Transcript Economics, Inflation and Making Money

Inflation, Its Effects, And
How To Preserve Value
How is Value Determined?
What is a dollar?
• Began as a Joachimthaler which was one
troy ounce of silver
• Eventually the name was shortened to
thaler.
• Thaler was changed to daler and in time
became dollar.
• Thus a dollar is an ounce of silver.
What is the Value of Money?
• Remember the Laws of Supply and
Demand?
• If there is very little money, then money is
valuable.
• If there is a lot of money, then money is
worth very little.
Inflation
• Inflation is an increase in the total amount
of money.
• When there are more dollars, each dollar
is worth less.
• Since other goods didn’t change in value,
it takes more dollars to buy the same
good. Thus prices have went up.
Why do we get inflation?
• At its root, it is a moral problem.
• Government has 2 ways to raise money:
– tax
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duty
income
sales
etc.
– inflation
TANSTAAFL
• There Ain’t No Such Thing As A Free Lunch
• Nothing of Value comes for free
• Someone had to pay for it
– with money
– by work
– by taxes
– by inflation
• “I want, I want” = “Tax Me, Tax Me”
Velocity
• Velocity is the speed at which money
changes hands
• If a 10 dollar bill goes to 50 parties in a
year, then the velocity is 50.
• 10 people in circle all want to sell goods
– with 10 five dollar bills
– with 1 five dollar bill
Demand for Money
• Money can be thought of as just another
product on the market which has its own
supply and demand curves.
• When demand for the dollar falls, people
want to get rid of the dollar, so they spend it.
This has the effect of increasing the supply
• When demand for the dollar rises, people
want to hold the dollar, so they keep it. This
has the effect of decreasing the money
supply.
Demand Velocity Relationship
• If demand for money falls, the velocity
rises.
• If the demand for money rises, then
velocity falls.
Stages of Inflation
•
•
Prices rise, but people hold their money
waiting for prices to fall.
Because the money is held, prices don’t rise
fast.
Prices rise still further, and now you spend
your money because you see that prices
won’t fall. You also speed up buying since
you know money is declining in value.
Velocity is increasing as demand for money
falls. Prices go up faster than the money
supply.
Stages of Inflation
• Prices keep going up so you now try to get rid of
your money as quick as possible. You will buy
anything that has value because the money is
becoming worthless.
Money changes hands very fast. Demand for
money is falling fast and Velocity is skyrocketing.
The money is becoming worthless and even if
no more money is printed, the money is
doomed.
Federal Debt
• The Government knows that if to much
currency is injected into the economy, we
will get stage 3 inflation.
• Thus, the Gov has decided to inflate
something else – Treasury Notes.
• The Gov is papering the world in these
notes – inflating them instead of dollars, so
it can keep up its spending.
• For now this seems to be working.
Why is Gov Debt Bad?
• Think of supply and demand of investment
money.
• Businesses and Gov compete on market
for investment dollars.
• When the Gov gets the money, then
Businesses can’t get it to expand
operations and grow.
What is Impact of Inflation on
Investment?
Principle
Interest Rate
Inflation Rate
Tax Rate
Number of periods per year
Number of years
10.00
3.00
30.00
Compount Interest
Value of Ending value in starting value
Relative Value of ending in starting
taxable gain
Tax
Post tax ending dollars
Post tax ending dollars in starting value
Net Performance
$1,000.00
0.1
0.03
0.3
12
50
$145,369.92
0.223548224
$32,497.19
$144,369.92
$43,310.98
$102,058.95
$22,815.10
$21,815.10
The French Lesson
• Introduce Paper Money
• Inflate that money
– Stage 1 inflation
– Stage 2 inflation
– Stage 3 inflation
• The Black Market
• The “Legal Tender” Laws
• Government collapse
The Panic of 1980
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The Carter inflation – over 18% in two years
Iranian hostage situation
Freeze of Iranian Assets
Global run on the dollar
USSR invades Afghanistan
Carter levies grain embargo on USSR
The Panic of 1980
• Gold prices skyrocket, and dollar is about
in stage 3.
• Paul Volker triggered deflation and raised
interest rates by 3 points in a month
• The panic subsided
Lessons from 1980 Panic
• Most foreign investors now keep liquid
investments instead of long-term
investments
• Banks realized that gold was necessary in
light of government policies
• Few learned about demand for money
Increasing Velocity
Shares traded on NYSE in millions
1980
1985
1990
1995
2000
11,562
27,774
39,946
87,873
262,477
Value of shares traced on NYSE in billions of $
1980
1985
1990
1995
2000
382
981
1,336
3,110
11,060
The Hair Trigger
• Because of the 1980 Panic, the rich hold
very liquid assets. This means that at the
sniff of something going wrong with the
economy they will pull their cash out of the
banks.
• With each shot of inflation, the economy
becomes more and more unstable
because of all the malinvestment.
The Injection Effect
• When the Gov issues money, to whom
does that money go?
• Is it spread evenly across the people in the
economy?
• Or is it poured into the economy in certain
places or to certain groups of people?
To Whom Does the Money Flow
• Where are these cones?
• Is a cone a deliberate cone (DC) or an
accidental code (AC)?
• Is the cone filled (F) or hollow (H)?
Cone Classifications
• DCF1 – Deliberate Cone Federal 1st in line
• These are people or companies who have
extremely stable incomes from the gov
and backed by the printing press
• Ex: Social Security, Gov Pensioners,
military pensioners, civil service
pensioners
• If this is the customer base, you can plan 5
to 10 years out. Extremely stable
Cone Classifications
• DCS1 – Deliberate Cone State 1st in line
• State pensioners
• Not backed by printing press, but very
stable
Cone Classifications
• DCL1 – Deliberate Cone Local 1st in line
• County and city pensioners from police,
fire, social services and education.
• Not backed by printing press, but very
stable
Cone Classifications
• DCF2 – Federal 2nd in line
• Ex: Federal Agencies, employees
• Can experience budget cuts, layoff, career
changes.
• Stable, but not as good as DC1s.
Cone Classifications
• DCS2 – State 2nd in line
– State Agencies and employees
• DCL2 – Local 2nd in line
– Local Agencies and employees
Cone Classifications
• DCF3 – Federal 3rd in line
• This is a firm or person which sells directly
to DCF1s and DCF2s.
• Military contractors, retailer just out of
military bases, insurance to federal
employees, etc.
• Much more stable than regular
businesses, but effected by budget cuts
and changes.
Cone Classifications
• DCS3 – State 3rd in line
– People or companies which sell to DCS1s
and DCS2s.
• DCL3 – Local 3rd in line
– People or companies which sell to DCL1s and
DCL2s.
Cone Classifications
• ACF – Accidental Cone Filled
– This is a company, location or industry which
is booming due to money sloshing around.
– This can be a good source of profit but it
could crash in a week.
• ACH – Accidental Cone Hollow
– This is a area which is spending to prepare for
a boom that never comes. Can make money
selling while they prepare, but business will
never take off.
Cone Classifications
• S – Sinkhole
• Slums, poverty stricken areas.
• They have no money so you cannot sell to
them, but you can buy from them for
cheap.
• Buy in the S and sell in the other areas.
Dangers of Arbitrary Law
• When the Gov can make money and move
it around whimsically, then it is dangerous
to hold to many fixed assets.
• You don’t want to be stuck holding the
factory with no production in a S or ACH.
• So be a connector instead of a
manufacturer.