De Crash Course 11 & 12
Deze crash course gaat over de veranderingen die de maatschappij te wachten staan. Economische, maar ook maatschappelijke. De focus is uit de aard van de herkomst op de USA, maar ook voor West-Europa bevat het nuttige lessen. Komende weken zullen we er met regelmaat een aantal toepasselijke lessen uit (her)publiceren.
NB: de link naar de gesproken tekst zit onder de link waar de duur staat aangegeven!
Engelstalige transcriptie Chapter 11: Inflation
We’ve got one more key concept to share before we go deeper into current economic conditions: Inflation.
Most of us think of inflation as rising prices, as if it were things becoming more expensive, but that’s not quite right. It’s actually your money losing value.
Imagine if one year an apple and an orange are a dollar each, but next year they are ten dollars each.
Since you enjoy eating apples and oranges the same amount in one year as the next, then they will be exactly the same next year as this year.
But next year they will cost ten times as much, which means that the only thing that’s truly changed in this example is your money, which has declined in value.
Inflation is not caused by rising prices. Rising prices are a symptom of inflation. Inflation is caused by the presence of too much money in relation to things we want to buy.
What we experience is things going up in price, but in fact inflation is really the value of our money going down, simply because there’s too much of it around.
Now, here’s an example. Suppose you are on a life raft and somebody on board has an orange that they are willing to sell for money.
Only one person in the raft has any money and that’s a single dollar. So the orange sells for a dollar. But wait!
Just before it sells you find a ten-dollar bill in your pocket. Now how much do you suppose the orange sells for? That’s right, ten bucks.
It just shot up in price ten-fold. But it’s still the same orange right?
Nothing about the utility or desirability of the orange has changed from one minute to the next, only the amount of money kicking around in the boat.
Which puts us in the camp of Milton Friedman who claimed that inflation is everywhere and always a monetary phenomenon.
Again, inflation is not rising prices. They are the symptom. The cause of rising prices everywhere and always is an excess of money relative to the things people want to buy.
And what’s true within our tiny life raft example is equally true across an entire nation. Here, let me illustrate this point using a long sweep of US history.
What we’re looking at here is a graph of price levels in the United States that begins on the left in 1665 and progresses more than 300 years to 2008 on the right. But at this moment, only inflation over the period from 1665 to 1776 is marked on the chart.
On the “Y” Axis what is being charted are price levels *not* the rate of inflation.
In 1665 the basic cost of living was set to a value of “5”. What is most striking about this chart to me is that from 1665 to 1776 there was absolutely no inflation. Zero. None.
That is, over a one hundred and eleven year period if you saved a dollar you had a dollar. Put another timeline under this one, with 1903 on one end and 2014 on the other. To contrast this to today, if one hundred and eleven years ago you saved a dollar, today you would have about 2 cents.
Along came a war, the Revolutionary War, and the country found itself unable to pay for the war with the gold and silver to be found in the treasury.
So a paper currency called the “Continental” was printed, and at first it was fully backed by a specified amount of real gold and/or silver in the treasury.
But then the war proved to be more expensive than thought and more and more continentals were printed.
Then the British, aware of the corrosive effects of inflation on a society, started counterfeiting and distributing vast amounts of bogus continentals and soon the currency began to collapse.
Seen on the inflation chart, the Revolutionary War took the general price level from a reading of “5” to a reading of “8” which is a pretty serious increase of some 60% in so short a time.
After the war, the paper continentals were utterly rejected by the populace, who strongly preferred gold and silver. Most interestingly, with the return to using gold and silver as money, price levels promptly returned back to their prewar levels.
The next serious bout of inflation was also associated with a war, again due to overprinting of paper currency, and again, upon conclusion of the war we saw a relatively prompt return of prices to their pre-war levels where they stayed for an additional 30 years.
By now, we are nearly 200 years into this chart and we find that the cost of living is roughly that same as it was in 1665. Just try to imagine a world where you will know the price of things hundreds of years into the future…because they will be the same as today.
At any rate, prices remained stable until – you guessed it – another war came along – the civil war – which was highly inflationary. Eventually, before too long prices again returned to their baseline levels.
But then another war came long, this one even bigger than any before, and again it was a highly inflationary event.
And then war came along, even bigger than any before it, which again proved inflationary but this time, something odd happened. Inflation did not retreat before the next war began.
Why? Two reasons. First America was no longer on a gold standard, but instead a fiat paper standard administered by the Federal Reserve, and the populace did not have another form of money to which it could turn in preference.
And second instead of dismantling the war apparatus upon conclusion of hostilities the Pentagon was built, full mobilization was maintained and a protracted cold war was fought; certainly as inflationary a conflict as any shooting war ever was.
