Inflation is a big influx of money into the economy. Cash payments, proposed monthly check for parents of children, student loan forgiveness, etc. From this the US will issue more debt, leading to more stimulus inflation. People will realize more that the currency isn’t tied to anything, which will only increase inflation, and people will rely on other physical goods, barter, real estate, stocks, and cryptocurrency. I also predict interest rates will rise after they try to unsuccessfully regulate them down. Because of that, now is the time to act.
A Quick Lesson on Inflation
The government could eliminate the national debt tomorrow if it wanted to. How? The dollar isn’t tied to anything. It’s literally just paper, and the government tries to control how much is in circulation. In today’s digital age, it’s usually not even paper. It’s just a number. If there is nothing backing the dollar, like gold was in the early years of our country, then it’s based on people’s faith in the country and in some perception of value.
Currency today is really just a measure that we compare the value of things to. The government controls how much of those units are in circulation. If there is all of the sudden more units in circulation, a loaf of bread will still likely be worth comparatively more than a cup of flour in the same proportion, but the amount of units (dollars) used to compare those units will go up. Think of it like doubling a recipe, but you don’t double the end result. This is inflation. And there is nothing, other than the government trying to play God with inflation rates (other than the checks and balances the government created for itself), stopping the government from sending out a lot of numbers tied to nothing to make our national debt zero.
What The Government Can Do
The stimulus aid has shown that the government can just send numbers to people’s bank accounts if it wants to. So it has the power, and it has the capacity to control inflation. The government controls inflation now almost 100%. The government essentially controls how much your savings account is worth. That scares me. How does it do this? When it takes on new debt, it is essentially creating money. Why? A lot of the money that the government owes is to itself. How is this possible? It takes from other funds, like social security. Will social security run out? No, because the dollar isn’t tied to anything. If the government borrows money from itself, and it decides how many dollars are created, every time it does this, it creates new money. So debt=inflation.
But why are we in debt to other countries? We are in debt to them so all of our economies are tied together. By selling bonds to China, China now has to have faith in our economy and how we treat the dollar. They also probably paid us in Chinese money, so the US now has some Chinese currency (numbers). Tying our economies together does two things- it essentially creates Mutually Assured Destruction for all economies throughout the world if one country decides to be stupid with their money. It also just helps feed the illusion that the government isn’t just creating money, even though it is.
How Inflation Applies to the Stimulus
The chart below shows the projected deficit that would have been spent by the federal government. In terms of the GDP, the government usually has a deficit of about 5%. It spends more than that, but revenues (taxes) cover about 75-80%. That means that they create about 5% more money each year. This in turn leads to an inflation rate of about 2% every year. Then you add the stimulus on top of that. The stimulus has added 5 trillion dollars to that in the last year. Which, as shown by the second chart below, is about 27% of our GDP.
- 2.2 Trillion Cares Act Passed on Mar 27, 2020
- 900 Billion Stimulus (as part of omnibus spending bill) Passed on Dec 21, 2020
- 1.9 Trillion American Rescue Plan Passed on Mar 11, 2020
What Will the Stimulus Do to Inflation?
We don’t know what the stimulus money will do to inflation. This is completely unprecedented. Can we base it off of what has happened before? This is a simplistic view, and I couldn’t find any research claiming this correlation, but if 5% of GDP deficit spending leads to 2% inflation, and we spent have a deficit of 32% GDP (5%+27%) then we would have an inflation rate of 12.8%. It could be higher and it could be lower. We don’t know. This sort of stimulus deficit spending has never been done before on this scale.
A study was done in Asian countries, looking at deficit spending and inflation rates. The basis of their results were that there is definitely a relationship between deficit spending and inflation rates. It was more pronounced in less advanced financial systems. In basic terms, if the country wasn’t very advanced it was more likely to just print money to cover its deficits. The study didn’t explicitly say that other countries just “printed” money, but the deficit spending essentially created money. The more complex systems are just better at keeping up the mirage that all is well and inflation is unrelated. The US is a very complex financial system, which is why our massive national debt really hasn’t been strongly linked to inflation, in fact, some disagree as to whether it relates to it at all in the US.
