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August 19, 2012 / 74

Easy to See Inflation Indicators

So… you’ve noticed that your paycheck doesn’t seem to be going as far as it used to. But you’re being careful with your spending. You stopped buying those $4 Starbucks coffees that are more fancy additives than coffee. ($4/day times 5 days a week times 50 weeks a year = $1,000 a year! Ka-Ching!) Good start!

And you stopped buying the Brand Name stuff that doesn’t seem to be any better than the Generic Label stuff and you haven’t noticed much difference in quality. (Frequently the generic label stuff IS the brand name stuff!) But it seems that your paycheck is STILL getting shorter and shorter. It’s like a Gremlin is eating your stuff as soon as you put it in the cupboard and it’s driving you CRAZY!!

Well… the Econ Doctor is IN, and he’s gonna tell you what is causing the disappearance of your money.

When a government makes money, there are several ways they can do it.  In history, money was usually representative of something of value, like gold, silver, gems, whatever the people in that culture valued, and that was also durable so it could handle being passed around and safely stored.

But today, most governments use what is called “fiat” currency – which is just paper or electronic data entries that they just decide to call money. According to an online dictionary, the word “fiat” means “an authoritative decree, sanction, or order”. So fiat currency is money because the government SAYS it is.

Fiat currency is not backed or based on anything of value like gold or silver or copper. In the US the money is supposed to be “backed” by the “full faith and credit of the United States government”. That doesn’t mean that the government stands behind the money – or that the government will make sure you get anything of value for it. It seems to mean that as long as people believe it’s worth something, and as long as the government can borrow money or things of value from others, then the US money will be worth something to most people, and that you can pay your taxes with it.

One thing that governments like to do is to spend money. They spend it on public benefits like a military to protect the nation and its people from other countries, they spend it on national infrastructure like roads and communications systems like the Post Office. These and other things that facilitate commerce are part of what governments are supposed to do. To get the money to do them, they impose taxes on the people.

So what happens when the people think the government is charging them too much tax? The people get unhappy and begin to think about getting rid of the government and putting in one that will cost less. The government knows this, so it will try very hard to keep the people from thinking, or knowing, that they are charging waaaay too much tax, and spending it on things that are not really the government’s job to spend the people’s money on.

One of the things governments use to keep the people from knowing how much tax they are really paying is called “inflation.” Inflation is when the government prints up more money than the economy needs to operate. (ie the government creates money faster than the people create wealth.) Inflation is like blowing up a balloon. You take a balloon and put air in it under pressure, and the balloon expands. The balloon gets bigger and bigger, but it still has the same amount of material – the material is just stretched thinner. You haven’t added anything to the balloon.

When a government inflates the money, it makes more and more of it, so each unit of money is worth less because the purchasing power of each unit is “thinner”. That’s what inflation is.

Something else you need to know about inflation is that it is a hidden tax. It takes value from the people without telling them that it’s doing it. It’s a ‘stealth tax’. That way the people who run the government can pretend that they are not raising taxes, while they secretly are – so you don’t blame them and throw them out.

So – how can you tell that the government is inflating the money?

Well… you can study and learn lots of economics and figure out how to read charts and graphs and do high powered math formulas… but most people don’t have the time or the inclination to do that. Besides, it’s boring.

You can believe what the government tells you… but if you plan to believe the government you need to know that a basic principle of life is that “GOVERNMENTS LIE”. Why are they inflating the money? Because they don’t want you to KNOW they are taxing you more. So do you think they are going to just TELL you they are causing inflation? Probably not.

Another way you can tell is to watch what you are buying, and watch the prices. But here is where it gets a bit tricky because when the government causes inflation there’s a little side effect of the money becoming “thinner” (being worth less.) Prices go up – because making the stuff you buy will cost the people who make it more to make it, so they will have to increase prices to cover the higher dollar costs. And that leads to a little thing that we accountants call “price shock.”

Price shock is when you buy frozen burritos at the store. Last week they were 10 burritos for $3. But THIS week those 10 burritos cost $3.60. Will you buy them? Probably not because the maker of burritos put off raising the prices as long as he could, but now he HAS to increase the price to stay in business. But when you see the price of a few burritos go up by 20% (in at least 2 of the last 3 years real inflation has been running at or above 20%), you will say “Oh, HELL no!” and toss them back in the store freezer. So the burrito maker sells fewer burritos and makes less money, and maybe goes out of business.

But as any accountant who is worth his pay can tell you, there are ways to avoid price shock. One of the most common is to keep the price per package the same, but to DECREASE the amount of the contents. So Mr burrito maker doesn’t raise the price 20%. He decreases the number of burritos by 20%. And what will you do? You’ll say, “burritos – there they are” and you’ll grab the package and toss it in the cart, not noticing the small “8” on the side of the package. And especially if you have teenagers you won’t notice that you’re running out of burritos faster than you used to. You’ll just add them to your list more often.

A few things I’ve noticed in the store – fun sized candy bars – used to be 10 per package – not 8, or 12 or 14. At 8 per package, you pay the same price or even more. At 12 per package, the price is “lower” than 8, but still higher than it was at ten per package. Which introduces another way that packaging can be used to hide price increases.

The manufacturer can change the amount of the contents, and the price at the same time. And they make the contents hard to divide by nice numbers like 2 or 5. You’ll have to divide the contents by 7 or 9 which most people won’t do. They just notice that they are getting more in the package, and they expect to pay a little more – so *poof* – price shock has been avoided and you’re paying your taxes.

The key to successfully avoiding price shock is to keep the customer (you) from noticing the increased price. If you don’t notice, you won’t be shocked, and you’ll continue to buy as before.

So… if it makes you feel better, you’re not going crazy, and you don’t have Gremlins. You’re just being robbed by the government… Ummm… does that make you feel better? 😦

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