In this episode of Fiscally Savage, Dylan discusses three aspects of the inflation equation: too much money, too many people, and too few goods. Dylan also addresses related topics such as supply and demand, the COVID-19 pandemic and how it affected global supply chains, what the Federal Reserve is doing to combat inflation, and more.
- [03:22] The functional definition of inflation
- [04:25] The problem with demand and supply
- [08:11] The problem with printing money
- [08:52] The “too much money” part of the inflation equation
- [09:52] The “too many people” part of the inflation equation
- [11:26] The “too few goods” part of the inflation equation
- [12:06] How the COVID-19 pandemic impacted global supply chains
- [13:19] How China’s lockdowns are affecting global supply chains
- [14:33] How the pandemic affected meat prices in the U.S.
- [15:11] How the war in Ukraine is affecting corn, fertilizer, and gas prices globally
- [17:49] Why inflation is a supply chain issue
- [20:12] How the Federal Reserve plans to control inflation
- [21:32] How raising taxes can help lower inflation
- [22:35] Why gold and silver are poor inflation hedges
- [24:52] Two ways to hedge against inflation
[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage podcast.
[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. Today, on our Friday shows, we do something a little bit different. Our Tuesday shows are really dedicated to teaching you how to handle money, heal your relationship with money, and the tips, strategies, tactics, and mindsets that you need to really obtain financial sovereignty.
[00:00:35] Our Friday shows, however, are going to be separate and different from that. We’re going to attempt, at least, to bring you content and education that’s more relevant to what’s going on in day-to-day life. That is to say, I’m gonna be responding to something that’s in the market. You might see in the news, might be some chatter around, you know, the water cooler, if you’re still in the office. Or you might see something on Reddit or on Instagram or wherever you’re getting your information from these days. You might hear about a topic. So on Fridays, I’m gonna be just talking about that topic. In the future, I might bring on interview guests, different people, interesting humans that I come across in my different travels and circles that I run in. And I wanna bring that content to you.
[00:01:23] And so today, we’re, this is gonna be an education show where we’re gonna really talk about a topic that I think is near and dear to a lot of people’s hearts right now. And that is the topic of inflation. Inflation is a word that gets bandied around and used as a boogeyman in all sorts of different walks of life. And when people start talking about inflation, they tend to think of imagery of with the Weimar Republican Germany prior to World War II, where they were buying loaves of bread with wheel barrels of cash. Or Zimbabwe, where they were having a $1 trillion note and people were using that to buy a Snickers bar.
[00:02:01] Now, one of the things that is interesting to me, as somebody who works in financial markets and somebody who works with people on personal finances, is that the idea that we are all rational actors, which is the foundational idea of most economic schools of thought, I’ve found to be just completely ridiculous. People are not purely rational, purely logical economic actors. Human beings are tribal. Or if we wanna be a little more pejorative about it, we’re hurt animals, which means that we are going to be dictated based upon our emotions and our fears. If you watch the stock market, one random comment by Elon Musk can send a stock up or send a stock down. And we see this where they can use their economic power and their visibility to pump up or suppress the value of an asset or a stock or a bond.
[00:02:52] And so today, we’re gonna talk about a boogeyman like inflation because people use this in the same way. It’s not very well understood. Most economic people don’t actually really know how inflation works. We have a basic understanding. So I wanna kind of just level set expectations that I’m not holding myself out here as somebody who is a complete expert. I’m going to be speaking to you as a guy with maybe an above average level of knowledge on the topic, sprinkled in with my own thoughts and opinions on.
[00:03:22] So when we’re talking about inflation, it’s a boogeyman. And inflation is not very well understood. But we’re gonna start off with a functional definition of what inflation is because if we don’t know what we’re talking about, it’s really hard to have a discussion. So we’re gonna define inflation by the traditional definition, which is, too much money in the hands of too many people chasing too few goods. I’ll say that again. It’s too much money in the hands of too many people chasing too few goods. You can also throw services on there. But typically, we think about inflation as the price of bread or milk in the grocery store going up.