And now if we look at the entire sweep of history we can make an utterly obvious claim; all wars are inflationary. Period; no exceptions.
The reason is simply because the government spends more money than it has, so we can amend this statement to say that ”government deficit spending is inflationary.
We discussed the reason why back in the chapter on money and wealth where we noted that prices can only remain stable if there is a stable relationship between the amount of circulating currency and the things we need and want to buy.
When the government borrows money that is printed out of thin air by a compliant central bank, the new money definitely has real purchasing power. But where did that come from?
By definition it is not possible to print up real things, only purchasing power so any and all acts of printing simply removes a tiny fraction of the value of all the other outstanding money and gives that real purchasing power to the new money.
At any rate, back to our main story. Here’s inflation between 1665 and 1975. Knowing what you now know about Nixon’s actions on August 15th 1971 where any physical restraint on human desires was removed from the system, what do you suppose the rest of the graph looks like between 1975 and today?
This is your world. You’ve been living on the steeply rising portion of the graph for so long that that you probably view it as level ground.
That is, you expect inflation and plan for it, as if it were an unavoidable feature of life like gravity. But I hope we’ve shown you that sustained inflation wasn’t always a permanent condition of life but rather a recent development.
And the cause of that persistent inflation is simply that money and debt have been growing faster than the economy on a percentage basis for decades.
Which means your money has been declining in value exponentially.
That’s what this “hockey stick” graph is telling you.
What does it mean to live in a world where your money loses value exponentially? You know what it means, because you live there.
It means increasingly having to work harder and harder just to stay in place; and it means increasingly perplexing and astoundingly risky investment decisions have to be made in an attempt to grow ones savings fast enough to outpace the creation of money and debt.
It means two incomes are needed where one used to suffice, leaving less time for family & community strengthening while both parents work.
A world of constantly eroding money is a devilishly complicated world to navigate and, for most, leaves scant room for error.
But – wait a minute – you’re thinking – inflation has not yet really gotten out of control yet and the Fed has been printing like crazy for a while, how can that be?
Actually we are experiencing a huge amount of inflation but we have to remember that inflation applies to anything that people might want to buy.
Sometimes inflation means the basic necessities of life like bread and gasoline become more expensive, and sometimes inflation means that our houses become more expensive to purchase, and sometimes, as is true today, it means things like stocks and bonds shoot up in price.
Quite unfairly, when governments print like crazy, those closest to the printing benefit the most because they have access to all that newly created money first. The name for this is seignorage, and it has been known about for a long time. It’s a very well understood process.
In today’s world, those closest to the money printing are already fabulously wealthy – you’ve heard about the 1% – and after a point, additional money in their hands does not stimulate as much in the way of additional purchasing of things like bread and gasoline…there’s only so much one can consume.
The wealth disparity in the US is now as large as it has ever been and that is largely just a known side-effect of central bank printing.
But the money these ultra-wealthy families and financial institutions have piles up faster and faster and it has to go somewhere, and so it does. First into anything that can contain that much money, so it goes into the largest and most liquid markets, like US Treasury bonds and the stock market.
That’s stage one and it has already happened.
Then it goes into things rich people can most easily appreciate such as fine wine, high-end art, and trophy properties.
That’s stage two, and it has already happened.
Eventually, as paper investments begin to look shaky due growing concerns that there’s just too many claims on real wealth, these concentrated holders of wealth will shift out of paper and back into real things.
Slowly at first, but then suddenly towards the end.
Real things like land, metals, housing, and basic commodities begin to rise in price as we shift to stage three of the inflationary process.
Looking at the exponential trajectory of our money supply since America went off the gold standard in 1971, and the increasingly extreme recent measures discussed in the chapter on Quantitative Easing, we are dangerously close to entering Stage Three if not already in its early days.
John Maynard Keynes, the father of the branch of economics that utterly dominates our lives, had this to say about inflation.
“Lenin was certainly right, there is no more positive, or subtle or surer means of destroying the existing basis of society than to debauch the currency.
By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of the citizens.
The process engages all of the hidden forces of economics on the side of destruction, and does it in a manner that not one man in a million can diagnose.”
Now, finally, in this chapter of the Crash course we can string together these three important dots.
- Number 1 – In 1971 the US, and by extension the world, terminated the last connection to a gold restraint and federal borrowing “turned the corner, never to look back.
- Number 2 – At this same time, the money supply and debt levels turned the corner started piling up at rates much faster than the economy was growing; and
- Number 3 – Inflation is the fully predictable outcome of facts #1 and #2.
Boom. Boom. Boom. One, two, three. All connected, all saying the same thing, with profound implications for our future.
