Inflation's Illusion: Debunking the Normalcy of Currency Debasesment
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What kind of money for the rest of us? This is a personal financial on money, how that works, how to invest IT and how to live without worrying about IT. And your host, David dying today is episodes seventy five.

Is title inflation illusion to bunking the Normalcy of currency debasement? Last week, the financial times published in their big read section a lengthy article by cona in a gari and leo Lewis title. Is japan finally becoming A Q Normal economy? They wrote now japan center bankers and government officials say the country is at a historic inflection point and may finally become a Normal economy.

Companies will be able to pass on increased costs to consumers in the form of higher Prices, and workers will respond by demanding Better pay. They're suggesting and have some other quotes from the article from government and central bank officials, that Normal is having inflation, rising Prices, which means the value of the currency isn't going as far as being debased, prime minister formio catia said. We have obtained a once in a lifetime historic opportunity to exit from deflation, deflation being falling Prices.

We are going to make sure that a positive mindset that will see rising wages as the norm will be firmly established across the entire society that suggest deflation is bad and inflationary minds that expecting inflation, wanting inflation, wanting Prices to go up so that we can the main entire wages. That's a good thing. Let's see if that's the case in this episode.

Prices in japan started rising in the spring of twenty twenty two after the COVID pandemic and russia's invasion of ukraine. Core inflation, excluding food, rose two point eight percent for the year ending february twenty twenty four. Wages have also been going up.

The country's largish employers agreed to a point three percent wage increase during the spring negotiations. The increase in inflation has helped the japanese stock market. The two hundred twenty five stock index surpassed its previous peak from thirty four years prior in february twenty twenty four.

We discuss that in episode four sixty eight of the podcast. In march twenty twenty four, the bank of japan ended negative interest rates, a negative policy rate. IT began that experiment back in two thousand seven.

We discussed that in our insiders guide newsletter last month, and even I fell into that language trap. In the news letter I wrote, the bank of japan is Normalizing its monetary policy because the japanese economy is experiencing some modest inflation. I put IT out how central bank asset purchases can boost the money supply.

If the federal government running a deficit that can be inflationary in the new letter I wrote yet, it's taken eight years of negative interest rates and other unconventional monetary policies to overcome japanese households and businesses. Deflationary mindsets is a deflationary mindset. A bad thing is clearly we're trying to overcome.

That is what I road officials wrote to told me what tanai professor economics at the university of tokyo said the virtuous cycle between rising wages and Prices began to emerge. Ge and the bank of japan started to raise interest rates. It's not complete yet, but japan is gradually heading toward a Normal direction.

Now there are some impediments. As a financial times pointed out, they wrote. One major concern is the deflationary mindset that has become entangled in societies, watanabe said. Among senior people receiving pensions, they may wish for inflation to go away because they feel that life was easier when Prices did not go up. We'll see that life is actually a little easier when we don't have to worry about inflation.

What tabby continued, there is going to be a force of resistance, people fighting against inflation, not running an inflationary mindset as the broader minds that is starting to change. The number of people who don't want things to change will be relatively large, bank of japan governor gazoo a said in march. People should be living without being conscious of the bank of japan's existence.

We are now at a transition perier where we might be able to shift to that kind of situation of things go well, do you find yourself making investment decisions based on what the central bank is saying are doing? I don't know. To the extent that japanese households, bit or not, they clearly have been comfortable with stable Prices.

Japan has not experienced out right deflation, fallowing Prices. They've had very, very low inflation, about zero point eight percent per year over the past decade. One more cute cut hero, jasu coachy, was the chair, the japanese, the association of metal machinery and manufacturing workers, about three hundred ninety thousand workers that are employed by small and medium sized businesses, says, we feel that we need to achieve a society where two percent inflation and three percent wage increases will always be achieved.

This isn't just about next year, but over a long span of time, such as five or ten years, a two percent annual Price inflation will double Prices every thirty five years that considered Normal. Many central banks around the world that two percent inflation is their target. I've been reading lin auden's book broken money.

SHE raised some legitimate questions when IT comes to this acceptance of Normal of inflation. He wrote, if we replace the description of an inflation target with the basement target, which is ultimately what IT is, IT shows how silly some of these comments are. The basement, the word, means losing value.