[00:03:56] Now in this equation — too much money, too many people, too few goods — there are two sides to this equation. The demand side and the supply side. Now, we all kind of have some basic understanding of how demand and supply works. That if demand rises and supply stays the same, then the price of the good is gonna rise. Similarly, if the supply of a good falls and the demand stays exactly the same, the price is gonna rise. And the reverse on these are both true.
[00:04:25] The problem with this is that what determines prices is kind of sticky. So for example, you can look at the case of airline pilots right now where there’s a huge shortage of airline pilots. But the price of that labor — that is, what they’re paying the airline pilots — hasn’t come up to reach the demand. And so prices are sticky. It doesn’t work on a one-to-one equation. And this is, of course, the game of economics where people try to figure out what’s gonna happen in these markets.
[00:04:52] But what I wanna do right now is start to understand that the price is really determined by whatever the last person was willing to pay. We’re used to, in our economic system, that the prices are set by a company. You walk in. The gallon of milk should cost what the gallon of milk costs. There’s no negotiation. The price is the price is the price. But that’s not actually true. You see, those prices are set based upon what you’re willing to pay because what the grocer doesn’t want is to have a bunch of milk sitting on the shelf going to waste. So those prices are going to, at least in theory, adjust.
[00:05:27] Now, where inflation — that definition of too much money in the hands of too many people chasing too few goods — comes in is that if I have too much money that’s entering the system, then the amount of money in the hands of people will make them want to — you guessed it — spend it. And so in this particular case, this is where people will say, “Aha! Inflation is caused solely by government printing.” If the government prints more money, you get inflation. They all point at Weimar Germany. And then people will take that as truth. Well, they’re taking that truth because it feels good. And then, of course, we have a boogeyman that we can all point to — the government or the Fed or whatever it is you wish to believe in.
[00:06:08] But this is, again, this is more nuanced because if I printed all this money, say trillions of dollars, and distributed it to the hands of very few people, well, it’s not gonna cause inflation because those people are only going to chase so many goods. That is to say, say that the particular type of pillow is the most hot thing on the market right now. Well, if I print up a million dollars and give it to one person, that person’s only gonna buy so many pillows before their demand is exhausted.
[00:06:35] And so, we’ve actually seen this. And you, ladies and gentlemen, I’m sure have seen it, too. We started printing money in the United States through a program called Quantitative Easing back in 2008 in response to the Great Recession. The issue was is that we gave all that money to wealthy people through tax cuts, through bond offerings, through various channels in which the Fed was able to get that money into the market. And low interest rates were part of this equation, right? Because what the Fed was doing is they were printing money and then buying bonds in the market to artificially suppress interest rates, which meant that the cost of money was actually really cheap. So if you had the capacity to borrow money, i.e., you already had money in the bank and something to borrow against, you could get money at rock-bottom prices. And of course, if you are the type of person who’s already wealthy and very successful, chances are good you’re not gonna go out and buy 50,000 pairs of blue jeans. You’re probably gonna use that money to make more money.
[00:07:36] And so since 2008, where have we seen the highest level of inflation that is almost one-to-one in line with the money printing that’s taking place? And the answer is the S&P 500. If you look at a chart of the amount of money that was going into the economy due to QE during that period of time and you look at the stock market as a broad index, they go up about the same amount. Why? Because that’s where the money flowed to. But of course, we don’t think of that as quote-unquote inflation because we think the stock market going up is a good thing.
[00:08:11] The issue with printing too much money is when you really put it in the hands of the people on the bottom of the economic ladder because they will go spend it. And when the people on the bottom level of that economic ladder spend it, it creates something called the velocity of money. And of course, we’ve seen this in part with the COVID response, with landlords jacking up prices, with people selling their houses at ridiculous amounts of money. And the idea of course is, oh, these people have more money. So if I’m the landlord, I can jack up the rent and take their production for myself. And that of course creates this inflationary spiral because if one person does it, then the next person wants to do it as well. And that’s how the market tries to adjust.
