Several months ago I talked about the zombie apocalypse and how to survive it. It was a lot of fun for me to write about the end of the world at the hands of the living dead, but I’m gonna let you all in on a little secret.
I’m pretty sure that’s not very likely to happen in real life.
But today I want to talk to you about a disaster that may affect you in the coming months and years. Economic disaster.
I’m not an economist. I do not have a degree in this. But I have made this something of a topic of personal interest, to learn about what makes the economic world function. I’ve read a number of books on the topic (most notably Adam Smith’s doorstopper The Wealth of Nations) and over the years it’s become something of an increasing concern to me that the population at large doesn’t understand the basics of economics. So today I’m doing my own small part to remedy that.
Specifically I want to talk to you today about inflation. Inflation is what happens when money becomes less valuable.
“Hold on a second, Albert,” you might be saying. “Do we need to go and get that jacket with the extra long sleeves again? Money can’t become less valuable. It’s money. One dollar is always worth one dollar.”
Ah, yes. Let me explain. You see, dollars have no inherent value at all. You can’t eat them. You can’t live in them. And if you light your cigars with them you just look like a snob.
Dollars only mean something if you can trade them for other things. Things like bread, and houses, and Zippo lighters. When I talk about dollars becoming less valuable I mean that you can’t trade them for as much stuff. For instance you can’t buy as much bread for one dollar today as you could in 1980. Why? It’s not because the bread we have today is so much more valuable than the bread we had in 1980. It’s because the dollars are less valuable.
“Wait a minute, Albert,” you might be asking. “How does this happen? Do dollars have some kind of half-life that causes them to lose value over time?”
No indeed. The factors that cause the value of dollars change are the same factors that cause the value of anything else to change. One the one hand we have “supply” and over here we have his brother “demand”. You may have heard of them.
Supply is how much of something there is. Demand is how badly people want it.
If supply does down, value goes up. If I’m the last guy in the world with a glass of water you had better believe that glass of water is going to be valuable.
But when supply goes up, value goes down. If the earth is covered in a deluge of drinking water, I’m not gonna have much luck trying to pawn off my one little measly glass of water to the guy in the next boat over.
If demand goes up, value goes up and vice versa. The more people want something, the more it’s worth.
The value of the dollar has been going down pretty steadily over the last eighty years or so because the Federal Reserve has been adding to the money supply a little at a time.
Why have they been doing this? Because they don’t want the dollar to become more valuable (there are a number of reasons for this and we can’t get into them here for the sake of length.)
“Okay Albert, so what’s the big deal? The value of the dollar has been going down steadily over the years which means that prices have gone up a little at a time. This does not seem like that big of a deal.”
And on the whole I’d say you’re right. Except.
Lately the Federal Reserve has been doing its money creation thing way faster than normal. Again, the reasons for this are kinda complicated, but remember what we said about what happens when supply goes up? Value goes down. That means that your dollar won’t buy as much as it used to.
You’re probably seeing it already, in the price of groceries. I know I have. The increased supply of dollars is creating lower money value which translates into higher prices.
Meanwhile, the US government is experiencing financial difficulties. That means that other governments are giving us the sideways eye, wondering what’s going to happen to the US economy. Result?
The demand for dollars in other countries could drop, and anything we get from overseas (which is almost everything these days) will necessarily cost more.
Now comes the scary part. You see increased prices now at the grocery story, but it’s possible things could get much worse, and if they do, it’s likely it could happen very fast. In other countries where this kind of thing has happened, prices of basic commodities would skyrocket in a matter of months or even weeks.
So what can you do? Not much. But if you have investments, it might be a good idea to take stock and see if they’re likely to hold their value as the dollar takes a plunge. I also recommend owning your own home, because if you can weather the storm of inflation, the mortgage you’ll be paying on the other side will be worth way less than it was before the whole thing collapsed.
Oh, and on the bright side, your paycheck will probably go up eventually. It won’t mean anything because the dollars will be worth less, but it’ll feel good. So that’s something.
And maybe none of this will ever happen. As I said before, I’m not an expert. And I’m certainly not a prophet. My main goal is that you all be informed, that you understand how money works. So you can watch the headlines and decide for yourself how likely all of this is.
You know what they say: Knowing is half the battle.
The other half is superior numbers and overwhelming firepower.