In the case of currency, purchasing power, are losing IT. As there is more money in circulation, each unit of currency, each dollar is worth less. We can buy as much that what inflation does.

We need more and more dollars, other currency to buy the same. And the goods we did five years ago, that's considered Normal. Odin continues using that terminology. Rather than heads of central bank lamenting that inflation is below the target, they would be lamenting that the currency that people earn their wages in and keep their savings in is not being the based as quickly as their target debasement rate says they should. Here's the thing though.

What should be Normal is as companies become more productive in building things, making things, providing services, the Price should drop because IT takes fewer resources, including time, to make that thing or to do that thing. That's Normal. But it's not considered Normal because the money supply, the amount of cash in the system IT keeps increasing od and write.

To put this another way, central bankers do everything in their power to ensure that deflationary productivity gains are continually offset by a great later amount of currency debasement so that noral Prices of goods and services would be Prices including the impact of inflation, keep marching higher at a slow and steady pace despite becoming more efficient to produce. If we look at the U. S.

Over the past decade, the consumer Price index has risen on average, two point eight percent per year, but not everything has gone up. Energy commodities, about the same Prices they were a decade ago. Gasoline, about the same place as IT was a decade.

Or do you have A A deflationary mindset when IT comes to gasoline? Are you upset when the Price goes up? We sort of hope the Price of gas is the same, were very sensitive to the Price of gasoline.

What about their fairs? Airline fairs have fAllen twelve percent in the past decade, but one point three percent per year. Have you stopped flying because you're waiting for airfares to form more? No, we buy airfares when we want to take a trip.

One recent central bankers worry about deflation is that what people stop buying, waiting for Prices to fall. And as people stop buying, that companies will produced less, will get into a downal deflationary spiral. Yet we purchase things all the time, Better falling in Price airfares.

Gasoline a para was only increased zero point four percent per year. That pretty stable. Prices for clothing information technology hardware services has fAllen sixteen percent in the past decade.

That's about one point seven percent decline per year. Now the inflation statistics are adjusted to take into account quality improvements. And so I might look for I, uh, a cell phone.

Iphone is more expensive today than IT was ten years ago, but it's also much more capable that same phones from a decade ago he was Operating brand knew would cost yes, today, then I did a decade ago. It's just that because the phones today have more memory than faster writer screens. They cost more.

But the norm is for computers and other electronics to fall in Price because productivity is increasing, getting Better, add producing chips, memory producing screens, fruits and vegetables. They've only increased about two percent per year. So do we have a deflationary mind? So when he comes to airline tickets and gasoline, if we look at the money supply, the money supply consist of the currency outstanding.

So dollar bills, coins, IT includes checking and savings accounts and money market metro funds, another type of very liquid savings vehicle. Since general thousand and fifty nine, the money supply in us has increased six point nine percent per year, just the amount of cash in the system that the savings and checking accounts in the past decade, its increased six point four percent per year, even though this money supply has fAllen just over four percent since march twenty twenty two. But about six percent increase every year on the average the amount of money happening, yet inflation was half that two point eight percent.

Why has an inflation kept up with the increase in the money supply? Because companies are getting more productive. They're getting Better at producing things more efficiently, and that keeps the inflation rate down.

So as all and point out, the central banks are doing everything to try to get greater increase of money supply so that inflation isn't zero. So we don't have stable Prices, all because they're afraid households and businesses will stop buying and stop producing because Prices are falling. Now we use fiat currency.

The currency is not bad by anything. We've discussed in a number episodes how the money spite increases when banks make loans. Those loans create new deposits because I take out a loan, I sign loan documents in the bank now has an asset, a loan receiver on their baLance sheet, and they offset that with a credit reflecting the deposit that I get for the loan.

So that newly created deposit, that digital deposit, brand new money. And that increase in that leads to an increase in the money supply. And central banks try to adjust their policy rates to encourage more lending.

That's why bank japan's policy rate was zero or less to encourage household and businesses to borrow money, leading to an increase in the money supply. But central banks don't just leave IT at that anymore. Now they want to print money through quantitative tive easing by effectively purchasing the bonds that are issued by governments to fund their deficit spending, government spending more than they received in tax revenue.