[00:08:52] And so, the too much money part of that equation is really dependent on where it’s going to enter the economy and how as to whether or not it’s gonna create the inflationary effect that we’re all dealing with right this second. And people will talk about how many dollars or percentages of dollars that were created over COVID. And my response back to them is, well, yeah, there’s a lot of them that were created, but where did they go? Did they go in the hands of thoroughbred horse breeders in Kentucky? As in the last COVID bill under President Trump that was passed, had a provision specifically for that. Is that causing the inflation that I’m seeing right now? Ladies and gentlemen, for my money is, I’d probably tell you no.
[00:09:31] So that has to be taken into consideration. And if you’re one of those people who’s thinking, well, we handed all these stimulus checks. I don’t know about you. But my stimmy check was out of my bank account the second it hit because I had things I wanted to get. And maybe that caused inflation. But I doubt it because what I did with it was I paid down my student loans.
[00:09:52] Now the too many people part of this equation is really just that a person has a baseline of financial needs. And this lines up with the bottom tier of Maslow’s hierarchy of needs. A person is going to require physical needs. That’s food, water, shelter, heat, those types of things. And they’re gonna require some security, right? So they’re gonna require four walls that are relatively stable, and the police presence, and all those other stuff. So too many people, each person that enters the economy is going to have some sort of demand effect on that economy. So as we increase people, so then increases our demand.
[00:10:26] Well, is that what’s going on? Well, no. We just got out of a global pandemic. And whether or not you believe that that was a big deal or not, it still had an effect, not only in the United States but globally. And the truth of the matter, ladies and gentlemen, is that the U.S. has been below replacement in terms of their population growth for decades. The only thing that really buoys us up in terms of our population is immigration. And under the Trump administration, that fell off. So our current inflation is not really being driven by because we have too many people. If anything, we’re probably in danger of having too little people here in the, you know, next 20-year time frame.
[00:11:06] So was it too much money? I don’t know. I really can’t tell you. I doubt it considering that we gave it to very specific people who spent it on very specific things. Is it too many people? Well, I can definitively say I don’t believe that’s the case either because we haven’t had just a gigantic baby boom. In fact, there was a baby bust over COVID.
[00:11:26] Which leaves us with too few goods. And ladies and gentlemen, this is the place where in my professional life, I work in supply chains, I work in the corporate world, and I have a front-row seat to see how this is actually breaking down. One of the things to know that in March of 2020, nobody knew what was gonna happen. I mean, do you all recall the market dropping 30% over the course of five days? Because I do. It was a great buying opportunity. But it was also a great opportunity to question of who else is panicking and what are they doing while they’re panicking? Because the assumption was, at the time, everything globally would come to a screeching halt.
[00:12:06] And if you’re a shipping company, you’re looking at your ships going, well, now I owe the bank for these ships. And they’re not doing anything. Ships are really expensive to maintain. And so, what a lot of international shipping companies did was they took their smallest and their oldest ships and they broke them, meaning they sent them to the ship graveyard where they were cut up and sold for scrap. The shipping companies did this in order to make sure that they could survive the pandemic because they didn’t wanna go bankrupt. But the effect was the reducing of shipping globally. That is to say that we have less container ships now than we did at the beginning of 2020. That is to say, global shipping capacity is down. There’s less of it. It’s scarce, which means it’s expensive.
[00:12:54] And this is all at a time and where, at least in America, a lot of people started working from home. We decided we wanted to buy a bunch of stuff from Amazon because we’re used to being able to just click on something and have it appear at our door. Well, if you can’t ship it from overseas, it has a hard time getting to you, which is why we saw all of those delays. And as time has gone on, supply chains have started to figure this out. But this is still a problem.
