On January 29 I reported to you that we were in economic recession, weeks before any economists uttered the words. I didn’t have any magic crystal ball to predict the future. It was just obvious that we had negative growth.
On today’s show we’re talking about the consequence of the government handouts. In the next 5 minutes I’m going to build the case to show you that we are now in a period of stagflation.
Stagflation is a combination of stagnant economic growth, high unemployment, and high inflation. It’s an unnatural situation because inflation is not supposed to occur in a weak economy. In a normal market economy, slow growth prevents inflation. As a result, consumer demand drops enough to keep prices from rising. Stagflation can only occur if government policies disrupt normal market functioning.
Many people are treating these bailouts like they’re free. Nothing is ever free. But there has been zero discussion of who is actually going to pay for these handouts. If its coming from government, it ultimately means that we the population are going to pay. But nobody is saying how exactly.
A lot of people tend to measure the cost of government in terms of the cost of taxation in their personal situation. If they’re paying 50% of their income in taxes, then the cost of government is 50% of their income. If someone else is in a 10% tax bracket, then their perceived cost of government is 10%.
But that’s not the cost of government. The true cost of government is measured by government spending, not in the amount of tax collected. So for example if government brings in $100 in taxes, but actually spends $150 of those $100, the cost of government is actually $150, not $100.
You pay for government in two ways. You pay in taxation and in inflation. When government prints money, you pay for that spending in terms of reduced buying power, in terms of reduction in your savings.
So here we are, governments are spending cash in vast quantities to bail out various industries.
They’re spending cash they don’t have, so it’s being printed out of thin air.
If you’ve been listening to this podcast for a while, you’ll know my opinion on inflation. We have plenty of modern day examples of hyper-inflation. So we don’t have to dig too far in the history books to look and see what happens. We can look to modern day Venezuela, or Zimbabwe for current examples. You can look to Argentina in the mid-1980’s.
In a world of hyperinflation, there is so much currency being printed that the purchasing power of the currency gets eroded. It has the impact of eroding the purchasing power of those on fixed incomes, it devalues savings, and it devalues debt.
If you know that you’re entering an inflationary period, you would want to hold assets that will benefit from a devaluation of debt and a devaluation of savings.
Let’s say for example that you hold a piece of real estate that is generating income. That income property is producing positive cash flow, and its not over-leveraged.
Well guess what, we have the conditions for stagflation. We have governments the world over telling people that they should not go to work, that they should stay home, and that they should avoid social contact.
Don’t get me wrong, it’s all being done for a good reason, to save human lives. The social lockdowns are absolutely the right thing to do.
But we have to acknowledge that the vast printing of money will have an inflationary impact. Now some of you might be saying that the government has been printing money for decades and it hasn’t resulted in hyperinflation. Why is that?
I believe that we have exported our inflation through globalization. The extra printed money went to pay for goods that were manufactured in the East and imported into Western economies. We exported the extra cash, so long as they were willing to accept it.