Inflation: Steal from You, Give to Rich. Long-term Ramifications.

Level 1 - NGMI

Welcome Avatar! This is a bit of a high level post as we expect inflation numbers to slow. Based on what we’ve seen from “government data”, full time employment is starting to go negative, part time work is up and Central Banks are starting to cut interest rates (Europe, Canada etc.).

In short, we expect inflation numbers to improve at this point (after three years of pain).

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Part 1: Reminder that Inflation is Cumulative

For anyone who expects prices to go down… simply think again. When President Powell said “transitory” inflation, he did not mean that prices would go back down.

Transitory means that prices continue to go up, but at a slower rate.

Example A: A $100 food item you buy all the time now costs $125. Transitory does not mean that it will cost less than $125. It means that the cost of the item will be $126, $127, $128 or something close to those numbers. This would be “up” but not a $25 jump. A few dollars is minimal inflation.

Example B: The goal of 2% inflation is based on cumulative numbers. If a five year period is supposed to have 2% inflation that would be 1.02^5 = 110.4% = 10.4% inflation.

Since we know inflation is at 25% now after 3-4 years, it does not mean that they want this number to read 10.4% by year 5. It means they want inflation to stop increasing *rapidly* which means an *additional* 2% is the goal. Cumulative inflation would be 27%+.

Deflation Isn’t the Goal: Deflation is when prices actually go down. You buy something for $100 and the next year it would only cost $90. This is called deflation.

Disinflation is the goal. If prices are rising 10% a year and they find a way to make prices go up by 5% a year this would be disinflation. While prices are not going from $100 to $110 anymore, they are still going up 5% from the higher level. $100 to $105 is a lower level of inflation rate.

Summary and Reminder

President Powell already gave up on bringing prices down to 2020 levels. The goal is to simply stop the *rate* of inflation. While you (the consumer) pay 25% more for everything (homes, cars, food etc.), their goal is to make sure you pay only 2% more *on top of* the 25%. There is no plan to bring prices down to 2020 levels.

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Part 2: How this Hurts You and Helps the Rich

You’re probably wondering why this matters for you. It matters a lot. Even if prices go up 25% for the rich as well, this is beneficial to asset holders.

Housing Example

Joe the renter has to pay $2,000 a month. Due to massive money printing and insanity, the cost of rent has to rise by say 10%. This would be $2,200. While this isn’t a big deal numbers wise you have to look at the relative valuation that is occurring.

John the owner explains that he has to raise rents to $2,200 due to inflation. What Joe needs to realize is that the cost of buying that house just went up by 10% (keeping it simple) and John uses it to pay a mortgage with a meaningless 3% interest rate (locked in low rates during COVID or during ZIRP).

This is extremely simplistic. In a more realistic scenario John is making even more money because the $200 rental payment makes him generate more positive cash flows while the additional tax payment is minimal. However. We kept it simple.

As you can see, if rents go up and everyone pays. The only winner here is John.

Joe has to pay an extra $200 while John sees no negative financial impacts. He is able to pay the additional property taxes, he gets to see his home value go up and his financial situation actually improves. The debt is fixed so the loan value goes down as well!

In short, the loan is being eaten up by high inflation. If you can borrow at 3% knowing that anything you buy will go up by 10% in value, what should you do? Borrow!

Asset Example

If this example isn’t good, you can simply look at the stock market. We’ve gone full crazy mode with stocks, crypto etc. ever since COVID due to the money printing. Now why does this matter if everything is going up? It matters because asset owners (largely the top 0.1%) don’t need to do anything anymore. Purely sitting around is more “valuable” than a full time doctor.

Joe: Followed the rules and became a doctor making $500,000/year while in debt with $200,000 in student loans. He plans to be debt free in about 2-3 years.

John: Inherited $10M from his grand mother who previous worked as a private driver for Nancy Pelosi. John simply puts all his money into the S&P 500.

Using Quick Math: Joe is out of debt and has ~$300-500K in savings. John, spent his time partying, drinking and being a degenerate like Hunter Biden.

John didn’t work at all and his net worth is now 1.85x higher and sits at $18,500,000. He spent $160,000 a year (the dividends from the S&P 500), to keep it simple here.

Quick Comparison: Over a 5-year frame Joe has saved about 1 year worth of earnings. John? He has saved 17 times that amount and didn’t do anything.

