Last March, we asked a simple question after the US Bureau of Labor Statistics announced that the Consumer Price Index (CPI) had increased 7.9% from the previous 12 months.
The question was: “Could inflation break America?”
In retrospect, we were too modest with that question. A better question would have been,
“Could inflation break the world?”
Inflation can break a civilization because a person who relies on their labor to generate income can’t keep up with rising prices. Wages almost never keep up with inflation.
What does keep up are productive assets, whose returns rise with inflation. For instance, I own a rental property here in Phoenix. Recently, I increased the rent by 10%. My tenants didn’t complain, because they knew that comparatively speaking, I was being generous. After all, the average rent for a one-bedroom apartment in Phoenix has increased 16% in the past year.
But unlike my tenants, I didn’t have to work harder or take on an overtime shift to pay the bills. I simply told my rental agent that when the lease came up for renewal, the rent would rise 10%.
This is why “the rich” or simply anyone who owns productive assets can more easily adapt to inflation. Those assets hold their purchasing power as inflation slashes the value of wages.
Assets that keep pace or even outgrow inflation are worth a market premium. The value of these assets soars during times of inflation. For instance, according to Zillow, the market price of my rental property increased 25% in the last year.
Wealthy people benefit from inflation more than anyone else because they own the vast majority of assets. Inflation is thus a key driver of inequality; the rich get richer while the poor and middle-class struggle to maintain their standard of living.
What’s more, America’s real inflation rate is actually much worse than the current version of the CPI. If the CPI was measured the same way it was in 1980, without the various adjustments the government now inserts to suppress the official rate, it would be increasing at around 18% per year.
This is why, as we pointed out in April, inflation in the United States is probably worse now than at any other time in our nation’s history.
When ordinary working people discover that the fruits of their labor can’t keep up with inflation, chaos ensues. It’s every man for himself. Society be damned.
Here’s an example that anyone raising a baby can appreciate: the baby formula shortage. The immediate cause of this shortage was a supply chain issue, but it was greatly worsened by inflation.
A few years ago, inflation was much lower. If you needed baby formula, you would probably buy just enough to feed your baby until the next time you visit the supermarket. Today, with inflation raging, you’ll probably stock up in the expectation of higher prices on your next visit.
That’s how inflation causes shortages, even without the supply chain disruptions we’re experiencing in the aftermath of the COVID lockdowns and Russia’s invasion of Ukraine.
And this phenomenon is by no means peculiar to the United States. Indeed, in many countries, it’s much worse.
Sri Lanka, with an official inflation rate exceeding 50%, is the best-known example. The country is almost entirely dependent on imported energy to fuel its economy. Since Russia’s invasion of Ukraine, the price of that energy has soared. At the end of May, Sri Lanka defaulted on its international debts. In June, the government announced it would need to start rationing gasoline.
The dire economic conditions in Sri Lanka led to mass protests, and earlier this month, the country’s president fled the country. But even with a new president appointed, Sri Lanka has no foreign currency reserves to pay for imported food or fuel.
There are many more examples. We’ve seen mass protests against inflation in dozens of countries, including Albania, Argentina, Ecuador, Ghana, Kenya, Panama, Peru, South Korea, and even the United Kingdom.
So we’re not exaggerating when we conclude that inflation is breaking the world.
The question, of course, is what you can do about it. The best solution for most people is to live below their means and save money they can put to work buying productive assets. I started down that road in the 1980s, after learning first-hand how devastating inflation is to a wage-earner with no significant assets.
Of course, most people don’t want to live below their means. And for the poorest members of any society that are one paycheck away from destitution, it can be impossible to save anything, especially while inflation is raging.
With global inflation as severe as it is now, you’ll want to look at ways of “getting out of Dodge,” if necessary. The ultimate tool for doing so is a second citizenship and passport, or at least legal residency in another country.
That’s one of our specialties, and if you’d like more information on how we can assist you in acquiring second citizenship, email us at service@nestmann.com and a member of our team will get in touch with you.