I was hoping to find a study that would give some sort of clear equation I could use to determine the amount of inflation that would come from this stimulus, but this study didn’t provide it, and I don’t think there is any study that can, mostly because its hard to compare the US to any other country, and the US hasn’t ever spent at this level. Because of this, I am sticking to my very imperfect estimation of about 13%. I imagine there will be studies done after the fact, looking at the effects of this stimulus, and economists will be arguing about the cause and effects that will come from this for years, but for my purposes, 13% is a good enough starting estimate. This article is less about the actual math and more about the principles.
We believe the government tries to enact policies to dampen or delay these things. From an economist perspective, this deficit spending will be a true experiment that will help show the effect that deficit spending will have. While it may be valuable for learning, the learning comes at the expense of the public.
What the Stimulus Inflation Won’t Do
It won’t affect our standing with other countries. Why? 2 main reasons- 1. most other countries spent a ton on Covid-19 relief as well, and 2. All the world economies are all tied together, if not through trade and private deals, then through sharing each other’s debt. Furthermore, most major countries had some form of Covid Relief. Everyone’s doing it, so it’s just going to make one country look bad.
It won’t help old people, pensioners, and people on retirement plans. The inflation essentially kills a year of stock market growth. The stock market on average grown about 10% every year. So if they had a retirement plan, it just got cut back at least a year. If they’re on a pension, things will now cost, by our estimation, about 13% more, meaning their money doesn’t go as far, and they are essentially 13% poorer. If the government tries to increase social security to take care of them, this will only lead to more inflation, further snowballing the aftermath and making inflation worse. That is, unless they cut from somewhere else.
What the Stimulus Means for the National Debt
The government has shown that the national debt is a joke and essentially meaningless. It really isn’t going anywhere. Is the national debt ever going to be paid off? No. It realistically isn’t. If we can create more than 5 trillion dollars to solve our problems, its not going anywhere. The National debt at this point is just abstract. Furthermore, the government doesn’t ever give back powers. It’s likely the norm that we as a country are now more likely to spend our way out of a problem. I mean more than we have so far. This applies to Democrats and Republicans. The Republicans at least pretend to care about the National Debt when they’re not in power, but both sides add to the debt without much restraint. In fact, most of the stimulus came from President Trump, to the sum of 3.1 trillion dollars.
The idea that we will have to pay back the national debt is absurd. It just isn’t going to happen. It’s inaccurate to say that our kids will have to pay back the national debt. What is accurate is to say that our kids will have to pay FOR the national debt. There’s an important distinction there that ties into inflation. The country can make the debt disappear, but unless they reduce deficit spending, which isn’t going to happen any time soon, they can’t make the inflation disappear. I think its scarier. Debt has a finish line, an end. If my rough calculations are correct, the stimulus will make us all pay about 13% more pretty much forever, along with whatever else the government now feels enabled to spend for.
When Will All This Stimulus Lead to Inflation?
Gas has risen a dollar in the last month. Could this be part of the inflation from the stimulus? I’m sure there are many factors, but this could be part of it. A lot of stimulus inflation has to deal with how quickly the dollars hit the market, and how quickly the market responds. It’s a question of supply and demand. Demand and the amount a person is willing to pay will go up as they have more money. The amount will stabilize at a new higher point. When will it stabilize? Again, it’ll depend on demand levels, and it will vary by the item.
What’s the Next Inflation Cause?
The biggest example of the government’s capacity to create money, almost from thin air, is the power given to the government to forgive student loans. The president can do this unilaterally if he decides to. This would essentially increase a good chunk of the country’s cash flow. This will put more money immediately into circulation which I believe is more likely to increase inflation more than other government spending, in the same way that the cash payments to individuals as part of the stimulus led to a lot of immediate spending.
Stock Up on What Stimulus Inflation Will Affect
If you know something is going to be more expensive tomorrow, buy it today. That’s the very easiest way to brace yourself from inflation. What areas should you most consider?
Food Storage:
There are a lot of things that you could invest in, but if you want a buffer against inflation, you start with the things you know you’ll use. I’m not planning on giving up eating any time soon. Because of this, I’m always looking to increase my food storage. I don’t do this from a hoarding perspective. I store what I eat and eat what I store, and this is the model we recommend to everyone.
Household Staples Storage
When the pandemic hit and everyone started buying out all the toilet paper of all things, we weren’t concerned. We had a good stash. Having a year or more supply of toilet paper, toothpaste, shampoo, and other items you use all the time will mean you will have a buffer between you and possible inflation. You won’t have to pay higher prices for a year, or as long as your supply lasts. Even better- learn how to make different household things like soap and toothpaste.
