steel makers capacity. We are seeing a spike in the cost of construction materials. Contractors are not able to provide a workable proposal because costs change from one week to the next. Home construction is suddenly costing tens of thousands of dollars more than anticipated. With the construction cost inflation, real estate is also seeing a spike in prices. Car rentals are charging $400 to $500 per day.

One could argue that some of this market imbalance is a result of COVID measures. That may be true. However, the net result is the same. People's paychecks are having to do more without a corresponding increase.

Inflation is a double-edged sword. If you have loans that are in the single digits, it may be a saving grace in that your loans will cost you less in real terms than having cash. According to Michael Saylor and Raoul Pal, the economy is operating at a 15% cost of capital. That is to say, businesses are having to produce returns greater than 15% in order to have any actual growth. Companies reporting smaller growth in nominal terms, are slowly losing their value in real terms.

We are at a point where we can no longer rely on government statistics to help us figure out the economic landscape. The Fed, for instance, has stopped reporting on the M2 money supply. We have long known that the CPI has been manipulated to meet the fiscal needs of the Social Security system. We are having to rely on quarterly reports from corporations to glean a real picture of what is going on.

The question is, what do we do? Sadly, any answer is going to be specific to the individual. A retired Baby Boomer will not have the same choices as a Millennial. Families may need to resort to caring for elderly parents at home. We may see the rise of multi-generational homes. Here at TravelWriteMoney, we aren't expecting a financial apocalypse. We do, however, expect a crunch that is already changing the financial systems and will eventually change governments. Clearly, the incumbents cannot be trusted with money.

What, in your opinion, can we do, individually, to prepare for the economic crunch on the horizon?

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