Inflation vs. Scams

These are rough numbers as the tax structures vary wildly.

Inflation in North America is at crazy highs right now, near the 7% mark. This has a massive impact on people with limited disposable income (read: middle class and lower), as they are now faced with making much harder decisions. They are likely making the same income, but the value of their dollar is much less… fuel in particular. Odds are if you live outside an urban centre, a truck is in the driveway. At $300 per tank, that really limits options. There are only a few possible counters to inflation that actually work at a larger scale and unfortunately, pay raises is not one of them (it is an outcome though!) The primary tool to manage inflation, in a neoliberal market, is borrowing rates.

Why? It’s because inflation is not caused by the bottom, but the top. Inflation is a market correction for an overvalued economy, which is grown from speculation. Speculation is funded through easy access to credit. Let me rephrase this a bit. Let’s say you took a $10k loan from the bank… you’d probably pay 5-7% interest because it isn’t backed and isn’t large enough. Let’s say you take a 2nd mortgage and get $500k instead, that rate is likely to be closer to 1.5%. You can do the same with other forms of equity, such as other investments. These lower rates were seen as stimulus after the crash of 2008.

So let’s pretend you borrow $500k at 1.5% in 2010 and invest it in the stock market. By 2020 you would have made a ~160% return. Invest in real estate, and the returns are similar (2020 – current you would have gained an additional 50%). Depending on where you are, you are taxed at a different rate on your gains… over here you pay on only 50% of those gains at a nominal rate – which effectively means you are taxed at ~20% on all the gains. To break even on the 1.5% borrowing rate, you need to make ~1.7% return. This is a machine to print money. And once you made that money, you can leverage it to make more money. The problem here is that access to the seed funding to invest at these levels is next to impossible to acquire for people without assets to leverage. It’s not possible for someone making minimum wage, trying to put food on the table, to get approved for any meaningful loan without crazy interest rates.

The mean wage during this same period increased by about 40%. If you worked and were not able to invest, then you were making less money than someone who didn’t work and solely invested. If you worked and started at 500K, you’d have gained ~600k (pre-tax) by the end. If you didn’t work and solely invested, you would have started with 500K and gained 1.3m (pre-tax) by the end. By investing once and never touching it, you would have gained twice as much as a worker. By doing nothing. That’s our version of capitalism.

Crypto is like this, except access is much easier to acquire. 1 stock of Apple is $145 today. You can buy any amount of crypto you want, it’s all broken into smaller pieces. Have 5$, you can buy crypto. Bitcoin only hit $1 in 2011. In 2020 it was worth nearly $30k. If somehow you had invested $500k (not technically possible, but the argument is the point) in 2010, buy 2020 you would have $15b dollars (Sep 2020 to Feb 2021 Bitcoin went from 8k to 55k). For a lot of people who have no concept of what investing is, and simply focus on the % returns, crypto seems like the simplest thing in the world.. it just prints money. Except the value of crypto is not linked to anything but the value of crypto… and therefore almost exclusively inflated and therefore extremely volatile to trends.

If by chance, you had 5k invested in crypto and you needed that money suddenly because of inflation pressures, then you would take that out to spend it. If enough people do this, then it deflates the value in the currency. In the stock market, the % of trades required to impact the market are massive, and there are balances to reduce the impacts (generally). It is really hard to have a run on the market. In crypto, a totally unregulated market, there are no such controls and runs are extremely common. Enough that the market has dropped ~40% value since Jan 2022 (hell, Luna lost 99% value in 24 hours). The stock market as comparison is down ~10%.

The larger problem space is that it may appear that people are playing the same game, the truth is simply that the rules are different. The value of crypto in particular is based on the last person who invested, making it effectively a giant ponzi scheme (as evident multiple times). The stock market is certainly bad, but there is something on the other end of it that is tangible.

Back to the original point… if you want to tackle inflation it’s not about pumping more money to people at the bottom… they don’t have disposable income in the first place. It’s about removing the amount of easy money entering the top, who are made up entirely of disposable income and are frankly gambling against a house that has been paying out at a crazy rate for nearly 40 years. They don’t care an ounce that gas costs triple… it could cost $2000 a tank and they wouldn’t know (they would from a profit perspective if they are running a business). The outcome of inflation being controlled is that the non-stop increased in costs are reigned in, which would then allow for incomes themselves to catch up.

There is no model that fixes this without changing the way the people who manage the majority of wealth are taxed. (Top 1% own ~40% of income, bottom 50% are 20% of the income. Top 1% = assets >$5m, annual income of >$500k). If you were in a hockey stadium with 20,000 people, 1% of those people would fit on a single articulated bus.