IT issues a bond that either directly to the central bank or the central bank buys IT in the marketplace that effective sends money into the economy. IT increases the network of household and businesses. New money leads to increase in the money supply.

And as that money supply expense because households, businesses now have new money, higher network. There's greater demand for goods and services. They wanted buy, they wanted spend IT.

And if the supply of goods and services doesn't keep up to me, that demand that can put some up, put Price pressure made new inflation. Our businesses realize well, our cost are going up, our input costs that they are raising Prices. And you do get with the call.

And I don't think this is a good term as virtuous cycle of inflation of higher wages, higher Prices. That's not virtuous. That's A A royal pain as we'll see.

Look at the bank of the japan the past decade, their money supply increase three point six percent per year, and inflation came in at zero point eight percent per year over the last decade. So it's not like they didn't have inflation. IT was just very, very low throughout the time of anger, japan is trying to crease the money supply.

They began doing quantity, easing this purchasing of government bonds to boost the money. Fly back in two thousand. One back then the bank of japan's asset, or less than twenty percent of economic output, or GDP.

Now the bank of japan owns one hundred and thirty percent, were the assets as a percent of GDP, and amount a government debt because of the government deficit, went from one hundred and thirty six percent of GDP. This is gross debt, including the bonds owned by the bank of japan. That's now of the two hundred and forty five percent.

Japan is, I believe, the most indeed country in the world when IT comes to the national debt. Before we continue, let me pause and share some words from this week. sponsors. Now what are some of the distortions from this inflationary mindset? As consumers, savers, we have to take action because are purchasing power the currency is being debased?

In the financial times article, IT talks about how japanese investors jumped around seventy trillion dollars of domestic stock shares in the past thirty four years and that they, as a recently half of the total financial assets in cash and deposit next time, right? For many years, when consumer Prices were stagnant or falling, that was perfectly rational. Why bother taking equity risk if your cash was not losing any real value, if your currency is stable and you can buy the same amount of goods twenty years from now with one hundred dollars hundred, and you don't have to invest the money because the purchasing power will be there.

We have to invest so that we can earn a rate to return greater than inflation. Because of currency debasement, an entry times continued. But as inflation has picked up, that logic no longer holds.

Savers can see Prices rising and the purchasing power of their cash falling for the first time that many can remember, they need to think about yield and returns wouldn't be great if we can have to worry about investing at all. Because our currency was stable, IT held its value. Instead, we have to take action.

We have to own scarce things, things where the supply isn't growing as fast as the supply of money, so that IT keeps pace with inflation. Gold is a great example that for the ten years ending march twenty twenty four, when inflation increase, the two point eight percent gold has appreciated four point seven percent per year. It's held its value.

If we take IT through April fifteen, twenty twenty four where gold recently Spiked, gold has increased seven point one percent per year. The reason being the gold supply, which is about two hundred twelve thousand times that the total amount of goal that exists in the world supply only grows at two percent per year. Whether the money supply is increasing at six percent per year.

That's why gold or apart from gold, in order to output inflation, we can own businesses, businesses that can generate cash flow that outpaces inflation. And we typically do that by investing in publicly traded stocks, owning gold or stocks when we sell them, if we want to sell them in order to spend the money, we had to pick capital gains tax. If you have money and IT held its value, you wouldn't have to pay capital gains tax when you spend your money.

But we do with investments such as gold or stocks, some other market distortions that we've discussed in the past, lyn all in points out in her book, he writes, people gently build the retirement savings account out of equities rather than money. Therefore, equities of large publicly traded companies acquire a monetary premium compared to most private businesses. This gives large corporations a lower cost of equity capital and thus gives them a structural advantage over smaller private businesses.

The cost of capital goes down. What that means is the cost of capital equals the expected return for investors. As more households invest in stocks in order to maintain their purchasing power, IT pushes up the Price of stocks, and as the Price goes up, the expected return false. Lower expected return equals a lower cost of capital, which means as businesses are figuring out what projects to invest in the hurdle rate is lower, less attractive projects get funded. In addition, this incessant demand for stocks allows unprofitable businesses that are unprofiting because they don't charge enough, but they can keep issuing stocks to stay in business.