[00:13:19] Which brings us to the second problem and that is China doesn’t give a rip what you want and neither do a lot of other countries. And the reason I bring this up is that Shenzhen Province, which is one of the semi-autonomous zones in China for factories, is still shut down. Shanghai is still shut down. Those are huge economic areas of China. And as of this recording at least, it’s not looking like they’re gonna be lifting that restriction anytime soon. And what that means is that the factories that produce the goods that we’re actually looking to buy aren’t working. They’re not producing.
[00:13:56] And in a lot of ways over the last 20 years, we have allowed China to consolidate a stranglehold over certain manufacturing sectors, like transformers for our bulk electricity grid, like heavy industries, like steel production, rare earth, all sorts of stuff. And so, if China is shut down, I can’t get the goods anyway, which of course means if demand stays steady and supply decreases, the cost is going to go up. But of course, that’s not what happened, is it? Because demand went up at the same time the supply went down.
[00:14:33] There’s another issue, particularly with food. There’s a lagging indicator. During COVID, we saw a lot of articles of beef cattle being slaughtered because they didn’t think they’d be able to sell them over on the open market. What this meant, of course, is that the cows that would’ve made more cows were now out of the system. And so in order to get the geometric growth back up, that’s gonna take a couple years. This is why meat prices spiked really early on in the pandemic. Because when the beef supply started dropping, people — those forward contracts purchasing on futures — they knew this. And of course, if I know I’m gonna have scarcity in the future, it’s going to be more expensive.
[00:15:11] Which, you know, speaking of cows, cows eat grass until they don’t on feed lots, in which case they eat corn. Well, in the United States, a lot of that corn is produced domestically. But did you know that Ukraine accounts for 10 to 15% of corn, wheat, and barley production globally? That’s right, ladies and gentlemen. The war in Ukraine with Russia’s invasion is actually having an effect. Because if you stop and think about it, yes, the United States’ corn production is local. And we could, in fact, put a wall around that agricultural sector and keep all that corn for ourself.
[00:15:45] But in the United States, we don’t do things like that. We allow our farmers to trade on the open global markets. This, of course, allows them to get the best price for what they produce. If you’re asking me, that sounds like a pretty good system. And it also is going to have a negative externality that when 15% of the corn production in the world goes away, that’s gonna leave a dent. Because when you reduce the supply by 15%, what happens to the price? Oh, yeah. It goes up. And it goes up right at a time in which particularly the feed corn is in high demand because two years ago we culled our herds with our beef cows. And now we’re trying to get them back, which means, of course, we need more corn.
[00:16:25] And that’s of course just one thing that the Ukrainian conflict’s actually causing. Russia’s the largest exporter of fertilizer and fertilizer precursors — which are the components that make fertilizers — in the world. All that’s staying in Russia right now and it’s pretty hairy. Fertilizer prices are through the roof because supply, of course, dropped off a cliff. Demand’s still relatively high. And as a result, food is becoming more expensive.
[00:16:48] Russian gas. And this is the same effect with the corn. If the Russians can’t export their gas and their oil, that means that the other producers of gas and oil now have a buying opportunity — or a selling opportunity, sorry. Why would they have the selling opportunity? Well, because Russia’s out of the market now. And so we can, if I’m looking at this, if I’m a U.S. Shell producer and I could sell it locally for X amount or I could sell it internationally for Y amount — which is greater than X — I’m gonna take the Y amount. Again, free markets. This is how they operate. Protectionist policies, you can take them or leave them. But still, a war in one of the largest productive areas of the world is going to have an effect.
[00:17:27] And then we also need to take into consideration that the weather in the last year in the United States has sucked. It’s been abnormally hot. It’s been abnormally dry. And when I’ve been driving around this beautiful nation, I’ve seen a lot of fallow crops. All that is to say is that, again, this contributes to the two few goods side of the equation.
