Prepare for the Worst, Hope for the Best

Prepare for the worst and hope for the best.  These are words that Jia and I try to live by.  We are both economic nerds.  We enjoy discussing (and writing about) money, finances, frugality, and the future. So for a family that watches their finances so closely, why is there a new car in the driveway and a new dishwasher on the way?

As with any large purchase, there are many answers.  We have been talking about getting a large car for our family for a long time.  This is the first time in my life I have ever owned a new car and I’m 46.  I have always bought cars that were used.  Before buying the car, both of our cars had well over 100,000 miles, and fixing them was getting more expensive.  Plus, the car we traded in was in an accident a few years ago, that left me a concussion that took me a good two years to recover from.

Aside from these answers, we are buying because of inflation.  This is exactly how inflation leads to more inflation.  As we have seen in the housing market, the fear of missing out on the ability to buy, causes people to buy. Usually, prices continue to rise before they come crashing down.  So is our current inflation transitory, will it go away, is it simply caused by issues with the supply chain or is something else going on.

The answer is yes and no.  Some of the inflation we are seeing is caused by supply chain issues. But these supply chain issues are being exacerbated by a lack of people willing to work, and a large number of people being put out of jobs by the pandemic, either via vaccine mandates or fear of getting sick.

How do you get people to go back to work?  They need the incentive to work.  Supply and demand will take over, meaning wages will rise.  Social Security payments are set to rise this year at a rate not seen in 40 years.  Even with this rise in payments, people on fixed incomes will struggle as prices are rapidly rising.

We bought the car because we think next year the same car is likely to cost more.  If we could have bought the car last year, we would have likely paid over 5% less! 

Jia and I are fearful right now.  I just read an article  about Jack Dorsey the CEO of Twitter saying hyperinflation is coming to the US.”  “HYPER-INFLATION!”, just the thought of that gives me the chills.  Many people do not understand what this means.  According to the Corporate Finance Institute Hyper-inflation is a term usually used with inflationary growth at a rate that is at or more than 50% a month.

Imagine paying $5 a gallon for gas this month, %7.50 next month, and over $10 a gallon the following month.  At these rates, it would not be long before people could not even afford to drive to work.  All prices will sky-rocket. Cheaply feeding the family will become a highly valued task (we hope Jia’s recipes help).

Hyper-inflation destroys economies, countries, and lives.  It’s truly a hope that Jack Dorsey simply does not understand what Hyper-inflation is because what he is talking about for the US could only be compared to the Great Depression of the 1930s, and even then, we didn’t have hyperinflation in the United States.

Chairman of the Federal Reserve, Jerome Powell recently said that inflation pressures “are likely to last longer than previously expected”.  He doesn’t mention hyper-inflation.  I believe that inflation has risen at a pace that is much faster than economists would like this year.  I think that a controlled steady slow rise in inflation is the best we can hope for, but history shows us that we often don’t have the kind of control over the economy that our leaders like to think.  Often the economic numbers reported by the government differ from what we see on the street.  Government reports try to soften the blow due to politics.  Even the way we measure the Consumer Price Index (which is a measure of inflation) is manipulated by replacement costs of goods sold.  So, for example, the price of steak can be compared to the price of chicken to say there was less inflation. The Bureau of Labor Statistics claims that while they change items compared they keep the same “satisfaction” level.  This leaves one to wonder, are they putting steak sauce on that chicken to try to achieve the same level of satisfaction?

Political leaders, and voters, are not economists.  As times get tough, many people look to the government to help.  Right now, the largest economic spending package in history is being debated by congress.  Large amounts of government spending, historically have stoked inflationary pressures.

Yes, you heard that right.  Inflation is a problem that the government is talking about solving by doing something that in the past has caused more inflation.  Governments need to act, but they must be very careful not to overreact and that is a difficult task to balance. 

I for one hope that the government is able to give targeted assistance to areas in need in order to fix supply chain issues, keep trucks on the road, keep farmers working, and keep workers in their jobs.  This assistance should start by working to bring down the cost of fuel and ending mandates that are causing workers to lose their jobs.  Ending the pandemic is important, but avoiding out-of-control inflation is also of paramount concern.

There is of course the other side of the coin.  Investors like Kathy Woods of Ark Invest think that we are undergoing a time of rapid technological change that will cause massive deflation.  She points to the lower costs to produce electric cars as an example of this.  I think she is way too early for that party. 

Others think that rapid inflation will trigger a collapse in the housing market which is deflationary.  This deflation will lead prices to bounce up and down before settling.  I defiantly can see this scenario playing out but for this to happen, mortgage interest rates will need to rise, and government policy will need to keep non-housing prices under control. 

I don’t have a crystal ball. Fear of inflation can lead people with money to park their cash in the housing market, and it can cause people how have locked in fixed mortgages to keep from selling.  I really can see the need for housing prices to come down, I can see what could cause them to fall, but if that plays out or not, is just a guess.  While I can envision falling housing prices, I think inflation for goods and services is here to stay for a while.  Thus, Jia and I will continue to prepare for the worst and hope for the best.  To read more on inflation please see Jia’s article: 7 Things to Consider When Inflation is High.

 

References

Cathie Wood: The Big Risk Is Deflation, Not Inflation | Chief Investment Officer. (2021, May 14). Chief Investment Officer. https://www.ai-cio.com/news/cathie-wood-the-big-risk-is-deflation-not-inflation/.

Common Misconceptions About the Consumer Price Index: Questions And Answers: U.S. Bureau Of Labor Statistics. (2019, August 15). Common Misconceptions about the Consumer Price Index: Questions and Answers: U.S. Bureau of Labor Statistics. https://www.bls.gov/cpi/factsheets/common-misconceptions-about-cpi.htm.

Cox, J. (2021, October 23). Twitter And Square CEO Jack Dorsey Says ‘hyperinflation’ Will Happen Soon In the U.S. And the World. CNBC. https://www.cnbc.com/2021/10/23/twitter-and-square-ceo-jack-dorsey-says-hyperinflation-will-happen-soon-in-the-us-and-the-world.html.

Hyperinflation – Definition, Causes, And Effects, Example. (2021, February 3). Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/knowledge/economics/hyperinflation/.

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