We have private companies and even publicly traded companies that still haven't figured out a profitable of business model, but they stay in business because because of this monetary premium for stocks, because investors have to purchase stocks and other assets, because just holding their their money loses its value over the long term. And that considered the Normal currency debasement. Inflation encourages taking on more debt rather than savings.

That debates currency benefits powers because if you have a mortgage or some other dead, you're paying back that debt with a debased currency. The amount of money in the system, the greater money supply are earning more just because of inflation. And so as you take those future dollars to pay down the debt that you took back in the past, there's a benefit to that because you have more dollars simply because of inflation.

But because of inflation, borrowers don't have to be a disciplined in terms of their barring. Because inflation, the rise in Prices means that whatever project they're invested in and say it's a house for a building, it's going up in Price, generating cash alles to pay off the debt. But if the currency isn't weakening, if inflation isn't there, IT means barbers have to be more discipline to make sure that the project has a positive real rate of return in order to justify taking on that risk of borrowing money, so that on its own merit, without the benefit of inflation, the particular project earns the right return in order to pay back the debt.

But with inflation, IT distorts that we can see how an inflationary environment encourages financialization, such as the financialization of homes where we live. Shelter people buy houses, second houses, not because they need somewhere to live, but because they need somewhere to put their debased currency in order to, hopefully, real state will hold its value. Houses aren't treated as homes.

They treated as an asset is that the men for multiple homes and people coming from overseas where their currencies being debased to buy homes in another country that generate higher demand for houses. And if a in area has a housing shortage, that can push up the Prices even more so as we step back and think, well how do we get here? Why is currency like this? Currency used to be back by gold, but in all ten points its out in her book gold not terribly convenient.

You can easily divide IT and to settle transactions. It's a physical item. You have to ship IT different places. We want access to cash. Now there is an managed to having cash, money digital.

Nice to have the paper bills and coins, but it's nice to be able to send money to somebody digitally, electronically. And because of that and because Frankly, it's is easier for governments to print money rather than collect taxes. IT just happens.

The money is play grows significantly year by year, six percent per year in the U. S. But that's just the system we we have.

But IT doesn't have to be that way in japan. And IT wasn't for many years, partly because they had a big debt bubble and that was deflated. But also the the population is aging, the demographics population was shrinking and companies were becoming more productive, more technologically advanced.

They had very stable Prices for decades, even though the central bank and government officials trying to do everything they could to have inflation so they could be included in the countries that were Normal. I would prefer stable currency, very, very low levels of inflation, which just we ve bought into this inflationary mind. Even there are many goods and services that were used to them falling in Price are holding stable things such as gasoline, airfares, clothing.

Now, one of things that I do is I do have currency diversification. I own gold, and it's done well. And I owit for many years. I own bitcoin, bitcoin diffin gold because it's digital. IT also is skewed.

The amount of bitcoin created each year is less than the amount of newly created dollars, another fiat currency, but golden bitcoin or not, convenient as money, because you do have to pay capital gains tax if you sell IT to go buy something. But IT does hold its value, and IT can be used as a currency. I have used bitcoin as a currency despite its inconveniences, but I think having some monetary diversification makes sense because we do live in an era where the money supply could continue to increase.

We do have inflation, and so we do have to take action to offset that, and we do that through investing. And in the case of golden bitcoin, in speculating because there is no cash low, continued this in golden bitcoin depends on the willingness of individuals and firms to own IT, that they think IT will have value, that they will believe it's a substitute for money, that IT is a boniface asset. And if there is not trust over nobody values IT, anymore than doesn't matter if IT scares, nobody wants to own IT.

So there's that underlying premise, but gold been that way from millennia bitcoin for just over a decade. IT is getting that trust and IT has I hold IT along with many other investments because we live in an inflationary world. But don't beat yourself up if you like stable currency and don't like Price increases, that's Normal.

Not having an inflationary world in a world where the money supply is growing so quickly, often through manipulation by the central banks and government, that's not Normal, but it's the world we live in. Now that's episode for seventy five. Thanks for listening.

Everything I have shared with you in this website and for general education, i'm not considered your specific risk situation of not provided investment advice. This is simply general education on money investing in the economy. Have a great week.