How Inflation Impacts Your Wealth and What You Can Do About It
Inflation isn’t just an economic buzzword; it’s a reality that we all face. You’ve felt it every time you’ve gone grocery shopping or watched a movie. Everything just seems to cost more today. But what’s causing this? Let’s dive into the intricacies of inflation and how it affects our financial well-being.
Fractionalized Banking: The Beginning of Inflation
One of the main culprits behind inflation is fractionalized banking. While this might sound complicated, it’s actually quite straightforward. Imagine you borrow money from a bank and then deposit a check you received from that borrowed amount. The bank lends out most of that deposited money to another person, retaining only a small fraction as a reserve requirement. This lending cycle increases the money supply, leading to inflation.
The Dark Side of Quantitative Easing
Another factor that plays into the inflation narrative is “quantitative easing.” In simple terms, it’s like adding more digital dots to computer screens. While it might be easy to assume that this means printing vast amounts of money, the reality is different. For every physical dollar in circulation, there are dozens more existing only digitally. Recent data shows that we’ve added 40% to the money supply in just a few years without any corresponding increase in value or goods. This dilution of the money supply is a significant contributor to inflation.
The True Essence of Money
At its core, money is a tool we use to facilitate exchanges. This exchange system creates wealth. When we spend money, it doesn’t end its journey; it continues to change hands, creating more value with each transaction. Real wealth isn’t just about money magically appearing in someone’s account. It comes from serving others, solving problems, and delivering value. However, when money is created without corresponding value, it devalues our entire monetary system.
The Silent Victims of Inflation
Those who bear the brunt of inflation the most are wage earners. As their purchasing power diminishes, they struggle to buy the same number of goods and services with their paychecks. Moreover, inflation pushes individuals into higher tax brackets without a corresponding increase in their purchasing power. For instance, if you earned $100,000 in 1980, you’d need to earn $360,000 today to have the same buying power, pushing you into a higher tax bracket.
Navigating the Inflationary Landscape
Inflation is fueled not just by banking systems and monetary policies but also by massive government spending and debt. While low-interest rate mortgages might seem appealing, they can lead to people buying homes they can’t truly afford, leading to larger utility bills and potential foreclosures.
External factors like pandemics, government shutdowns, and trillion-dollar infrastructure bills only add to the inflationary pressures. When businesses are given long-term contracts with guaranteed payments, it can lead to overspending and further devaluation of the currency.
The Value Perspective
Value is more than just monetary worth. It’s about satisfaction, joy, problem-solving, and service. When our monetary system no longer measures based on real value, we start to see inflation. Think of it like watering down soup – you might have the same amount of liquid, but it lacks taste and fulfillment.
Charting a Path Forward
Instead of letting inflation erode your wealth, invest in yourself. By increasing your value and being more efficient with your money, you can outpace inflation. While it’s staggering to think that $1 in 1980 now requires $3.60 to match its purchasing power, there’s a silver lining. Many are earning more than 3.6 times what they made back then, evident in the luxury cars, opulent homes, and upscale restaurants around us.
Instead of focusing on external factors like fractionalized banking, quantitative easing, and government spending, look inward. Become more efficient with your finances and invest in increasing your value. By doing so, you can ensure that your wealth growth outpaces inflation.
