BONUS Episode #1 | January Blog | Inflation for Dummies

Welcome back to the local experience podcast. This is your host, Kurt Bear. And today I'm going to be doing the first of what will be a series of bonus episodes, specifically me reading my blog from the local perspective newsletter. And so without further ado, this month's blog post titled, inflation for dummies. Greetings and salutations to you as we're now about a month into our new year of 2022. So far it seems a lot like 2020 and 2021 with new pandemic threats, durable hopes for a return to normalcy or at least a stable new normal and business disruptions and supply chain challenges. And yet the world goes round and round and in many ways things seem good. As always our thoughts and time are mostly consumed with the navigation of life. But we may take a few minutes here and there to check in with the markets and scan the news. Big in the news and the markets lately is that scary little term no one likes to talk about but which has been making the rounds just lately inflation. In this month's blog I'll be taking a high level flyover on the topics of money and prices and supply and demand and finally zering in on inflation. What is it? Where does it come from? And how does it behave? And what actions can we take at the micro and macro levels to confront this dragon who consumes? First some news. We have a new internet logo think tank helping us level up and have more consistency in our social media game. She's from Venezuela and frankly she stalked me on LinkedIn because she was interested in our model of business and wondered if we needed any remote work done. Almost cup was overflowing and social media is not a great love for either of us and so we here we are with this new teammate at least for a season and I hope for longer. Gabriella is a third year engineering student remote education at present she's actually staying with family in Brazil and not optimistic about finding an engineering job in Venezuela when she's graduated where there is no construction there is no great demand for engineers so finding connections and possible pathways outside of her home country has become her second major equipped with almost bilinguality and her penchant for process and my willingness to try new things and follow my gut I think there's a nice opportunity for a win-win-win with no great bias as to what that might turn out to be. I've a soft spot in my heart for Venezuelans and it's in part because of an interesting chapter in life we shared with a young lady named Carolina Sackle. Carol she preferred because she thought Americans wouldn't be comfortable with a strange name like Carolina which made me smile because we have two states that share that name and I've yet to meet another Carol. But anyway I met Carol in 2016 at the dog park off Lake Street in Midtown for Collins when my 20-pound dog Tucker defended her 60-pound dog K from an aggressive dog German Shepherd of unknown name she was in Fort Collins for cancer treatment with her dog which was one of two that she kept and which were her key helpers in her dog training business. Carol had a very successful dog training business in Caracas, Venezuela and had a new branch in Mexico City and was working on the logistics of another branch in Panama saying that Mexico City in Panama were branches as perhaps overstatement at that time it was more like they had become financial refugee areas where her key employees had escaped to from Venezuela and they had a brand and training system to work with. The economy in Venezuela was melting down battling hyperinflation and corruption and also battling economic warfare from the U.S. to punish those naughty socialists. Carol is the daughter of an oil industry economist and to my surprise her principles were very libertarian and natural rights oriented much like my own. Though she was an upper class business owner in Venezuela her bees the local term for Bolivars the national currency were quickly becoming worthless when it came to paying dollar denominated vet bills from CSU. Though the official exchange rate was still 10 bees to the dollar no transactions ever occurred at that rate. When Carol and I met the black market exchange rate was about a thousand bees to the dollar and within nine months that spread had gone to 10 thousand bees to the dollar. We became friends she visited my rotary club and joined my wife and I for church and for dinner occasionally and she gave us some lessons with our dog Tucker. You know that dog training is just as much human training yes. As the savings that Carol had were becoming increasingly futile to address her U.S. denominated vet bills I decided to apply for a grant from my employer at the time thriving financial and we turned our annual backyard dinner party into a fundraiser for K's cancer treatment. We raised some funds and thriving paid for the party costs and it was a beneficial event overall. Thanks to CSU K survived its brush with cancer and remained strong and Carol has successfully rebuilt her business into a truly international brand with operations in five countries and headquartered in Denver Colorado where she remains. You can check out canine universities website at ucanine.com if you're curious or if you and your dog need training she's a maestro. One of her specialties is training your dog to participate in a wedding as your ring bearer or bride accompaniment. How Colorado is that? It's been amazing to see how quickly Carol has rebuilt her life and her business. Great challenges often bring resilience and strength but that's a blessing for another day. The lesson for today is inflation and in the example just delivered hyperinflation. To get there though we have to do a quick primer on money. Money is what we say it is. Historically and especially today with fiat currencies predominantly in exchange. Money can really be any rare thing. You've heard no doubt of shells being used by native tribes and then commonly it was rare metals for many generations. Silver and gold especially with the less rare copper relegated to the pennies. Money is a medium of exchange and a store of wealth and the value is based on the marketplace just like anything. It's supply and demand to me. If we had a comet vaporized in our atmosphere and it rained quarter size gold nuggets down in the world for two days you can bet the price of gold would drop. The US dollar is our medium exchange and it's got some extraordinary features that serve as demand enhancements making our dollar worth more than it otherwise might be. First it's still the world's reserve currency meaning the central banks around the world hold dollars as a more stable store of wealth than their own currency and for differentiation and to defend their own currencies. Another is that oil is transacted in US dollars so if you've got yen and you want to buy some oil from Saudi Arabia you got to trade your yen for some dollars and then pay the Saudis for your oil. Another demand enhancement. Another and perhaps the most important reason why demand for the dollar is boosted America. We are the wealthiest most innovative and diverse economy in the world and we remain on nation of laws and individual rights. People all around the world want vacations and property and lives here in America because it's safer and better and offers more opportunity than other options and to find their way here they need to get dollars. When you're in Venezuela though in Hugo Chava's legacy has committed education and health care benefits and transfer payments