“If you take cash, on the other hand, and you think about it from a purchasing power standpoint, if you own cash in the world today, you know your central bank has an avowed goal of depreciating its value 2% per year,” Jones said in May. “So you have, in essence, a wasting asset in your hands.”

Source: The ballooning money supply may be the key to unlocking inflation in the U.S.

Conversely, inflation rewards those who hold debt – because debts will be paid off in future devalued dollars.

Of course, there is a lot of hand waving going on that “this time its different”. Seems like we’ve heard that phrase before … the current theory is that if no one spends much money, then there is little demand to drive inflation.

That may be true in the short term – there are some items I am interested in buying but they remain in short supply due to supply chain disruptions, so I’m am not buying. Also, this was the year I had planned on  – at long last – learning to travel. But all trips were canceled for the year and travel does not look to be fun or convenient for at least another 6-9 months. When supply chains restart and refill and activities like travel and going to restaurants become possible again, will that demand suddenly ramp up?

Nobel economist Paul Krugman, Election night, 2016, writing in the NY Times:

Nobel economist Paul Krugman, July 28, 2020:

As Talib has observed, most economics prognosticators do okay for some number of years – mostly due to luck – and then reality hits. I used to enjoy reading Krugman’s columns but he increasingly went off the rails into politicized nutty land.

I agree with concerns over today’s stock market valuations, however a size-able part of this is the expectation of future inflation due to governments’ mammoth money printing required to accommodate their pandemic policies’ economic destruction.

My guess, though, as good or bad as any other, is that we are already seeing asset-price inflation due to the future devaluation of money caused by money printing. That’s why the stock market is up (and gold too). Owning assets that maintain their inherent value might be a good idea. Similarly, debt that will be paid off in future deflated dollars is a traditional good idea.

There are arguments that it is “different this time” – and the demand side might not be there to support inflation’s effects on prices. We will see!

This is a though provoking video: Economics theory is based on the idea that wants (demand) exceeds supply. Stated another way, we tend to want more than we can afford – we do not have the resources to acquire everything we may desire. But today we are, for a great many, and for many of life’s necessities, living in a post scarcity world. Once we have fulfilled our basic “wants” we have the luxury of being tricked by marketing into wanting even more (basically, a fake want designed to increase demand).

Maslov’s Hierarchy of Needs tries to explain human motivation in terms of fulfilling the basics, like food and water, first, at the bottom of his pyramid. Above that we seek shelter and safety, then peer support, self esteem and finally self actualization.

The reality of life today is that life is actually quite good – compared to the past. (Poverty is at a global low point, for example. Literacy is at a historical high point, and so on, in spite of the daily dose of fear mongering news media.) In effect, for most people, the goods and services of daily life are not scarce. We enter a world of post-scarcity economics for much of our daily needs.

Most people (yes, there are definitely exceptions) in modern economies have fulfilled the bottom 3 tiers of the Hierarchy of Needs. At this point, our wants become warped. Few people need digital watches (to quote Douglas Adam’s comments about the 1970s) – or for that matter smart phones or any number of other goods and services.

Since we do not really need a lot of “stuff”, marketing tricks us in to wanting things we don’t need. So we acquire more.[1] Because many of our basic wants are satisfied, we create new “wants”. Some “wants” are not goods or services – we have the luxury of time so we build ourselves up (top of the pyramid) by running marathons and ultramarathons or spending time at the gym or the hair salon to look good.

At some point, many people are persuaded to want things they cannot afford today – so lenders step into loan money to acquire stuff (you probably don’t really need). This can be loans for cars, homes, or consumer loans for vacations and home improvement, or accumulation of credit card debt to acquire “stuff” we believe improves our self-esteem (catching up or exceeding those in our peer group). As satirist JP Sears says, “Tesla – pretend to save the environment while looking rich” 🙂

Eventually, our loan payments cause us to cut back on spending on other things. As collective debt loads become too high, economic activity slows down and we enter a recession.