[00:17:49] So what is my verdict on this? Was it too much money being printed and thrown into the system? Is it too many people showing up with money in their hands and hope in their hearts wanting to buy something cool? Or is it too few goods? Well, I can’t count out the money printing. I know it’s had an effect. But if I really had to point to something, we’ve been printing money for 10 years and it didn’t have, make that much of a dent. But supply chains functioned during that time. So my money, it’s a supply chain issue. And until that gets ironed out, it’s gonna continue. And it’s not looking good. We don’t know where the war in Ukraine is gonna go. China doesn’t look like it’s gonna open up. And it takes about five years to build a container ship. And I just named off a couple. There’s a lot more than just these.
[00:18:37] So what’s the issue when it comes to trying to reign in inflation? Because, I don’t know about you, but I’m not really a big fan of having to shell out the same amount of money that I’m shelling out at the grocery store. It’s not exactly great trying to feed my daughters. Well, we live in interesting times. And that was a curse that Confucius came up with. I need something to be said at all times that is also a curse. And it’s “may you live in interesting times.”
[00:19:06] COVID knocked out 4 to 5% of the US workforce — between long COVID, early retirements from baby boomers, women having to take care of their children, and straight-up good old-fashioned death. And what that means, ladies and gentlemen, is that inflation’s gonna be harder to deal with because, again, supply and demand. The demand for labor is pretty high. The supply of labor has decreased by 5%, 4 to 5%.
[00:19:32] And on top of all of that, between the supply chain issues, the breakdown of globalization, a global pandemic, and this workforce issue, all of the metrics by which we navigate the economy and try to get a handle on what’s going on are all pointing in different directions. Some say the sky is falling. Some say it’s never been a more beautiful day. And as a result, you’re left with a Federal Reserve who really doesn’t know which way is up. I’m a scuba diver as a hobby. And one of the most terrifying things is if you’re underwater and you get turned around and you don’t know which way your bubbles are going. Well, I think it’s safe to say that Jerome Powell and the Federal Reserve of the United States do not know which way their bubbles are going.
[00:20:12] The other part about what’s going on with the Fed is we all hear that the Fed is raising interest rates or lowering interest rates. Well, in this case, they’re only raising interest rates. The Fed only has control over one lever of the economy, which is the money supply. And if they reduce the money supply, they can reduce demand. They do this by raising interest rates, which is what they’re doing right now. And they are currently the most aggressive Fed that’s ever existed in terms of how high they’ve raised those interest rates over such a short period of time.
[00:20:42] When you raise interest rates, everything becomes more expensive because we use a debt-based system in the economy in order to get money to flow from one side to the other. Raising interest rates will remove that money through banks that charge higher interest rates on things both to each other and to a consumer. If you’re carrying debt on your credit cards, you’ve noticed that your rates have gone up because they’re pegged to what the Fed is doing. Same thing with mortgage rates. That’s why the real estate market in Phoenix and Colorado and California is so terrible right now is because mortgage rates have shot up to about 6 to 7%. Or to put it another way, what was considered normal before 2008. But, you know, we’ve had 12 years, 14 years since then. But interest rates right now are around seven, which means people cannot afford to pay the same prices that they were paying before.
[00:21:32] Is there another way to possibly reduce demand, Dylan, you ask? Well, of course. And all you’re doing is stripping money out of the the economy and making things more expensive. There’s another lever that we could use to do this. We could raise taxes. And who wants to raise taxes? And this could be good, this could be bad. I’m not gonna make a political statement on it because that’s not what I do here. But raising taxes would remove money from the economy just as effectively as raising interest rates. It’s just a matter of who benefits. The banks? Or the government? And of course, the government could use that to retire some of the national debts. Maybe. Probably not.