to the poor and to pay for it they've taxed the formerly healthy oil and agricultural sectors nearly to death then the global market for oil drops from the low 100s down below 40 due to the fracking boom in the US and your government has corrupt and heavily in debt and is writing huge deficits nobody wants your bowl of ours and so you print more of them to pay your existing bills and the budget shortfall and then you print more to pay your bills and the shortfall and then repeat and by 2018 it was the equivalent of one million bowl of ours to the dollar. My example from earlier was just the beginning of the meltdown. I'm told that nowadays one convocation and or live very well in Venezuela on about nine dollars a day provided you don't get kidnapped and held for ransom by desperate citizens because they've noticed you've been spending US dollars so that's hyperinflation. It often comes from governments overextending themselves and their currencies to the point where the future value of the currency is in serious question. Inflation is basically the same thing only a little bit of time. In our current situation through the combination of pandemic stimulus credit programs for businesses and unemployment benefits we've grown the supply of money in the economy that's increasing demand for goods and services of the world. At the same time due to the shutdowns the great resignation the dreaded supply chain challenges the available supply of goods and services is constrained. Increased demand plus reduced supply equals increased prices. That's economics 101. But there's a pair of factors really. This simple supply and demand is discussed in the prior paragraph and also the notion that cutting the pie into smaller pieces doesn't increase the amount of pie available. When new money is created it devalues the existing money just like that asteroid that rained down gold nuggets from earlier. You've probably heard that headline or meme that 40% of US dollars in existence were printed in 2020. But it's actually much worse than that according to an article in tech startups that indicated near 80% of all money US dollars was created in the last two years. So of course the value of dollars is going to go down. It's been raining money from the sky. When we try to have a discussion about how inflation behaves it's really a discussion about how people behave. When prices are going up it encourages people to spend their money right away because next month this thing I want will likely cost me more. In doing so it discourages savings which is what allows us on a macro level to purchase homes and automobiles and to build wealth generally. As we start to creep toward the macro level inflation gets a lot more complicated. Because prices for inputs and labor are going up the business owner must raise prices to maintain a profit margin which they fear due to the possible negative effect on demand from customers who are already paying more for their other wants and needs. But raise prices they must if they wish to sustain the enterprise which contributes to increase prices in the greater economy. Ultimately despite these measures profit margins tend to decline during inflationary seasons which leads to declining taxable income which leads to declining government tax receipts which leads to greater deficits which must be funded by the printing of new money which leads to the evaluation of these $16 it's a tiger in a cage and its inflation. The reason we pay so much attention to inflation generally is because it's known to be an economic strangulation device. But for those who already have lots of assets it's not as painful. Your $500,000 home becomes worth a million in a few short years your stocks are up at least for a while and if you owe a bunch of debt like most Americans and especially our government it's kind of nice because you can remember the days when 29 trillion seemed like a lot of money. But for the debt issuers it sucks as well as for the savers because they can't do nearly as much with those repay dollars and interest earnings as they could have before they sacrifice to save. One of the reasons other countries want U.S. dollars is that historically it has been a stable currency. The Federal Reserve has what is called a dual mandate but which is actually a triple mandate of maximum employment, stable prices and moderate long-term interest rates. I would argue that the extended accommodative monetary policy of the post 2008 crash is largely blame here. We've been goosing the economy with artificially low interest rates for a decade trying to foster business growth but also burdening the economy with an ever-increasing debt load and regulatory tangle. At the same time the U.S. and the world have been subsidizing renewable energy that isn't ready for prime time yet to such a level that Texas nearly lost its power grid last year because of an aggressive winter storm and stupid policy decisions. Texas where they have over a hundred and fifty thousand oil and gas wells today. Despite what you might read wind and solar costs a lot more to produce power than coal and natural gas and nuclear do and so to transition to a lower carbon economy it is likely to cost a lot more for your energy and your heat. As more and more copper wires and silicon panels and fancy pants windmill blade metals are needed to transition to this quiet, streeted and bird-be-ref new world it's likely to make those renewable energy sources and electric cars even more expensive. Greenflation has been called and it's real. You can read about it in the financial times or in Bloomberg. Energy is basically money and if we raise the price of energy it serves to keep all the poor people poor. They're already energy starved. The challenges business goes where the economics make sense. China is wealthy now because the US largely outsourced its manufacturing to China over the last fifty years due to the lower wages and less stringent environmental standards. Now the place is a mess environmentally but their people are much better off financially. So as the western world pushes on the gas pedal with low interest rates and applies the breaks with decarbonation efforts and crippling deficits what could go wrong. A lot. A lot could go wrong and if the US were to lose reserve currency status the impact on our currency and living standards would be near catastrophic. What's likely needed is a rapid increase in interest rates and a slow decrease in the money supply and the pain of a recession to combat the dragon inflation and put it back in its cage. Just stop in other words take your foot off the gas and off the break and coast to a nice stable equilibrium where we can maintain positive price growth in the one to three percent range and work off our debt for a while. It's hard on both a macro and macro level to live within your means and harder still to pay off the debts from your extravagant days during leaner times ahead but we will and we must. No more stimulus checks no more infrastructure spending bills no more money printing no more credit card spending and no more voting for those who promise more than they can budget for. Dummy is as dummy does and I don't think you're dummy at all. Thanks for listening to this episode of the Logix Variants Podcast. If you enjoyed this program share with your favorite people and please leave us a review on your favorite listening platform. Subscribe to never miss a latest interview and check out belogueexperience.com to learn more and find our library of episodes. Until next time stay local.