If there’s one thing I’ve learned over the years, it’s that inflation is a tax that can rob you blind.
I mean, it’s an extreme case but you can see what I mean when you look at what happened in Argentina during hyperinflation in 1989.
I was living there at that time, and prices rose by the hour.
As soon as people got their salaries they would rush to buy whatever they needed for the month. The longer you waited the less your money could buy, and people were worried they wouldn’t have anything to eat.
And there were shortages. While some shops were stocked up with supplies, they refused to sell. They knew that if they sold now the price to restock would be even higher. In other words, they would lose money.
At its basic, inflation lowers your purchasing power.
It’s a similar story with negative interest rates.
In fact, a few years back the St Louis Fed called them ‘a tax in sheep’s clothing’. And as the Fed noted, this ‘tax has to be borne by someone’.
After 2008, central banks spent the last 10 years lowering rates and fuelling an asset price bubble instead of getting the economy back to normal. Usually, crises start when central banks raise interest rates to tame inflation. But this pandemic caught us at already record low interest rates.
So far, the Reserve Bank of Australia has cut interest rates to 0.1% and has started quantitative easing to keep rates low. As they said, this lowers the costs of borrowing not only for the government but for everyone.
As the RBA noted last week:
‘I want to highlight the important distinction between providing finance and affecting the cost of that finance. The RBA is not providing finance to the government, but our actions are lowering the cost of government finance. I should point that our actions are also lowering the cost of finance for all other borrowers in Australia, whether they are a household buying a home or a business wanting to expand. This lower cost of finance for everybody is supporting the recovery from the pandemic.’
While interest rates are slightly above 0, we are at negative real interest rates. Our inflation is running above at 0.7%.
But that number may be even higher than we think.
It’s something the IMF flagged recently in a paper.
The pandemic and lockdowns have changed the way we spend. I mean, if you’ve been in lockdown in Melbourne you know we’ve been spending more on food and less in transport, for example.
The IMF said our inflation indicators aren’t keeping up. As they noted:
‘The consumer price index (CPI) does not reflect these abrupt changes in spending patterns because the CPI weights are not continuously updated. For example, the CPI could be pulled down by a decline in the prices of nonessentials that are no longer purchased.’
The IMF used spending estimates from credit and debit cards to match spending changes with inflation and found that between February and May this year inflation was higher than thought.
Worldwide, they found there’s a 0.23% gap.
A silent tax on your money…
It may not sound like much but combine it with the fact that central banks are keeping interest rates low. And that you are taking a risk for it.
Remember your money in the bank is a loan, you are taking the risk of lending to the bank for a return and losing money for it.
And with the fact that negative rates make banks riskier because it affects their earnings.
If you are in cash, this is a silent tax on your money.
It’s people with deposits that are costing this. These policies are rewarding borrowers and risk takers and punishing savers.
This is not the way economies are supposed to work.
When there’s a crisis, cash is one of the safest things you can hold. But you are losing money by staying in cash. Don’t get me wrong, I’m not advocating to leave cash, I’m pointing out that it pushes people to take on more risk.
But things are likely to get even more sketchier. Because of course, there’s the question of how much will this really do for the economy when debt is at record highs.
But in my head, all this does is increase the case for holding things that are outside the financial system. Things like gold, silver or even bitcoin.
For The Rum Rebellion