[00:22:09] All that is to say, ladies and gentlemen, is this crash course that we’ve been doing over the last 20 minutes or so on inflation is shallow, shallow, shallow. We could be here all day on any one of these points going down an infinite rabbit hole of information, data, supposition, theory, and straight-up guesswork. All I’m trying to do is give you at least some north stars to point to and some green lights to know which way to go.
[00:22:35] But before I leave you, ladies and gentlemen, I do wanna talk about inflation hedges. Because right now, we have a once-in-a-lifetime opportunity to ask: Are the inflation hedges we’ve all been sold over the years actually working? And I’m talking very specifically about gold and silver. In my practice, I have people who come in all the time and want my take on what I think the best way to buy gold and silver is. And my answer is always the same. If that’s what helps you sleep at night, you should do it. But if you want a good return on your money, you should not do it. And I always get somebody who comes back in and says, well, but when the society collapses, blah, blah, blah, blah, blah. And my response to them is always the same. If you truly believe society’s gonna collapse, then whatever you invest in isn’t gonna matter. And if you’re really looking for something that you want to invest in, stick to things that you think you can barter because that’s what happened every single time.
[00:23:27] But let’s actually talk about gold and silver. Inflation right now is running at about 8.5 to 9% year over year. So if we wanna know if gold and silver are actually holding up against inflation, we can just look at what was the price of silver a year ago versus the price of silver now. Has it gone up and down with inflation? Is it in fact hedging our money against inflation? And ladies and gentlemen — drum roll please — silver year over year is down 8.5%. Wait, I thought it was supposed to be an inflation hedge. But of course, it’s not.
[00:23:58] Silver is an industrial commodity. That’s how it trades and that’s how its price is determined. Then of course, when you look at what’s going on with COVID, if you think manufacturing is going to take a hit because supply chains are broken and the factories in China are shut down and who uses all of that industrial silver? You guessed it. That would be China. Well, you’re not selling a lot of silver. And so, silver prices are in fact down year over year. Remember: inflation is up about 8.5% and silver’s down about 8.5%, meaning that there’s a pretty big gap between the two. But then you say, well, what about gold? Well, gold’s down 5%. So are gold and silver good inflation hedges? Nope. What about Bitcoin? Well, Bitcoin’s basically the tulip bulb of our day. And it’s down 64%. So not great against inflation either.
[00:24:52] But then you say, Dylan, there’s gotta be something I could have used to hedge against inflation. And of course, there is. There are two things you could use. The first one is an I bond, which is a debt that you give to the government. You give the government money. They have a debt instrument called an I bond or inflation bond — that’s where the “I” comes from — and they give you the inflation rate of return plus a little bit of extra unless you cash them in in the first five years, in which case they negate some of that and you actually end up earning less than inflation. The point that I’m getting to there is that if you think society’s gonna collapse, maybe you shouldn’t be investing in government securities. Just saying. But it does keep up with inflation. You can go to treasurydirect.com and buy your I bonds.
[00:25:34] The other one is broad commodities. In an inflationary environment, if you wanna keep the value of money right where it was, buy broad commodities. Because that’s what’s actually inflating. As the price of milk goes up, the commodity is the thing in the jug. So let’s just go out and take a look at what the broad commodities are doing. Remember: inflation’s up about 8.5 to 9%, and broad commodities is up 10%.
[00:26:03] So there you have it, ladies and gentlemen. Is inflation here? 100%. What’s causing it? Yeah, I think it’s probably more supply-induced than anything else. How do you hedge against it? Buy the things that inflate. Can the Fed do anything about it? Well, they’re trying. But like I said before, COVID knocked out 4.5% of the workforce. That’s having an effect. And all the metrics we use to point the way are all pointing in different directions.
[00:26:29] That’s all I got for you today. Thanks for listening. I hope this has added some value in giving you a little clarity on what’s going on in our economy. I’ll see you next Tuesday. And if you have any questions, comments, concerns, or worries, head on over to fiscallysavage.com where you can find me, my tools, and everything else that you need to take control of your financial life and live free.
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