Social and Economic Effects of Inflation and What You Should Do About It
Inflation is a hot, and generally negative topic of conversation more and more recently. The government and it’s agencies say it’s good, and others say it’s bad.
Whatever your stance may be, it no doubt has the power to drastically change your way of life.
What is Inflation?
To begin talking about inflation, we need to first understand what inflation is.
The definition of inflation is the expansion of the supply of money. In basic terms, it means there’s more dollars floating around in the economy today than there were yesterday.
This is crucial for understanding how supply and demand works in basic economics.
A Helpful Inflation Analogy
To help you understand how inflation has social and economic impacts, I’ve created this analogy:
Say there’s a civilization of people hidden deep within the Amazon rainforest. They’ve never encountered the outside world or anyone from it. Nobody has ever been taught an Econ 101 course.
In this tribe, people use beautiful, semi-rare, red flowers as money to trade for food, water, etc. The flowers also look great hung around the house, they’re worn as accessories on their outfits, and they can barter for other goods if they want.
Suddenly one day, a giant storm hits the area. Debris is everywhere, but no serious damage was done to the village.
In the aftermath of the storm, the Amazonians suddenly find thousands of these beautiful red flowers falling down from the sky!
Everyone’s rich!
… Well, no.
Slowly but surely, these flowers lose the appeal they used to have. The beautiful red flowers are not as rare as before, and people start taking them for granted.
If it used to cost three flowers to pay for a bucket of water before the storm. Now, it takes six flowers. The supply of beautiful red flowers (money) has doubled, and therefore the flowers are half as valuable as before.
Inflation has taken place in this hidden civilization. The money supply (red flowers) has been expanded from the storm.
In this story, the red flowers are dollars, the bucket of water represents basic goods, and the storm is any government spending bill that gets passed.
At surface level, inflation may not seem like a huge deal. But in reality, it has powerful social and economic impacts.
Economic Effects of Inflation
Decreased Purchasing Power and Higher Prices
As can be seen from the analogy above, inflation leads to higher prices. A bucket of water that used to cost three flowers now costs six.
This increase in prices isn’t just limited to buckets of water. Food, wood, and all other goods/services within the Amazonian tribe cost more now. Inflation doesn’t discriminate; it affects every industry.
One issue with inflation is that the money you had saved up before inflation is now worth less because prices of everything has gone up.
Let’s say you’re a lower-income Amazonian family who budgets 50 flowers/month to pay for expenses. The storm hits, and the supply of flowers doubles. Now, your expenses look like this:
With a savings of only 50 flowers, this family is going to be seriously impacted come next month.
In the modern world, prices rise from “printing” money (pulling it out of thin air) to pay for spending bills by the government. Politicians don’t want to raise taxes in fear of becoming unpopular with the voters. Instead, they pass the spending bills we basically have no say in. This is called the inflation tax: it’s not something that shows up on your tax forms, but you’re still forced to pay more for goods than before.
Politicians love passing spending bills- they stay popular by not raising taxes, they still spend money to get whatever they want, and everyone else pays a seemingly invisible, but very real, tax- the inflation tax.
Inflation brings higher prices to the market and makes your savings worth less with every printed dollar, no matter how much you have saved.
Makes Debt Easier to Pay Back
If there are any upsides to inflation, it’s this: debt becomes “easier” to pay back.
Let’s say you took out a 500 flower (*must be fixed interest rate*) loan to pay for your Amazonian hut before the storm hit.
The next month, the storm hits and more beautiful red flowers inflate the money supply.
This pushes the prices of everything up- including your wage (in theory). The market now charges more for goods/services since there’s more flowers in circulation. Your boss now pays you six flowers a day instead of the three flowers you would’ve earned before the storm.
The market for beautiful red flowers has been inflated, but the loan agreement (with fixed interest rate) of 500 flowers was already made months ago.
Over the course of a month, you used to earn 60 flowers. But due to inflation, you’re now bringing in 120 flowers per month. Your income has increased in flower terms, so you’re able to put more money towards your debts to pay it back quicker.
Puts You in a Higher Tax Bracket
Hopefully, the Amazonians are free people and haven’t set up a government they’re forced to pay taxes to. For this upcoming scenario, we now migrate back to America.
When inflation takes hold of our dollars, employers typically have to raise wages as well.
While our wages rise with inflation, one thing that stays the same is the tax bracket requirements.
I’m no accountant, but for simplicity sake, let’s say you get taxed at 20% if you make under $50,000/yr, and you get taxed at 40% if you make over $50,000/yr.
For this example, say you make $45,000/yr. After the government takes some of that money, let’s say you’re left with $36,000 to spend how you please ($45,000 x 0.8 = $36,000).
But next month the government passes a huge spending bill, and inflation takes its toll. In order to afford the inflated prices for rent, food, etc., your boss now pays you $52,000/yr. Not so bad, right?
Well, because you’ve been bumped up into the new tax bracket, you now pay 40% in taxes. At the end of the day, even though your new salary is $52,000, you’re only left with $31,200 to spend ($52,000 x 0.6 = $31,200).
That’s less than what you were taking home before!
Not only does everything cost more now, but now you’re forced to pay more in taxes to the government, (who’s the sole reason the money supply became inflated in the first place!)
The government spends money to do whatever they want (inflating the money supply), pushing you into the next tax bracket, where they’ll then take even more of your hard earned money while you struggle to pay bills.
Social Effects of Inflation
Lower Standard of Living
In times of inflation, most people need to cut down their expenses. Any money you have saved up in a bank account continues to lose some of its value to inflation by the minute, and you must adjust accordingly.
That means eating out less, shopping for lower prices, searching for better deals, and being frugal.