Think About the Consequences: Next time you have a dental appointment, doctor appointment etc. Be sure to be extra nice if you’ve done well for yourself. Does it make sense to live in a world where you’re incentivized to be *unproductive* since politicians keep printing money? Clown world.

Income Example

One of the goals of politicians is to get you to focus on taxing income. The psyop has worked for decades now and hopefully people are waking up to this sham.

For starters, we can agree that wages generally don’t keep pace with inflation. At best they are even/flat. Over the past 4 years or so inflation was around 20-25% and most wages are up 10-15% at best.

Now before people jump in and say “not me”, that is likely due to a few factors: 1) our audience goes to 20s/30s for the majority and 2) it does not cater in general to people in their 50s.

If you were to do the math across all age cohorts you’d see a similar trend of wages not keeping up. 20s/30s is when wage growth is the highest to get you into those copper handcuffs. Then around Late 30s/Early 40s people usually flat line or barely keep up with inflation. If you don’t believe this look up the earnings profile of a senior person at your company and compare it to a decade ago. It’s pretty close. (exceptions: firms with hyper growth like Big Tech or major growth firms in your specific industry).

Joe: Follows the rules and is a good worker. In fact his income keeps pace with inflation. *Surprise* he learns about tax brackets.

Joe makes exactly $191,950. He gets a raise in line with the last 3-4 years inflation of ~25%. To keep it simple that is $47,000. This is now taxed at 32% not 24%. Instead of getting $47,000*76% = $35,720 he gets $31,960. $3,760 difference.

Inflation is Post Tax: When you go and buy food, water, gas etc. You are paying with *post-tax* money. When the prices go up by 10% for the goods ($100 to $110) they do not “adjust this for income taxes”.

It’s a bit strange that this isn’t talked about since it is a pretty significant headwind for anyone on the edges/fringes. If the cost of living goes up by say $1,000 for you. You actually need to make $1,000 *post tax* not $1,000 gross. You likely need to earn closer to $1,400+ (not $1,000).

Part 3: Why Set It Up Like This and the New Reality

Now that the problems are clear, we can try to see the other side.

This was set up to encourage spending.

In a world where prices are going down every year, people would save a lot of money. This would cause economic activity to stop/sputter. Why would you buy that Honda Civic when you could just wait a year and get it for $1,000 less.

Disaster. This means people develop a scarcity belief and hold onto everything they have. This deflationary set up explains the dynamic in the great depression.

Idealistic

In an ideal world, having 1-3% inflation is pretty good. People do not want to hoard money because it does lose purchasing power and people realize the price of the items they want today will go up in the future.

Due to this small amount of spending pressure, they try to invest into other assets to beat that 1-3% marker.

New Reality

Now we’ve gone into full cost of living crisis mode.

Since prices have gone up so much (in a short period of time), we’re getting a fly wheel of population decline.

People know their wages don’t keep up with inflation (decide not to work as much). They know that affording a family is becoming incredibly expensive (the rise of pets over kids). They know that the rich are getting richer via asset inflation (homes, stocks, etc.)

Housing: The long term ramification is that lower populations would require less houses (see Japan as an example). It would reduce the value of larger homes. The rich areas remain insulated since there isn’t a lot of land in “prime” areas.

Digital Everything: This is already taking place with AI companies, internet companies, software companies and anything related to being at home glued to a computer going up in value.

The top 7 companies in the entire S&P 500 represent 30% of the entire weight and they are all tech companies.

Increased Populism: Since the entire goal of technology is to remove humans from doing work, this is going to lead to populism. You already see it now with more extreme political views. It’s really all part of the same root problem of work force reduction.

How to Play It

Pretty simple. If you understand how this whole game is played at this point you know the solution is pretty simple: 1) put all of your effort into building equity in something since you cannot fight inflation with wages, 2) build your future on the internet since that is where everyone will “hang out” in the future. In fact, many of you (including us) probably spend more time online than in the real world interacting with people. 3) learn to invest in a way that is going to grow *faster* than the general economy over the next 5-10 years, 4) have a 10-20 year view where population is actually lower in the western world - outside of immigration additions and 5) be ready for a populist movement - a real one - if tech can’t lower the cost of basic items fast enough. This is more of a guessing game. If robots/AI etc can provide entertainment while people are not working, we’d bet that 60%+ of the population honestly wouldn’t mind. (#5 is more of a wait and see).

Luckily We Cover Just That!

Assuming you agree with this general direction, we suggest tagging along for the ride.

As usual, best of luck and Stay Toon’d!

Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce.

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