There are larger reforms that can help here… but the people who have benefited the most from the broken system are the ones running the system. Crypto was a great option to say “here’s an option for the plebs” (Poilievre in Canada said “...it can also let Canadians opt out of inflation, with the ability to opt in to cryptocurrencies.”) If you’re voting, and finances are of any interest, dig a bit. Soundbites are fun and all, but the actual decisions that make a difference… been a long time since that’s happened.

8 thoughts on “Inflation vs. Scams

  1. It’s all very well being a crypto millionaire but even if you’re smart enough to see the drops coming, how do you actually cash out? The options to spend crypto directly seem somewhat limited so presumably the value is notional unless you can somehow convert it into a recognized currency like dollars or euros. Who is stumping up those real-world buyouts for all these proliferating crypto variants and why? Or are you just stuck with an imaginary fortune you’ll never be able to spend on much other than imaginary NFTs?

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  2. A lot of the pressures are due to some bad policy choices over the last 2 years. A great deal of the covid protocols have wreaked havoc on the economy. A lot of small companies with less than 25 employees closed doors, so many restaurants and bars that weren’t permitted to open, and eventually were allowed to reopen at such limited capacity than it wasn’t worth doing. Add on to that a year of an extra $600 a week if you were unemployed, people found it was easier to just not work. Now they don’t want to go back unless they get $15 an hour minimum, health insurance has jumped 40% that I’ve personally seen. Most took all that money from not having to drive to work and bonus money, and bought things driving the prices up because they had the money to spend. I won’t even go into those that took the opportunity to live rent free because landlords couldn’t evict, or paid a little and go free government assistance to cover the rest. All those manufacturers that were shuttered have not been around to replenish the supply. As an example, I have a pool. Normally for the past 15 years it costed me $85 for enough chlorine to last a summer. The one plant in New Jersey is closed now. I had to pay $145 on sale a few weeks ago. We are only at the beginning of the problem. All the extra money in the economy will eventually dry up and once again supply will be greater than demand at higher prices, and we will see a huge correction. I don’t know who the economists were that advised the government, but they should all be out of a job for what they encouraged or said would be fine.

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    • There is a lot to unpack in that. The US and Canada took wildly different approaches to COVID stimulus (we paid people, the US paid businesses), with significantly different results to the population.

      Global supply chain is a big factor for a lot of price increments. A 7K shipping container was like 50K for a while…

      The extra money won’t dry up. Money never dries up. It moves into other people’s pockets. That we have multi-billionaires is mind-boggling. Blaming a person that wants to make a living wage instead of the person filling from the pockets is right where those economists are making mint.

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      • Well as far as businesses getting money, the small company I work for submitted on 3 different occasions and we were told the funds were gone. But New Jersey I believe is still sitting on a few hundred million of unused funds. Big companies? Yeah they may have gotten the lions share. My wife’s company was required to completely shut down for 12 weeks. We struggled for 9 weeks on my paycheck alone because our state was so overwhelmed and the system couldn’t handle all the claims. We got by and eventually it got straightened out. But it was tough and we went further into debt even after using all the money she got plus the additional $600 a week. Credit cards don’t care. Fortunately her company stepped up and covered the employee out of pocket for health insurance for the 12 weeks.

        Living wage is a relative term. I look at costs for things when I was earning a third of what I am now, they are triple for the most part what they were they. The market is a reflection of what people have available to spend. If you double the paycheck of hourly workers, things will double in price over time. Those that are hurt by it are people like myself that have worked for 36 years and will see 20 years of pay increases wiped out. As an example a person hired to do the same job as me will demand a $15 living wage. I make 50% more, but I have been doing my job for so long I can do twice the work on more difficult aspects. But there is no way the company can afford to increase my pay to $30.

        It is definitely a topic economists will be looking at years from now to see what worked and what didn’t.

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      • Relative is exactly the word. I’m not following why you shouldn’t get paid in line with inflation and your experience. Anything other than that is a pay cut. Minimum wage today should be able to get you what it was able to get 20 years ago. All workers deserve their share…

        Is your company boss making less money?

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      • It’s been a tough couple years. Health insurance has jumped 30% or more a year. Software license fees keep rising. We’re doing all we can to keep our jobs

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      • It comes down to salary plus benefits. If my boss tells me hey, good news we did well last year, I’m giving you a 5% raise (which doesn’t cover inflation at the moment) oh, and, sorry, but your portion of your health insurance is now an additional $50 a week. I’m taking a pay cut.

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