Remember the Amazonian family that was affected by inflation? They’ll have to cut back on any and all unnecessary expenses in order to pay for basic necessities.
Those living off of pensions or social security have the most to lose- their fixed incomes are the same amount every month, but the prices of goods continue to rise.
In times of high inflation, savings evaporate away, prices rise, and people cut back on unnecessary expenses. In general, our standard of living decreases, and the economy slows to a trickle. If possible, it’s important to have a steady job or income that adjusts according to inflation.
Inflation Promotes Hoarding
As inflation takes its course, your money continues to decrease in value, which means goods are only getting more expensive. The rational thing to do? Go out and buy as much stuff as you’ll need later, now!
If you know next month you’ll still be eating the same food, except by then it will be more expensive, why wait to buy it next month? You’ll go out and buy it now, because you’ll get more for your money.
$50 will be able to buy more milk, bread, and meat now than with $50 a month from now.
The problem with this logic is everyone else is thinking the same thing. Remember what happened to toilet paper after the coronavirus scare?
People began hoarding. Stores couldn’t keep up with demand. Supply dwindled.
When people are in a panic, they hoard because they believe their future is uncertain.
When runaway inflation occurs, called hyperinflation, prices can double in as little as a day or a few hours. Weimar Germany, Venezuela, Zimbabwe, Hungary, Argentina, and several others have all felt the wrath of hyperinflation caused by the government printing money.
If hyperinflation hits the US, shelves holding basic necessities will run dry, similar to the TP shelves during the COVID scare.
During inflationary times and economic uncertainties, people panic. When people panic, they hoard whatever they can get their hands on.
How to Protect Yourself From Inflation
We are already in an inflationary environment.
The government has their own metric to measure inflation called the Consumer Price Index (CPI), but this is a flawed measuring stick. Government officials use faulty and unrealistic variables to calculate the CPI to make it seem like they have inflation under control. If you use the equation they used from the 70s, as opposed to the rigged equation they use today, the real inflation number is almost double what the “official” CPI is.
Over 40% of all of the money ever printed by the US government was printed in 2020 alone!
The money is already in circulation, the market just hasn’t risen prices yet because they’re being told the inflation will “go away.” The end result will be like trying to put a genie back in a bottle.
In inflationary environments, there’s too much money chasing too little goods. There are shortages of cars, electronics, meat, wood; anything valuable becomes scarce.
Being in an inflationary environment can be a scary place to be. If prices start rising dramatically month after month, day after day, it can send people into survival mode.
Take the following measures to protect yourself and your community from inflation.
Become Financially Independent
Financial independence is one of the best ways you can live a free life on your own terms. When you run your own business, you have the ability to set your own prices and make the right decisions based on your own insight and knowledge, and you have much more control over your money.
If you work for someone else, you’re banking on their intelligence and decision making skills to keep not only themselves but also you and your coworkers above water.
If you can get a business running now while times aren’t so bad, you can use that momentum to get you and your community through an economic depression.
Stock Up On Goods Now
What are some essential household items you use on a daily basis? Batteries, propane gas, medicine, duct tape, baby supplies, etc. are items you constantly use, even if you don’t realize it.
These items will be the first to run dry in times of panic.
Next time you go to the grocery store, grab a couple extra items to put in the back of your pantry or to store in your basement. Make it a habit to buy extra, non-perishable goods that last months, if not years every time you visit the store. If you have a surplus of these items, you can trade them for other goods you may need in the future barter economy.
Better yet, start learning how to garden! Growing and canning your own food is how the majority of Americans were able to survive in the Great Depression and in the years surrounding WW1 and WW2. It’s a long-term investment that pays off right before your eyes.
Own Livestock
Chickens, goats, cows, ducks and other livestock can be life-savers in times of need.
Goat, cow, and sheep are staples to a healthy diet. They all produce milk, and when it’s time, can give you meat that will last you weeks if not months. From the milk you can make butter, kefir, cheese, cream, and many other supplemental products that ensure survival in times of need.
Chickens, quail, and ducks all produce eggs that are packed full of life-sustaining vitamins and nutrients. Not only that, they keep the bug population in your yard to a minimum, and they keep your grass green and fertilized with their droppings.
If stores run out of milk or eggs, you can rest assured that you have a backup plan walking around in your backyard. You just need to let them graze in your yard, maybe throw some kitchen scraps their way, and they’re happy.
Taking care of livestock won’t go perfectly the first year you try it out. That’s why it’s important to get started now while you can afford to learn and mess things up. You may not have that luxury in the future!
Buy Gold and Silver
Prices are set by the ratio of money in circulation and the amount of goods for sale. This puts gold and silver in a great position, because you can’t print metal.
Gold and silver are the oldest and best inflation-proof items to own, because metals have been the basis for money since the beginning of civilization. As the number of dollars in circulation goes up, so does the price of gold and silver, just like any other good. In times of social and economic unrest due to inflation, silver and gold are universally prized possessions.
There are many ways to invest in these precious metals, and you can begin investing with $100 or $100,000. Learn how to invest in precious metals here.
Build a Community
When times are tough, you’ll need some support. The best support will be from your family, friends, and neighbors you keep up with. That said, you should resolve any outstanding issues you may have with certain people.
If you work to build a resilient community now, you give yourself insurance against future uncertainties. Through your community, you can trade for essential goods, share important information, provide emotional support, and find meaning through service.
Wrap Up
To those with a limited understanding of money and how it works, inflation can be scary. Once you understand the basics of inflation, you can rationalize and predict the social and economic effects it creates.
Unfortunately, the inflation genie is already out of the bottle. The only thing to do now is:
Become financially independent
Stock up on essential goods now before they run out
Learn how to garden and raise livestock
Keep your purchasing power by investing in silver and gold
Build a resilient community