Now if you’re of a mind that there’s no reason that all three of these graphs cannot just continue to exponentially accelerate to ever-higher amounts, without end, then there’s no point in watching the rest of the Crash Course.
However, if you don’t happen to believe that, then you’re going to want to see the rest of the video series.
All right, the point of this section was to help you appreciate the fact that our country has not always lived under a regime of perpetual inflation, and that, historically speaking, it’s actually a rather recent development.
So now we have our fifth key concept: Inflation is everywhere and always a monetary phenomenon.
Flipped a bit, we can say that inflation is a deliberate act of policy. We might also observe that this policy benefits a very small group of individuals and institutions at the expense of literally everybody else.
Most unfairly, it robs from our future selves to satisfy our current cravings.
Okay, now that we’ve covered compounding, money, and inflation, you’re nearly fully-equipped with the tools to get the most from the remaining sections of The Crash Course.
But, there’s one more tool to put in our kit: A better appreciation for really big numbers.
Publicatie 4 juli 2014
Engelstalige transcriptie Chapter 12 Hoeveel is een biljoen?
During the Crash Course you will often encounter numbers that are expressed in trillions. How much is a trillion?
You know what? I’m not really sure myself.
A trillion is a very, very big number, and I think it would be worth spending a couple of minutes trying to get our arms around the concept.
First, a numerical review.
A thousand is a one with three zeros after it.
A million is a thousand times bigger than that and it’s a one with six zeros after it.
At this level I can really get my mind around the difference between these two numbers. A million dollars in the bank is a very different concept from a thousand dollars in the bank.
I get that.
A billion then is a thousand times bigger than a million, and it’s a one followed by 9 zeros.
And a trillion is a thousand times bigger than that, and it’s a one followed by 12 zeros.
So a trillion is a thousand billions, which means it is a million millions.
You know what? I don’t know what that means!
I can’t visualize that, so let’s take a different tack on this.
Suppose I gave you a thousand dollar bill and said you and a friend had to spend it all in a single evening out on the town. You’d have a pretty good time.
Now suppose you had a stack of thousand dollar bills that was four inches in height. If you did, you know what? Congratulations, you’d be a millionaire.
Now suppose you wanted to enter the super-elite of the wealthy and have a billion dollars. How tall of a stack of thousand dollar bills would that be?
The answer is a stack 358 feet high, seen here reaching 50 feet higher than the Statue of Liberty.
Now how about a stack of thousand dollar bills to equal a trillion dollars? How tall would that stack be? Think of an answer.
Well, that stack would be 67.9 miles high.
And I meant stack, not laid end to end or anything cheesy like that. A solid stack of thousand dollar bills, 67.9 miles high. Now that’s a trillion dollars.
That still doesn’t do it for you?
Okay, I want you to imagine that you’re in a car on a roadway that is lined at the side with a sideways stack of thousand dollar bills.
A nice, compact, rectangular column of thousand dollar bills is snaking along the roadside next to you as you drive.
You drive along — brrrrrrrrrrrrr — without stopping for a little more than an hour, and the entire way there’s that stack of thousand dollar bills right next you, on the side of the road, the whole way.
Said another way, the amount of money created in the past year in the US economic system, if it had been printed up as thousand dollar bills and stacked along the side of the road, would stretch from the center of Manhattan to Trenton, New Jersey
So there it is. Either you can visualize the stack better by driving along next to it, or by standing on top if it, or any other way you wish to express this statement.
But make no mistake, a trillion is a very, very big number and we should not be lulled into complacency simply because it is too big to really get our minds around. Instead, we should be very nervous that our money supply now stands at – not 1 – but 12 trillions of dollars.
And the total accumulated debts and liabilities of the US are several times greater than that!
We are living in an era where our leaders are making decisions at orders of magnitude that they simply can’t truly understand.
And many politicians have less expertise in math, economics or business than most people watching this video.
When they vote for the next trillion-dollar bailout, raise the debt level by another trillion, or pressure the Federal Reserve for another trillion-dollar stimulus program – they don’t have any real sense of what the implications will be. No one can.
We have reached the point where we’re operating in territory beyond our neural programming.
As a result, unintended consequences to our current policies are guaranteed. We need to be ready for that.
Oh, and if you think wrapping your brain around the concept of a trillion is hard, let’s turn to Japan for a moment.
In August of 2013, Japan’s national debt exceeded 1 quadrillion yen for the first time.
How much is a quadrillion? Well, if we swapped out the $1,000 bills we’ve been using with 1,000-Yen notes, the stack would wrap around the Earth almost 3 times.
Ok, let’s move on to the next chapter. My brain hurts.
Publicatie 4 juli 2014