Post scarcity economics means we have the means to be persuaded (by marketing) to acquire stuff we probably don’t need and a ready supply of lenders to enable us to buy it today (versus saving our money).

A small observation: When we choose to purchase an item X, it is not so much a decision to buy X as it is a decision that we are not going to buy Y (and A, B and C too!) Few people think of purchase decisions this way though. But we should be asking ourselves, if I buy X, what product Y am I choosing not to buy? If we did this, we’d balance our spending – and wants – a lot better.

We see this effect at work in government spending. Legislators are constantly asked to spend more money on government programs (let’s call them X). But seldom is anyone simultaneously suggesting what projects (call them Y) we should not be funding in order to fund X. The solution is to buy X – and Y – and just borrow more money.

Keep this in mind the next time you “want” something (X) and ask yourself, what will I give up (Y) to buy X? Most people never ask this question and buy stuff they probably cannot afford. Spending decisions are about choosing between things X and Y, but most people view spending decisions as deciding whether to buy X1, X2 and X3.

[1] Getting tricked in to wanting and buying more is made possible by intense surveillance of our lives both on and offline. As Walmart says

“[W]e have a lot of data and we can gather even more data. [I]f you win their most frequently purchased items, you get the opportunity to serve impulse items online and in-store, and our focus is in driving that sweet spot,” he said.

https://www.marketwatch.com/story/walmart-could-run-into-privacy-issues-in-its-efforts-to-get-personal-with-consumers-analysts-say-2020-02-19?mod=home-page

Businesses are using multiple tricks to manipulate you in to wanting more than you need.

While working out the gym this week, I heard several ads on the local radio station urging consumers to take on more debt. One was for an airline promoting that you can now get a loan to pay for your vacation trip – this is not a wise idea.

This was followed by an ad for a local car dealer encouraging you to trade in your car, even if you owe more on a car loan than the car is worth. In the hyper rapid voice over at the end of the ad they mention this means taking on negative equity. In other words, going further into debt!

You take out a loan to buy a car for $25,000. Three years later the car is worth $15,000 but you still owe $20,000 on the car. You trade it in to buy a newer $30,000 car and roll over the $15,000 value of the used car to pay off $15,000 of the $20,000 remaining. Since you come up $5,000 short on the old car loan, you roll this over to the new car loan. Congratulations, you now owe $35,000 on your $30,000 car. That’s called negative equity.

When I heard the ad, I could not believe consumers could be this naive.

Borrowers are responsible for paying their remaining debt even after they get rid of the vehicle tied to it. When subsequently buying another car, they can roll this old debt into a new loan. The lender that originates the new loan typically pays off the old lender, and the consumer then owes the balance from both cars to the new lender. The transactions are often encouraged by dealerships, which now make more money on arranging financing than on selling cars.

More: A $45,000 loan for a $27,000 Ride: More Borrowers are Going Underwater on Car Loans

The lead anecdote in this story replaced his car 4 times in two years, each time taking out a larger loan (saying he had to do this due such things as a divorce, mechanical problems, and then wanting a larger vehicle). The article says 1/3d of those trading in a car took on negative equity loans.

As a general rule, its better to borrow money for items that deliver long term value. For example, home prices appreciate over time because multiple industries have persuaded government for police that make this happen. Taking out a loan for a high level education and degree may make sense for jobs that generate future high incomes, particularly professional degrees in health care, engineering, business and potentially law. It does not make sense to take out a loan so that you get a minimum wage job without benefits at Great Clips.

How can you buy “stuff” if you do not take out a loan? You work hard, avoid spending like crazy including buying less than you can afford at the time, and save your money.

Wealth = Assets – Debt

Many people prefer to look wealthy and do so by spending and borrowing, under the misconception that

Wealth = Assets + Debt

During The Great Recession, the local paper ran a story about the business of automotive repossessions (when debts were not paid). All of those interviewed had similar stories – the typical auto repossession was at a large, new house, with two newer SUVs, a $35,000 boat and an RV (trailer or mobile home) – all paid for using debt. These people all looked wealthy to the outside world but only because they confused the definition of wealth.