Start a Gas Reserve
It’s hard to have a large amount of gas on hand, and this can be a safety issue as well, but it isn’t unreasonable to have a few tanks you cycle through, especially if you have a generator, or other things around that have engines in addition to your vehicles. I don’t see gas prices coming down any time soon. There are permits and regulations you need to be aware of, especially if you want large quantities, but unless you like walking, you’re probably going to need to keep things fueled. You can read more about it in our article Fuel Storage 101.
Be Self Sufficient
Being self sufficient in more and more ways is the very best way to combat the stimulus package inflation, or really any inflation or change in the markets. If you can provide food for yourself, water for yourself, power, fuel, etc. you’ll be in a really good place. I’m not saying everyone should live off grid, but the more off grid capacity you have, the more insulated you’ll be from the effects of the world market– because you won’t rely on the world market. Look into solar, farming, gardening, and preserving food. Learn as much as you can and you’ll be better prepared.
Less in Savings Accounts, More in Investments
We are strong advocates for investing. We believe in having a good emergency fund, but your cash and savings account are becoming less valuable all the time because of stimulus package inflation. Because of this, we have our emergency fund split into 3 parts- cash, a savings account, and an investment account we can withdraw from fairly quickly without crazy tax penalties. You can read more about our emergency fund in our article Creating an Emergency Fund.
Along with investing your money, and investing in food, supplies, self sufficiency and water, we also recommend getting your money into the market. In the stats above, I estimated that if the stimulus package inflation impact is 13%, that’s about the equivalent of losing one year of investing. If your investments went up 13%, but money is worth 13% less, you didn’t really lose anything. If you had your money in a savings account, or under the mattress, it’d be like you lost 13%. Although our money system isn’t based on anything but trust and dreams, people put a lot of faith in it still, and I don’t think that’ll change any time soon.
I also expect that the sellers of physical goods will be able to weather this fairly well, as they’ll be able to ride the wave of inflation. People will still need food, water, and shelter. That won’t change.
Cryptocurrency:
Cryptocurrency is completely outside the game of imaginary money that has been created by countries. You’re probably thinking- isn’t it just a different kind of imaginary money? Yes. But so is all money. But what sets it apart? What’s the big deal about cryptocurrency? Here’s the basics- Cryptocurrency has a set amount. There are only so many bitcoins. There will be, when all are “mined” only 21 million Bitcoin for example, though there are other cryptocurrencies and others could be made in the future. Cryptocurrency also uses blockchain technology. This means it can be traced, so it cannot be duplicated or counterfeited. Because of this, people are trusting this more and more. Tesla even recently began accepting payment in bitcoin. Furthermore, some cryptocurrency has been “lost.” It can’t technically be lost because of the blockchain, but it has essentially been abandoned and isn’t in circulation, so it’ll cap at 21 million, but supply could actually go down from there. This is something you may want to consider adding to your investment portfolio, and we buy ours in Robinhood. Again, its all a game of what pretend money people will value more, and a lot of trust is going towards cryptocurrency. We invest in cryptocurrencies, index funds, stocks, bonds, and REITS. We like diversity in our investments. We are not by any means financial experts though, so we strongly encourage you to do your own research.
Real Estate
There are more and more people on this earth every year. Perhaps this is too soon to say, but we had a full blown pandemic and the earth’s population as a whole didn’t take a hit. Property values will continue to go up. People will still need a place to live. This makes Real Estate a generally stable investment option. It generally has a higher buy in cost than other investment options, but is another option you may want to look into.
Keep Learning
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Sources:
- https://www.stlouisfed.org/publications/central-banker/summer-2004/budget-deficits-and-interest-rates-what-is-the-link#:~:text=Deficits%20can%20be%20a%20source,increasing%20the%20growth%20of%20money.
- https://www.investopedia.com/ask/answers/021015/what-effect-fiscal-deficit-economy.asp
- https://www.sciencedirect.com/science/article/pii/S2214845015000149
- https://www.nytimes.com/2020/12/28/business/economy/second-stimulus-package.html
- https://www.buybitcoinworldwide.com/how-many-bitcoins-are-there/#:~:text=How%20Many%20Bitcoins%20Are%20There%20Now%20in%20Circulation%3F,adds%206.25%20bitcoins%20into%20circulation.
